Bitcoin emerged from the embers of the 2008 financial meltdown as an alternative currency to mainstream fiat. This is because Bitcoin is obviously decentralized and not issued by central banks. The dynamic of a community-driven currency reliant on member consensus rather than the levers of centralized management did bode well for many enthusiasts.
Accordingly, the performance of Bitcoin depends on people’s’ skepticism regarding fiat currencies. Early on, the coin caught on with a fringe group of nerds. However, the coin is now well positioned to act as an alternative in case of the global markets crash again. This is the case even for regular investors who are not well attuned to the technical aspects of the coin.
This is not saying that Bitcoin is predicated on a financial crisis alone. Sure, Bitcoin can have a solid run even with a strong economy. However, this is a realistic assessment of Bitcoin’s origins and how such circumstances in the near future shape things.
The Banking and Asset Management Sectors Post 2008
The blame for the 2008 financial meltdown was largely placed at the feet of the big banks in the world. After all, their risky practices such as the issuance of subprime loans were directly responsible for the housing bubble. These lead to an investigation that definitively concluded the same as true. Nonetheless, little has changed since the crisis and the proposed reforms are mild in most leading economies.
As a result, the world finds itself, a little over a decade later pretty much the same. The institutions that call the shots are still all powerful. One aspect of this that is glaring is that banks in the post-meltdown era have largely not expanded their balance sheets. Of the major banks in the USA, there has been a decline in total assets in aggregate, from US$19.3 trillion in 2008 to US$15.6 trillion in 2018.
On the other hand, asset managers are significantly better. These asset managers have actually increased their footprint. This is because there has been a sharp retrenchment of banks nursing their balance sheets back to health. This information is largely for the less regulated investment funds which typically disclose less than commercial banks. Nonetheless, it is a good indicator for the economy. Accordingly, it is fair to claim that there is consistency and better health overall compared to pre-2008 state of affairs.
The difference, in summary, is in the aspect of financial leverage. In 2008, the risk came about because of leverage in the banking system and the interrelationships between this and the securitization of the mortgage market. In the present time, the equivalent risk is leverage in the asset management industry. This is especially the case for the corporate debt sector, driven by the deceptively low volatility environment.
Corporate Debt and The Health of The Economy
One indicator that modern analysts use to determine the health of the economy is corporate debt. Corporate debt has risen considerably since 2008, with gross debt of Russell 3000 companies now totaling $11 trillion. The level before the last crisis was about $8 billion.
However, this is because as part of the stimulus measures after the last crisis, the Federal Reserve slashed interest rates. This led to companies taking advantage and proceeded to borrow money at record levels.
Nonetheless, when you look at these levels in totality, they are not as unhealthy as it looks as there has been significant growth in the economy. Besides, there are a few tech giants hoarding cash creating an apparent liquidity shortage.
In summary though, the levels of corporate debt are still at an unhealthy level meaning that protection for investors is still at an alarmingly low level. The banks don’t have the tools to precipitate a crisis as was pre-2008. This is because interest rates have remained low since 2008 and banks can only do so much. Nonetheless, they still remain terribly important to the global economy and will continue to be so.
The rates of debt and political upheavals like Brexit don’t bode well for the global economy. The global economy is interconnected meaning that it is not inconceivable to predict a crisis in the near future.
Bitcoin and Performance of Global Financial Markets
Bitcoin holders are definitely eager to move on from the brutal bear market in 2018. Not only did the market stagnate, but it also lost upwards of 80 percent in value from the year’s start.
Bitcoin has had the problem of volatility and speculation sometimes to the extreme. If you may well remember, the intention of Satoshi Nakamoto was to have it as a currency and not the opposite. That said, the reality is that Bitcoin will take time to stabilize given the aftershocks of the bear market. Waiting for Bitcoin to have an actual bull run is up for debate. