Staying Liquid In The Crypto Market

I suspect that it would be to our advantage, here at the TravelWriteMoney household, to keep our cryto liquid. That is to say, that it not be locked up in deposits or stakes for the rest of 2021. There are reports about Wells Fargo shutting down personal lines of credit. Also, JP Morgan Chase Bank has been hoarding cash. The debate on inflation and deflation still rages on. The Federal Reserve has painted itself in a corner. And, Bitcoin has been in a bit of a slump that potentially could revisit levels below $30K, causing some margin calls and potential liquidations.

The banks seem to be on to something coming up, for which they are preparing. We would be smart to also be prepared for bad economic weather. It may simply be a matter of time.

Image by Gerd Altmann from Pixabay

Be Ready To Spend

Unfortunately, I have been waffling on the issue of holding cash for the past few months. It is fashionable to always have money working and earning yield. On a philosophical level, this is a good position to have. However, as is often the problem with philosophy, the practical application isn't exactly practical. I think fans of The Good Place can visualize Chidi Anagonye trying to figure out the philosophy of money.

The problem with having money working for you all the time is that most instruments require you to lock up your cash. Money market and savings accounts have limits on how often you can withdraw. Certificates of Deposit will lock away your money for months or years at a time. Crypto.com, for example, will pay interest on your crypto if you lock it up in Earn.

The problem with locking up your cash is that if there is some emergency, you end up having to resort to credit cards or loans to pay for it. And, because the payments are manageable, you leave your savings earning money while you are paying interest on your loan. It doesn't make sense.

Given that there is the potential for economic headwinds, we are going to leave our crypto readily available to spend. This will include having some stablecoin and cash in inventory to protect against any drawdowns. Or, if there are drawdowns, to have the cash at hand to buy the dip.

No More Lockups

For the time being, I won't be locking up my cryptos into any long-term commitments, even if it means giving up yield. I will have to be satisfied with any capital appreciation, which is not insignificant in the crypto world.

I can visualize macroeconomic and microeconomic scenarios that might require me to dip into my savings. Some of this is the result of institutional investors entering the crypto markets. It is a blessing to have institutions piling billions of dollars into Bitcoin. But, at the same time, if they need to liquidate, we are looking at billions of dollars leaving the market. Cascading liquidations for everybody.

Spending on Capital Preservation

All of this is not to say that we would spend our liquid savings on goods or services. It is more along the lines of spending to preserve capital or to acquire more assets. For example, we have a couple of low-interest loans from Celsius, which we have had to top up for margin calls twice. If there is another big dip, you can be sure we will need to satisfy the margin call again.

You might be asking, why not pay off the loans? Two reasons. First, the interest is low, which is helping us while we pay off other, higher interest obligations. Second, a margin call is simply an invitation to level up at a lower price, lowering the cost basis of the collateral. Of course, if one doesn't have the cash on hand, it also means liquidation. It's smart to have cash, after all. Having cash ready to deploy is good insurance to protect against disaster.

If you think about it, most financial disasters are the result of not being able to get the cash to pay for an unexpected need. You may have the cash flow to finance the problem. But, if you need a big pile right here, right now, it's often difficult or impossible to cough it up on the spot. This leads to missed opportunities or ruin. Life insurance is like this. It mostly pays a lump sum to ensure that the deceased doesn't leave everybody in a financial bind. The ability to liquidate in an instant is important in this way. Or, you can also have a reserve of liquid assets to help buffer whatever life throws at you. Cash helps you avoid cashing out the big investments that are generating wealth.

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