OPINION: The financial crisis of 2008 is still fresh in the minds of those on Wall Street and those in the cryptocurrency space, albeit for very different reasons. While Wall Street is still reeling from the aftermath of the crisis, the cryptocurrency community indirectly exists due to the crisis.
As timelessly engraved in the genesis block of the Bitcoin [BTC] blockchain, the movement emerged from a need to move away from those who had power. The technology was created to change the way things were, and give the power of currency back to the people who owned it. The overreach of the Federal Reserve was ultimately the motion that set in motion the spectacular crash characterized by the meltdown of financial markets.
The Federal Reserve:
The Federal Reserve is the central banking system of the United States, and regulates, among other things, the long-term interest rates to be enforced by banks. This has been cited by economists as the deciding factor in the recession that the United States saw in 2008.
The low-interest rates imposed by the Fed, as low as 1%, saw investors looking for more illiquid assets as investments. For many, it was not profitable to save money in banks as it became a ‘non-investment’ due to dropping investment rates. This drove many investors to pour liquidity into stocks and, more importantly, houses. Banks capitalized on this and following the repeal of the Glass Steagall Act, began offering subprime mortgages on housing.
Following a boom in the housing sector, supply soon outgrew demand with the collapse officially occurring when Lehman Brothers, a Wall Street investment bank, declared bankruptcy while holding $600 billion in assets.
While a lot of things have changed over the past 10 years, the emergence of Bitcoin as a trustless and decentralized method of holding value is one of the most significant changes of the decade. Offering a system where the only people in control of the network are those who are on it, Bitcoin was forged in the fires of anti-establishment and anarchy following the financial crisis.
Today, this cryptocurrency has grown into one of the most popular options for retail investors looking for a store of value. Even as the market demonstrates remarkable volatility, there are many who believe that it will one day evolve to become a store of value comparable to gold.
While there is still no regulatory clarity, derivative products of the cryptocurrency have begun to gain prominence. Futures contracts were approved by the United States Securities and Exchanges Commission late last year and a recent proposal for an exchange-traded fund has gained prominence from members of the community.
In what seems to be a disregard to a lack of regulatory clarity, major Wall Street institutional players have already begun to get into the cryptocurrency space. Some of the big names include Goldman Sachs, JPMorgan Chase, and BlackRock. This is a cue of Bitcoin being the next most liquid asset. With the Federal Reserve imposing a 1.95% interest rate, finding more lucrative investment opportunities has become a mission in favor of the cryptocurrency sector.
A regulatory shakeup regarding Bitcoin is yet to emerge but there are already rumblings of clarity on the regulatory side of things. While Bitcoin is safe from being declared a security due to its property as a currency, the lack of a non-volatile market seems to be what regulators are looking for when approving derivatives.
Shadow banking has already penetrated into the cryptocurrency market with a multitude of cryptocurrency hedge funds and investment firms. Some reports indicate that there are around 150 hedge funds that were started during the last quarter of 2017. The deregulation in the financial sector as a whole still exists – interpreted by the lowered interest rate maintained by the Federal Reserve.
While the catalyst for the previous crash was subprime mortgages, that again won’t have the capacity to shake the market as it did in 2008. This is mainly due to the regulatory reform that took place in 2011 that offered greater clarity over the situation. This brings the question; what is the catalysing factor for an imminent market crash?
The catalyst for the next market crash?
The answer lies within the White House. The 45th President of the United States of America, Donald J. Trump Jr., may as well be the factor that causes the next crash. Due to his movement into the activities of the Federal Reserve, the President might change interest rates while prioritizing short-term political goals as opposed to the long-term planning executed by the Fed.
The Federal Reserve is required to have 7 members on the board, out of which there exist only 3 currently. Out of these, 2 are appointed by the President directly, with two more awaiting approval from the Senate after being nominated by Trump. Following the approval, two more will follow the nomination process. This would mean that 6 out of 7 people on the board of the Federal Reserve are directly appointed by Trump, adding this to the list of governmental organizations he has already infiltrated.
The President’s view on the interest is very clear – rates must go down. This incentivizes investment spending, as there is no reason for people to keep their money in the bank. Even as decreasing interest rates makes the currency weaker, thereby promoting trade, it encourages investment in riskier propositions, which is what led to the crash in 2008.
There are a multitude of markets that are ripe for being a catalyst towards the next big financial crisis. Among the major ones is the high amount of personal debt accumulated due to credit card debt, subprime auto loans, loans that finance corporate leveraged buyouts, and general corporate debt. Moreover, student debt is in the area of around $1.3 trillion due to the easy availability of loans and high amounts of money to be paid back. This draws parallels to the housing crisis.
The inflation of the US Dollar will then be contrasted directly against Bitcoin, which is inherently deflationary due to the digital scarcity imposed by the Proof of Work consensus mechanism. Moreover, Bitcoin is the cryptocurrency with the largest amount of regulatory focus on it and is by far the currency most likely to get regulatory support.
Regulators are focused towards stability in the cryptocurrency market. Technologies have begun to advance to the point where custody solutions have begun to offer sufficient security for institutional investors. An ETF might also increase the incentive for institutional investors to enter the market. Tokenized securities are also in the works, with the base pair most likely to be Bitcoin due to its market dominance.
The trustless, decentralized, and deflationary will be the go-to alternative for the eroding trust in the centralized systems that exist today. While Bitcoin is by no means the miracle cure, the value of the cryptocurrency will take the spotlight in the case of a financial meltdown.
In the end, the rocket fuel that pushes Bitcoin to the moon might as well be the flames of an economic recession.
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