We could be in for another financial crisis, including a government bailout for reckless banks. Bitcoin exists to fix this.
This is an editorial opinion by Julian Liniger, co-founder and CEO of Relai, a bitcoin-only investment app.
‘On the Brink of a Second Bailout for Banks’
At its core, Bitcoin is a database of transactions. Every 10 minutes, a new collection of these transactions, called blocks, queue up in Bitcoin, immutable for all eternity. Satoshi Nakamoto, the mysterious mastermind behind the first and most popular cryptocurrency, created the first transaction block himself. But Bitcoin is also a political project – at least, the idea is and will be political. Nakamoto entered a message into the code that is still the beginning of the decentralized Bitcoin 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 the global financial crisis sparked outrage and anger from people around the world. The reckless banks that caused this crisis were not punished, but rewarded with taxpayers’ money. The government has since claimed to have learned its lesson. Janet Yellen, the US treasury secretary, announced in 2017 that she expected there would not be a new financial crisis “in our lifetime.” Now, guess what: He was wrong.
Silicon Valley Bank is just the tip of the iceberg
The second largest bank failure in US history is now over. After Silvergate Bank, which specializes in financing crypto startups such as the explosive FTX exchange, rose, the regional Silicon Valley Bank (SVB) is now also affected. During the zero interest rate policy and the higher valuations of tech startups, the bank has evolved from David to Goliath – at least in terms of the amount transferred and spent there.
However, unlike in 2008, the banks are not speculating on the unhinged US mortgage market, but are simply adapting to the daily financial market frenzy. In other words: In a zero-interest-rate environment, they do not really know where to go with a vast amount of fresh money. So, they buy conservative government bonds and take a long time to get at least a return. The only problem with this is that the US Federal Reserve has now pushed the federal funds rate up to 4.57%, the highest since October 2007.
The bonds he bought earlier, which still had low interest rates, suddenly turned out to be the worst investment. When a startup that previously received exorbitant investor cash infusions in a zero-interest environment to stay afloat with even a modest business model began withdrawing money, chaos was inevitable. Of course, SVB is also not innocent because if you specialize in one customer segment, you can easily be vulnerable in the bank. And it is also becoming increasingly clear that banks’ general risk management leaves much to be desired.
Revenge Cheap Money
Without wanting to absolve banks like SVB of guilt, it must be said: The fact that we have reached this point is the result of a decade of irresponsibility. Although there was a lot of talk after the last financial crisis about the strict control and shortcomings of “fractional reserve banking,” in which banks only actually have a small percentage of customer funds, there is not much left after the year of zero-interest- rate policies.
The monetary policy of the Federal Reserve (and also the European Central Bank), which was given a turbo boost due to the COVID-19 pandemic, has now retaliated. “Higher, faster, more” is the motto of the financial and real estate markets. Relenting now is late and sudden. Emblematic of the excess of the new year is not only crazy initial valuations but also thousands of hyped “altcoins,” absurdly-highly-valued NFTs and even increasingly popular alternative forms of investment, such as luxury watches or even rare Lego sets. We are all forced to speculate. “Cash is trash” is the motto.
‘Crypto’ Is The Symptom, Not The Solution
With all the chaos in the financial and banking sector, it should be noted that the crypto industry is not an alternative, but a more fragile variant of the established financial system. It’s no wonder that FTX, Luna and other crypto projects were the first to explode as banks ran and lost confidence.
Instead of the independence requested by Nakamoto, many of the most popular crypto projects exist only because venture capitalists (VC) do not know where to put their money in recent years, because “blockchain” and “decentralized finance” are good keywords. the COVID-19 pandemic, and – this is an important factor – because there is unlimited money that can be made from newly created crypto project tokens. Making money from nothing is a reality. This is beneficial for some insiders and VCs, but fatal for retail investors and crypto newbies.
Incidentally, Silvergate Bank is also experiencing SVB, another bank that provides bank accounts for US crypto companies. The US Securities and Exchange Commission, chaired by Gary Gensler, seems serious when it says that every cryptocurrency except bitcoin is an illegal security.
‘Trust Scheme’ Or Absolute Transparency?
And now? Inflation rates around 10% are not uncommon in Europe, and in the US as well, confidence in the words and actions of the central bank has long been shaken. The wounds of the financial crisis have not healed – on the contrary. The stock market may face a sell-off; “crypto” is a risky proposition, especially in the US; The central bank must choose between stalling the economy and continuing to drive inflation.
The banking and monetary system is a “trust scheme,” that is, the importance of trust, revisited after the events surrounding the SVB.
Some have expressed disappointment with bitcoin, as it is touted in many quarters as a hedge against inflation. In fact, bitcoin performed well during the years of uncontrolled monetary expansion, but is now experiencing an all-time high, just like other risk and technology stocks.
Does that mean Bitcoin has failed? Not at all! If you look beyond the daily price plate, you can see an increasingly vibrant ecosystem emerging around Bitcoin, such as Bitcoin mining with green energy, pumping more computing power into a decentralized, disinflationary monetary system than ever before.
As an alternative money and payment system that has no central vulnerability, no open hours, no CEO, no one to block accounts, and always available to everyone around the globe, Bitcoin has more relevance 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.