Bitcoin solves this; the cryptocurrency’s role in a banking crisis

In recent weeks, fears of the beginning of a new global financial crisis have been spreading. Major banks such as Silicon Valley Bank (SVB), Signature, and First Republic have been caught in the storm. The panic has also rapidly spilled over to Europe, with Credit Suisse and BNP Paribas feeling the heat. In contrast, and as a direct response, Bitcoin's price made significant moves upwards in recent days. Could this be a sign of what will happen if the banking crisis worsens?

While the financial sector's troubles are much larger than crypto, it's important to understand how the emerging digital economy might be affected. Bitcoin was created in the wake of the 2008 financial crisis and is specifically designed to provide a hedge against situations like this. A perfect time to zoom in on Bitcoin’s value proposition against the backdrop of a looming global financial crisis.

Deja Vu

In 2008, the world trembled in the face of one of the most devastating financial crises ever witnessed. This cataclysmic event sent shockwaves across the globe, leaving economies shattered and lives upended. Desperate to remedy the crisis, governments responded by generating unfathomable sums of money and bailing out the banks, thereby socializing the losses and devaluing the currency.

This act imposed a double tax on citizens, as taxpayer money financed the bailouts while savings were severely diminished over the ensuing years and continue to depreciate to this day. The passage of the bailout package stabilized the stock markets, which hit bottom in March 2009 and then embarked on the longest bull market in its history. Still, the economic damage and human suffering were immense. Unemployment reached 10%. About 3.8 million Americans lost their homes to foreclosures.

The chilling events currently unfolding in the US and the EU evoke haunting memories of 2008. The recent turmoil involving SVB, Signature, and other regional US banks, and subsequent bank runs, underscore the perils of financial centralization, accounting alchemy and the inherent risks in entrusting centralized institutions with critical financial matters. The crisis intensified as whispers of a cash deficit at SVB rapidly circulated, culminating in a full-blown run on the bank.

Panic surged to new heights when regulators intervened, further unnerving depositors. This chain reaction exposed the underlying hazards of fractional reserve banking. With most banks retaining only a modest percentage of their deposits in reserves, they are left susceptible to the crippling effects of bank runs.

The future remains uncertain, but several unnerving parallels between the present situation and the global event that catalyzed the birth and adoption of Bitcoin are undeniable.

Just this week, the Federal Reserve experienced a substantial increase in borrowing activities. Net discount window borrowing reached a staggering $148.3 billion, while the newly launched Bank Term Funding Program brought in an additional $11.9 billion. These figures combined for a subtotal of $160.2 billion in new borrowing. Furthermore, banks seized by the FDIC also contributed to the borrowing spike, accounting for another $142.8 billion. In total, the Fed saw a remarkable $303 billion in new borrowings during this period, highlighting the growing demand for liquidity. As this balance sheet grows, asset prices including the crypto market will likely continue to move higher.

As these events continue, the important features of Bitcoin and why its value is increasing become clearer. The possibility of another financial crisis is scary because it could hurt the value of money and our economic systems' stability. This could lead to a world where trust in traditional financial institutions is damaged beyond repair. In response to such concerns, Bitcoin emerges as a viable alternative.

Bitcoin was invented exactly for this purpose

It was in the aftermath of the 2008 Global Financial Crisis that Bitcoin was invented. Its pseudonymous creator, Satoshi Nakamoto, embedded a reference to an article from The Times titled "Chancellor on the brink of second bailout for banks" within the first block he mined. This reference underscores the problems with traditional banking systems and the driving force behind creating a decentralized currency like Bitcoin.

In response to these shortcomings in traditional banking systems, Bitcoin's decentralized nature emerged as a viable alternative. Bitcoin allows individuals to store their wealth directly in their self-hosted wallet backed by math and a global network of computers rather than human validation or support. This means there is no possibility of a bank run, and no one can lend out 90% of your deposits to make a profit.

