How Safe Are Your Other Investments? (After FTX)

The recent collapse of FTX raises an important question for every investor. What happens if the company that holds your stocks and cash goes under? 

With Bank deposits, there is nothing to worry about. Banks are backed by the Federal Deposit Insurance Corporation (FDIC) since the 1930's. If a bank fails, the FDIC will pay each depositor up to $250,000 to compensate for their lost deposits. In most cases, depositors can access their insured funds within a few days of the bank's failure. Overall, the FDIC helps to ensure that depositors can have confidence in the safety of their money, even if a bank or other financial institution fails.

However, as the FTX collapse shows, there is no such insurance in the crypto world. With crypto exchanges, if it goes to bankruptcy, you become part of the bankruptcy process like all the other creditors. 

so what about your stocks? what happens if your brokerage goes under? 

Well the Securities Investor Protection Corporation (SIPC) serves a similar role as the FDIC with the banks. Its primary role is to return cash and securities to investors in the event that their brokerage firm goes out of business and is unable to meet its obligations. SIPC covers up to $500,000 per account, including up to $250,000 in cash.

If you are an investor with more than the $500,000 limit, you should keep these funds and investments in different accounts to ensure your full protection. Just another reason to use multiple brokerage accounts. 

With crypto exchanges there is no such protection. So the best way to protect your cryptocurrency is to hold it in your own wallet, not your keys not your coins kind of thing. 

Having said that, be very careful, a wallet on a computer or a phone can get hacked. With a cold wallet, also originally known as cold storage, the digital wallet is not subject to a hack since it is stored on a platform not connected to the internet, but it can be stolen or lost. There have been several instances of people accidentally throwing away computers or other devices containing cryptocurrencies. In some cases, the individuals were able to recover the lost devices and retrieve their cryptocurrency, while in other cases, the devices were not recoverable and the cryptocurrency was lost permanently. This is one of the risks associated with holding and using cryptocurrencies, and it highlights the importance of securely storing and backing up any cryptocurrency holdings.

Tom