Looking for a Safe Place to Park Your Cash After SVB Collapse? Don't Buy Crypto

If Silicon Valley Bank has you spooked, know that crypto is even riskier.

It's been a tough week for the banking sector. The collapse of several banks left us all wondering how safe our money actually is and raised questions about whether there might be better places to keep our cash. Indeed, it led some people to consider buying cryptocurrency instead.

Unfortunately, if you're looking for somewhere that's safer than a bank, crypto is not the answer. Crypto is fascinating. It could have potential. But even the biggest crypto enthusiasts would struggle to describe it as safe. Crypto is less regulated, more volatile, and ultimately, a lot riskier than traditional banking.

Here are four reasons not to put your savings into crypto.

1. Cryptocurrency is volatile

In November 2021, Bitcoin (BTC) was worth around $65,000. The following November, it had fallen below $16,500. Today, it is trading at almost $25,000. That kind of volatility is one thing in an investment that you plan to hold for the long term. But it's quite another when we're talking about the cash you need to pay your bills.

Let's say you use your paycheck to buy Bitcoin today rather than keeping it in the bank. Next week, the price of Bitcoin falls by 10% (which is not uncommon in crypto). But your rent or mortgage are due and you can't pay them in Bitcoin, you'd need dollars. In that scenario, you could be forced to sell your BTC at a loss in order to cover your expenses.

The same goes for your savings. Perhaps you're saving up for a vacation or have built up some money in case of emergency. It's completely understandable that you don't want to risk losing that money in a bank failure. The trouble is that there's a much higher chance of crypto declining in value than your cash being swallowed up in a bank collapse.

2. Cryptocurrency platforms can fail, too

Right now, we can't escape headlines about the failures of Silicon Valley Bank, Silvergate, and Signature. But don't forget, only four or five months ago, it was the collapse of FTX and other crypto platforms that dominated the news. Before that, there was a string of crypto closures and bankruptcies, triggered by the implosion of the Terra blockchain.

According to FDIC data, more crypto platforms failed in 2021 and 2022 than banks. And there's a good chance that 2023 will bring more crypto exchange failures.

Putting that worrying fact aside, it's true that one of the advantages of crypto is that you can self-custody your funds. Rather than relying on a crypto exchange (or bank), you can put your assets in a crypto wallet that you control. If an organization fails, it won't impact your funds. But if you're new to crypto, know that wallets can bring their own risks. For example, There are billions of dollars worth of Bitcoin locked in crypto wallets that people can't access because they forgot or lost the security codes.

3. Crypto does not have the same protections

When Silicon Valley Bank collapsed, its customers were protected by FDIC insurance. Not only did nobody lose money, but the FDIC took over the bank so customers' direct deposits, auto payments, and transactions continued to work as normal. It's a similar story with Signature bank.

In contrast, it isn't clear whether people who had assets on FTX, Celsius, BlockFi, or other failed crypto platforms will ever get their money back, nor how long it will take. Customers' accounts were suddenly frozen and there was nothing they could do. The lack of consumer protection means they are now in the hands of bankruptcy courts, and in some cases, they'll be at the back of the queue.

4. Crypto still has a long way to go

It's true that cryptocurrency, particularly Bitcoin, aims to offer an alternative to the traditional banking system. One of the attractions of decentralization -- essentially taking out the middleman -- is that people can manage their money without relying on banks. This holds the potential of more inclusion as, for example, it could make it easier for people without credit histories to access banking services and credit.

Decentralized finance also promises faster processing times and lower fees, particularly when it comes to international transactions. That's all very well, but it is still very early days and there's a lot we don't know about how crypto will unfold. SEC Chair Gary Gensler labeled the industry the "Wild West" because of the lack of protection and transparent information for consumers.

Increased crypto regulation will almost certainly come and it could eventually build trust and strengthen the foundations of crypto. In the meantime, authorities are using existing rules to crack down on cryptocurrency, eventually. Until then, increased enforcement and regulatory uncertainty will likely lead to more volatility. And that makes crypto a less than ideal place for your savings.

Bottom line

Savings and investments are two different things. Savings are for money we might need in the near term, and it's important to keep them somewhere safe. Cryptocurrency is an investment, and a risky one at that. Even if you use a crypto wallet to protect yourself against platform failure, you can't avoid the volatility and regulatory uncertainty. Put simply, it isn't a place for your day-to-day cash or emergency fund because you could lose it all.

It's understandable if the SVB collapse has made you nervous about traditional banks. However, consumer protections in traditional banking are much stronger than anything in the crypto world. Case in point: unlike the clients of several failed crypto platforms, SVB customers did not lose their money. Banks may feel risky right now, but they are still one of the safest places you can put your savings.