As the underlying problems in our economy are exposed by recent bank failures, Bitcoin stands as a trustless alternative money.
This is an opinion editorial by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before transitioning to the Finance Corps.
As unrealized losses piled up, Silicon Valley Bank (SVB) gradually, then suddenly became insolvent, followed by the Signature Bank collapse and peoplestarting to wake up to the problems that permeate our financial system. Modern bank runs, albeit digital, can force banks to sell reserve assets at a loss, inevitably leading to insolvency.
As Balaji Srinivasan has said he pointed, what was once considered the gold standard for risk-free reserve assets is now on the brink of a potential new banking crisis. Is this the end of the US treasury as we know it?
At least the events of the weekend, from the failure of SVB to problems with other financial institutions to alarming government intervention—demonstrate just how fragile the system has become, underscoring its reliance on printing money even as it is being unraveled by the low-yield, low-interest rate environment that was caused by printing in the first place. place. . The dichotomy is stark, but there are lessons to be learned.
Can’t Sharpen a Ponzi: Why the Legacy Banking System Is Ripe for Failure
The way the banking system works is essentially that banks take your deposits and lend them out at higher interest rates than they pay you. They often hold reserves in US Treasuries, among other things, and everything seems to work until it stops working.
With the Federal Reserve’s tightening cycle, raising interest rates meant lowering the price of bonds, devaluing the basic reserve asset of banks. When depositors come to redeem their deposits, banks are forced to sell their assets at a loss, eventually becoming unable to stop the bleeding.
Regional banks will bear the brunt of this blow, as evidenced by the recent collapse of SVB. Federal regulators are desperately trying to bolster confidence in the system backing 100% of depositors’ moneybut at what price?
Surely depositors are already fleeing to the big shots, resulting in a more concentrated and fragile system than before. I think everyone knows deep down that they will not be able to save all of the bank’s customers. How much money printing will the public tolerate in the name of financial stability?
In terms of shareholders, why would anyone want to own shares in a small bank right now? If the banks fail and the feds choose to win back depositors while everyone else suffers, all risk is transferred to everyone but depositors, incentivizing stock sell-offs and eating into banks’ risk-absorbing capital. in a hurry. This move could put smaller banks in much worse positions than before.
Systemic trust vs. Lack of systemic trust
The scenario unfolding before us is a stark illustration of what happens when trust begins to break down in a system fundamentally based on the idea of trusting, rather than verifying. In modern times, people think that they need to keep their money in banks, but they must trust that banks will maintain effective risk management strategies to secure their deposits.
Bitcoin is fundamentally different. You can eliminate reserve requirements, duration and interest rate risks, counterparty risks, and the like. There is no trust in Bitcoin. There is only code. It’s backed one to one with itself, and as long as you have your own keys right, you don’t need to worry about a run on the bank.
As businesses struggle to make payroll this week, I think this could just be a spark that ignites a fire behind Bitcoin. Money without trust could be the thing to help stem the tide of catastrophes in a system where trust seems to be crumbling.
This is a guest post by Mickey Koss. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
