How to Not Lose Your Crypto
More about the SEC's lawsuit against Coinbase... The hypocrisy involved... The precedent is not good... Coinbase could go bankrupt... How to not lose your crypto... Introducing The Quant Portfolio...
The SEC v. Coinbase: Part II...
I (Corey McLaughlin) wrote to you yesterday about the nuts and bolts and first impressions of the U.S. Securities and Exchange Commission's lawsuit against Coinbase (COIN). The SEC alleges that America's largest crypto exchange has been operating as an "unregistered broker" since at least 2019.
Today, I want to continue the analysis because there is plenty to talk about...
We've got a must-see report to share from Stansberry Research senior analyst Matt McCall... and thoughts from analyst Andrew McGuirk, who works on Crypto Capital editor Eric Wade's research team and contributes to the Stansberry Innovations Report...
We'll also share an urgent precaution that everyone who has ever bought a cryptocurrency needs to take today if they have not already.
Here we go...
In his Making Money With Matt McCall podcast yesterday, Matt delivered a comprehensive analysis of the story. He began with the background of the SEC's suits against Coinbase (and Binance), then continued with a passionate rant about the hypocrisy involved – given that the SEC approved Coinbase to go public four years ago...
If what they're saying is true and Coinbase is breaking laws, then the SEC allowed it... You can't play it both ways. This industry is full of hypocrites everywhere... and now we have the regulators that are supposed to be looking for our, as they say, 'the little people,' you and I, us, and now they're hypocrites as well.
I don't see this ending well for anybody. This is going to be drug on for years. From Coinbase's side, they have a great argument: You never told us the rules. We've asked for rules. We asked for rules. You had not given us any. Now you're going to say we had registered securities, but you never told us they were registered securities. It doesn't make any sense.
Matt says he's irritated with the SEC more than anything. As he continued...
[For] the people that invest in Coinbase stock or in bitcoin, [SEC officials are] knocking the price down and hurting people. They're not helping. They're not. There's so many bad people in this industry. Go after the bad people. They have this fixation on crypto, for whatever reason.
Be sure to check out Matt's entire podcast for his entire full-throated take on what he calls "hypocritical behavior," including the fact that the U.S. government owns seized cryptocurrency and reports that some of those assets are actually stored on Coinbase.
This isn't exactly new...
Coinbase is the biggest name in the U.S. crypto space, so the SEC taking it on is now getting a lot of attention...
But the regulatory agency has been essentially knocking off smaller crypto exchanges one by one over the past year or so. The SEC has previously moved against lesser-known operations like Kraken, Genesis, and Gemini Trust, charging them with offering unregistered securities and changing their businesses forever.
In February, the Kraken exchange agreed to pay $30 million in penalties and shut down its "staking" business... Genesis, a crypto lending firm, filed for bankruptcy in January... And Gemini Trust, founded by the billionaire Winklevoss twins, has shifted its focus to trading outside the U.S.
As I mentioned, Stansberry Research analyst Andrew McGuirk works closely with Crypto Capital editor Eric Wade. Today, Andrew told us that the whole situation with Coinbase reminds him of what happened recently to another crypto exchange, Bittrex...
Essentially, Bittrex saw the writing on the wall with Gary Gensler's SEC regime and knew that regulation was coming – so the company tried to create a dialogue with the agency in an attempt to change their operations to fit the SEC's view of securities laws when it comes to crypto.
Well, the SEC wasn't exactly ready for that dialogue, and instead of giving Bittrex an opportunity to comply with the laws, the agency came down with the regulation hammer and ordered [it] to pay a fine it couldn't afford – ultimately leading to the bankruptcy of its U.S. operations last month.
Coinbase has similarly been trying to play things "by the book," Andrew says. But it's clear to him the SEC is not willing to engage in dialogue... Instead, it's quick to "regulate by enforcement."
If the SEC 'wins'...
With this in mind, I want to share one big idea with all Digest readers today: If the SEC is successful in its case, it's quite possible that Coinbase could go bankrupt, as other crypto platforms have over the past year or so.
As Andrew notes...
Increased regulation could lead to a huge drop in activity on the platform, which directly affects Coinbase's profitability. Given that the company has over $3 billion in debt and the company currently operates at a loss, this could lead to a heavy strain on Coinbase's liquidity in the short run and solvency in the long run.