Bitcoin is truly decentralized in its security and protocol. It can be self-custodied, meaning you don't need a bank to hold it. Nor do you need permission from a third party to transact. You can send and receive Bitcoin from any wallet around the world. The total supply of bitcoins is hardcoded into the protocol, protected by the most powerful computer networks distributed worldwide and cannot be changed, so the supply can't be inflated. It is a truly global currency that can be used anywhere, making it an ideal store of value for those who wish to opt out of the traditional financial system. This is a significant advantage over traditional banking systems, which are centralization, opaqueness, accounting tricks and custodianship.

Bitcoin in a global crisis

In the context of a global crisis, Bitcoin has emerged as a potential hedge against these systemic pressures. Bitcoin's decentralized nature and capped supply make it an attractive alternative to traditional currencies, which can be manipulated by central banks and governments.

Bitcoin's limited supply of 21 million coins introduces an element of scarcity, similar to gold, helping it maintain its value over time. As a result, as demand for the cryptocurrency increases, its value is likely to appreciate, which helps preserve its purchasing power in the face of rising inflation.

Furthermore, Bitcoin's global acceptance and increasing recognition as a legitimate asset class make it easier for investors to use the cryptocurrency as a hedge against banking failures. They can readily buy, sell, and store the cryptocurrency, and its technological advancements ensure a secure and transparent transaction process.

These characteristics lead to use cases like these:

Banking failures have become a growing concern in the traditional financial industry, and many investors are seeking alternative assets to safeguard their wealth. Both Bitcoin and Ethereum offer decentralized platforms that can act as a hedge against potential banking collapses. Due to their decentralized nature, these cryptocurrencies can provide a level of protection from the vulnerabilities that plague centralized financial systems, such as bank insolvency and mismanagement.

However, Ethereum's transition to a Proof of Stake mechanism may lead to its classification as a security, while the SEC has consistently stated that Bitcoin is not a security. This distinction could impact Ethereum's potential as a hedge against banking failures, as it may face additional regulations compared to Bitcoin.

Although Bitcoin presents itself as a potential safeguard against financial meltdowns, its high volatility raises questions about its effectiveness in practice. During periods of significant inflation, Bitcoin has experienced substantial value loss; for example, it lost approximately 65% of its value when inflation rates spiked. This volatility highlights the need for a more stable hedge against banking failures and suggests that further research and development of alternative assets is necessary.

Bitcoin can act as protection against inflation, but not until it establishes its fundamentals and achieves mass adoption. In theory, Bitcoin should serve as a hedge against inflation. It's easy to access, its supply is predictable, and central banks cannot arbitrarily manipulate it.

A decentralized solution to financial security: Bitcoin solves this

Following the current financial troubles, people are starting to doubt the dependability of central systems. Fears surrounding the limitations of centralized authorities have prompted individuals to explore alternative means of wealth preservation.

Since its inception in 2008, Bitcoin has been poised as a potential solution during global financial crises. Its decentralized, capped supply and immutable nature makes it an attractive option for investors in times of uncertainty. Unlike traditional currencies, Bitcoin is not subject to central banks' or governments' whims, protecting it from manipulations and inflationary pressures, and it can always be sent across the world with ease.

As we navigate an increasingly uncertain financial landscape, Bitcoin has the potential to become a beacon of stability, a safe-haven asset that offers refuge during periods of economic turbulence. In tumultuous times, investors have historically sought solace in assets like gold or U.S. Treasuries, providing security and assurance. With its inherent characteristics of scarcity, durability, and decentralization, Bitcoin has emerged as a digital counterpart to gold, redefining what it means to have financial security in the digital age. Compared to gold, Bitcoin is much more suitable to facilitate economic activity as it can be sent globally at an instant.

The belief in the power of Bitcoin as a transformative force in the world of finance is more than just a speculative fascination; it is a testament to the resilience and adaptability of human ingenuity. By embracing the potential of this groundbreaking technology, we can chart a new course that is less reliant on centralized systems and more focused on empowering individuals to take control of their financial futures. Bitcoin solves this dependence on central systems, providing a decentralized solution to financial security that is both innovative and essential in today's world.