As the fundamental problems in our economy are exposed by recent banking 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 transferring to the Finance Corps.
As unrealized losses piled up, Silicon Valley Bank (SVB) gradually, then suddenly became bankrupt and people began to wake up to the problems pervading our financial system. Modern day banks, although digital, can force banks to sell their reserve assets at a loss, inevitably leading to insolvency.
As Balaji Srinivasan has pointed out, once considered the gold standard for risk-free reserve assets is now on the precipice of a potential new banking crisis. Is this the end of the US treasury as we know it?
If nothing else, the events of the weekend – from the failure of the SVB to problems with other financial institutions to the alarming intervention of the government – show how fragile the system is, which emphasizes the dependence on the printing of money even if it has been canceled by the few. -yield, less interest-level environment caused by printing in the first place. The dichotomy is clear, but there are lessons to be learned.
You Can’t Taper A Ponzi: Why Legacy Banking Systems Are Doomed To Fail
The way the banking system works, basically, banks take deposits and lend at a higher interest rate than they pay you. They often keep their reserves in US treasury bonds, etc., and it all seems to work until it doesn’t.
With the Federal Reserve’s tightening cycle, raising interest rates means reducing bond prices, reducing the bank’s core reserve assets. When depositors came to redeem their deposits, banks were forced to sell assets at a loss, eventually becoming unable to resist the bleeding.
Regional banks will bear this burden, as shown by the collapse of the recent SVB. The Federal Regulator is trying hard to support confidence in the system by supporting 100% of depositors’ money, but at what cost?
https://twitter.com/lisa_hough_/status/1635045124936982528
Depositors must have fled to the big boy, which will cause the system to be more concentrated and fragile than before. I think everyone knows that they will not be able to save every bank customer. How much money will the public spend in the name of financial stability?
In terms of equity holders, why would anyone want to hold a stake in a small bank at this point? If the banks fail and the Feds choose to make all the deposits while everyone else suffers, all the risk is transferred to everyone but the depositors, giving them an incentive to sell stocks and eat up the capital that absorbs the risk of the struggling banks. This move could force small banks into a worse position than before.
Systemic Trust Vs. Systemic Trustlessness
The scenario played out before us is a stark illustration of what happens when trust begins to erode in a system that is fundamentally based on the idea of trust, rather than verification. In modern times, people think that they should keep their money in banks, but they should trust banks to maintain an effective risk management strategy to secure their deposits.
Bitcoin is fundamentally different. You can eliminate reserve requirements, duration and interest rate risk, counterparty risk and more. There is no trust in Bitcoin. There is only code. It has been made one with yourself, and as long as you hold your own key correctly, you don’t need to worry about the bank run.
As companies struggle to pay salaries this week, I think this could just be the spark that ignites the back of Bitcoin. Money that cannot be trusted may be the very thing that can help us deal with disaster in a system where trust seems to be collapsing.
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.