The "ill-gotten gains" that the SEC is charging Coinbase with making from 13 cryptocurrencies in question since 2019 could amount to more than $6 billion. Balance that with Coinbase's $5 billion in cash and more than $3 billion in debt, as of the first quarter of this year, and you have a bad situation for the company. It could require a cash infusion or a settlement with the SEC to remain in business.
The flip side of this is unlike the other crypto exchanges that have come under attack, Coinbase is an SEC-approved publicly traded company and will likely put up a good defense in court... For how long it will fight, though, we don't know. Nor can we say what the platform will look like at the end of this litigation.
No matter what happens, here's what I want to really emphasize today...
If things go the bankruptcy route, or even if they don't, this situation could entangle crypto holders on Coinbase in a long legal process without access to their deposits. That's what users of BlockFi, Celsius, and other crypto platforms have dealt with for about a year – a problem that remains unresolved.
So, here is a reminder...
If you hold crypto on an exchange, don't...
We've talked about the importance of "self custody" of cryptocurrency in the Digest before (like here and here in 2022, along with this primer from Eric Wade way back in 2019). But with more eyeballs on this story now, it's worth repeating...
Platforms like Coinbase have made it easy to "buy" and exchange cryptocurrencies. And because it's easy and it makes intuitive sense to do so, many customers keep their crypto money right there in their Coinbase accounts.
But if your crypto assets are on Coinbase, you don't really own them. They can easily get tangled up in a crypto exchange's legal or financial troubles.
For example, just yesterday, the SEC filed a court order requesting that Binance.US, the American division of the world's largest crypto exchange, freeze all its assets.
Instead, use a 'self-custodial wallet'...
This has been standing advice for subscribers to Eric's Crypto Capital and Crypto Cashflow publications as long as they have existed. As Andrew told us today...
If your money is on an exchange and the exchange goes under, often it's a long and arduous process to ever see even a portion of that money again. So the best way to protect yourself would be to use self-custodial wallets like Exodus, Ledger, MetaMask, or Trezor, among others.
Fortunately, it's not that difficult to put this guidance into action. You can use one of the wallets mentioned and move your crypto holdings to it in a few minutes. Existing Crypto Capital subscribers and Stansberry Alliance members can find a step-by-step guide here.
This ease might remind you why cryptocurrency exists in the first place... to function outside the "system."
And for additional tips on how to open one of these wallets and other guidance for being a successful crypto investor, check out this August 13, 2022, Masters Series essay from Stephen Wooldridge II, another analyst on Eric's team. As Stephen wrote...
With a few tips, you can make sure your crypto is protected and be on your way to financial freedom... The transition from centralized banking to a decentralized financial landscape may seem daunting. In crypto, almost all of your security comes from your own actions.
This one move – opening a self-custodial wallet – could save you a lot of trouble and money, whatever you have sitting in an exchange today. And subscribers to our Crypto Capital and Crypto Cashflow publications can surely expect more analysis and guidance from Eric and our team as this story develops.
Switching gears, here's another public service announcement...
I am pleased to report that yesterday our Stansberry Research team published the first issue of The Quant Portfolio, a brand-new offering exclusively for our Stansberry Alliance members, who can check out all the details here.
Personally, I've seen requests from subscribers over the years for a quantitative-driven portfolio strategy – the kind designed to beat the market by using complex data analysis.
Normally, such a system is only available to elite hedge-fund clients who can afford multimillion-dollar minimums and high fees. Well, we've just changed that.
Our Director of Research Matt Weinschenk and analyst Matthew Poltorak have been hard at work putting together this new quant-based strategy, and they debuted it yesterday.
To get started, they put together a pair of special reports – "Quant Investing: How to Double Your Money by Seeing the Future Outcomes of 4,817 Stocks" and "The Mechanics of The Quant Portfolio" – that explain how everything works. As Matthew wrote yesterday...
In our "Holy Grail" special report, we introduce our own quantitative algorithm designed to bring this unique strategy directly to you in the form of a carefully allocated portfolio that has been painstakingly constructed to beat the market with minimal risk.
It all boils down to our proprietary "Stansberry Score," which uses capital efficiency, margins, balance-sheet health, trends, and value to find the best stocks in the market.
The first issue of The Quant Portfolio includes 22 stock recommendations in a fully allocated portfolio, designed to limit risk and maximize potential upside. As Matthew pointed out, The Quant Portfolio's computer picked out many high-quality businesses that our editors and analysts already recommend...
It's incredible to note that the top four holdings in our new model portfolio are all open recommendations across Stansberry Research. That is to say, the computer that runs The Quant Portfolio has settled on some of the same stocks our fundamental analysts love after their in-depth research.
These holdings alone account for nearly 50% of this month's portfolio allocation.
You can also see diversification at work. These companies represent a diverse range of businesses from many different sectors.
Alliance members can find this new portfolio right here. With this portfolio, you are getting high-quality businesses backed by a complex model with advanced math and quantitative algorithms.
It's the next step in the kind of high-caliber research you've come to expect from Stansberry Research. Check out the portfolio and the special reports to learn how the strategy works, and let us know what you think.
New 52-week highs (as of 6/6/23): Aehr Test Systems (AEHR), Berkshire Hathaway (BRK-B), Cintas (CTAS), Commvault Systems (CVLT), D.R. Horton (DHI), DraftKings (DKNG), iShares MSCI Japan Fund (EWJ), Comfort Systems USA (FIX), Fluence Energy (FLNC), Gambling.com (GAMB), Alphabet (GOOGL), Innodata (INOD), inTEST (INTT), Ingersoll Rand (IR), iShares U.S. Home Construction Fund (ITB), Lennar (LEN), London Stock Exchange Group (LNSTY), MasTec (MTZ), MYR Group (MYRG), OMRON (OMRNY), Invesco S&P 500 BuyWrite Fund (PBP), PulteGroup (PHM), and Pure Storage (PSTG).
In today's mailbag, feedback on yesterday's Digest – which was mostly about the SEC's lawsuit against Coinbase and also included a D-Day remembrance... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"When Sam Bankrupt Fraud was giving multi-millions to every Democrat he could shake hands with, there wasn't any talk of creating enforcement by legal means. It was supposed to get its framework done through Congress which is how we used to make laws in this country.
"Creating meaningful legislation takes time, and it should to be meaningful. Many politicians had to be taught what a blockchain even was to even begin understanding how a crypto works. [SEC Chair Gary] Gensler knows this as he taught blockchain technology at MIT. Coinbase if anyone understands crypto is basically a gigantic digital wallet. Every one of us can do the exact same thing Coinbase does without using them at all. All of these 'centralized exchanges' just happened to bring the technology to the masses.
"I'm no expert with crypto and I'm learning more every day. What I don't want is the government overreaching here which I'm sure they are trying to do...
"I'm looking for the SEC to get its ass handed to it if the Supreme Court has the correct people explaining blockchain and crypto to them. There for sure needs to be regulation in the industry to help the consumer but it's bigger than just investment and securities. Like I said I'm learning more about DeFi and Web 3 and how the different cryptos are working. I even own a couple NFTs and not because I believe they will be worth a billion dollars someday. I liked the pictures and I own them and will forever.
"Like anything else in life, if the subject interests you then educate yourself. The government cannot control these, which is scaring the hell out of them because the jig is up and it gives freedom back to the masses. Hopefully the masses use it for the freedom it gives us all. I know I'm trying." – Paid-up subscriber James S.
"They let Coinbase come to the stock market in 2019... right. What has changed 4 years later... the SEC seems like the jerks in this matter." – Paid-up subscriber Jeff W.
"It seems that the federal government is increasing its efforts to rein in crypto trading from different angles, especially as the day quickly approaches for the nationwide rollout of the Fed's [central bank digital currency]." – Paid-up subscriber Kevin S.
"Thanks so much for writing about D-Day. The generations which gave so much in this horrific war definitely deserve our recognition. My parents who were just children during WWII, but had older siblings who served, shared so many stories with me growing up. My mother actually discovered at age 80 that she had a half-brother who flew a bomber plane during WWII. Most of these planes didn't return so it was literally a statistical miracle for him to have survived and to meet my mom, his sister at age 80! I hope we will hear some special words for armistice day this fall on 11/11.
"This was to have been 'the war to end all wars' yet mankind can't escape this behavior, at least not yet. The sooner civilization can reach this enlightened age the better. Thanks again for honoring all those who experienced 'D-Day' and remembering all that was sacrificed by so many." – Paid-up subscriber Rodger G.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 7, 2023