We may be headed for another financial crisis, including government bailouts for reckless banks. Bitcoin exists to fix this.
This is an opinion editorial by Julian Liniger, co-founder and CEO of Relai, a bitcoin-only trading app.
‘On the verge of the second bailout for the banks’
At its core, Bitcoin is a transaction database. Every 10 minutes, a new collection of such transactions, called a block, queues up in Bitcoin, immutable for all eternity. Satoshi Nakamoto, the mysterious mastermind behind the first and most popular cryptocurrency, created that first block of transactions himself. But Bitcoin is also a political project; at least, the idea behind it was and always will be political. nakamoto inserted a message in the code that still forms the beginning of Bitcoin’s decentralized database: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
This political message is as relevant today as it was in early 2009, when a global financial crisis sowed anger and angered people around the world. The banks whose recklessness caused this crisis were not penalized, but rewarded with taxpayer money. Governments have since claimed to have learned their lesson. Janet Yellen, United States Secretary of the Treasury, famous proclaimed in 2017 that she hopes there will not be a new financial crisis “in our lifetimes.” Now, guess what: she was wrong.
Silicon Valley Bank is just the tip of the iceberg
He second largest bank failure in US history now it is in full swing. After Silvergate Bank, which specialized in Fund crypto startups like imploded FTX exchangewas belly up, the regional Silicon Valley Bank (SVB) has now also been affected. In the course of zero interest rate policy and rising tech start-up valuations, the bank had developed from a David to a Goliath — at least in terms of the sums that were transferred and stored there.
Unlike in 2008, however, these banks did not speculate in the crazy US mortgage market, but simply adapted to the daily madness of the financial market. In other words: in the zero interest rate environment, they really didn’t know where to go with the vast amounts of fresh money. So, they bought long-term conservative government bonds to earn at least a small return. The only problem with this is that the US Federal Reserve has now raised the federal funds rate to 4.57%, the highest since October 2007.
Previously purchased bonds, which still had low interest rates, suddenly became the worst possible investment. When startups that had previously received exorbitant cash injections from investors in the zero-interest environment to stay afloat with even modest business models began to withdraw their money, chaos was inevitable. Of course, SVB is not innocent either because if it specializes in only one customer segment, it is easily vulnerable to a run on the bank. And it’s also becoming increasingly clear that the bank’s overall risk management left a lot to be desired.
cheap money revenge
Without wanting to absolve banks like SVB of their guilt, it must be said: The fact that it can get to this point is the consequence of a decade of irresponsibility. Although there was much talk after the last financial crisis about tighter controls and the shortcomings of “fractional reserve banking,” in which banks hold only a small percentage of client funds, not much remains after years of zero interest. rate policies.
The absurdly loose monetary policy of the Federal Reserve (and also the European Central Bank), given a big boost in the wake of the COVID-19 pandemic, is now getting its revenge. “Higher, faster, further” was the motto of the financial and real estate markets. The softening now comes too late and too abruptly. Emblematic of the excesses of recent years are not only the crazy valuations of startups, but also thousands of hyped “altcoins”, absurdly priced NFTs, and even increasingly popular alternative forms of investment, such as luxury or even rare watches. Lego games. We were all forced to speculate. “Cash is garbage” was the motto.
‘Crypto’ is a symptom, not a solution
With all the chaos in the financial and banking sectors, it should be noted that the crypto industry is not an alternative, but an even more fragile variant of the established financial system. Not surprisingly, FTX, Luna, and other crypto projects were the first to implode due to bank runs and loss of trust.
Instead of the independence invoked by Nakamoto, many of the most hyped crypto projects only exist because venture capitalists (VCs) didn’t know where to put their money in recent years, because “blockchain” and “decentralized finance” were good buzzwords. fashionable during the COVID-19 pandemic and, this is an important factor, because unlimited money could be earned with the tokens of newly created crypto projects. Creating money out of thin air was a reality. This was lucrative for some experts and venture capitalists, but fatal for retail investors and crypto newbies.
By the way, silvergate bank it also went under in the wake of SVB, another bank that provided bank accounts to US crypto companies. The US Securities and Exchange Commission, led by Gary Gensler, seems serious when it says that all cryptocurrencies except bitcoin are possibly illegal securities.
‘Trust scheme’ or absolute transparency?
And now? inflation rates of about 10% are not uncommon in Europe, and also in the US, confidence in the words and deeds of the central bank has long been affected. The wounds of the financial crisis have not healed, on the contrary. The stock market you may be facing a liquidation; “crypto” is a risky proposition, especially in the US; Central banks have to choose between stagnating the economy and continuing to boost inflation.
That the banking and monetary system is a “trust scheme”, that is, in which trust is essential, is underlined again after the recent events surrounding SVB.
Some are expressing disappointment with bitcoin, as it is touted in many places as a hedge against inflation. Indeed, bitcoin performed excellently during the years of rampant monetary expansion, but is now relatively suffering from its all-time highs, just like other tech and venture stocks.
Does that mean Bitcoin has failed? You are welcome! If you look beyond the day-to-day price plate, you’ll see an increasingly vibrant ecosystem emerging around Bitcoin, such as green-powered Bitcoin mining, injecting more computing power into the disinflationary, decentralized monetary system. never.
As an alternative payment and money system that has no core vulnerability, no opening hours, no CEO, no one to block an account, and is always available to everyone around the world, Bitcoin is more relevant than ever.
This is a guest post by Julian Liniger. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
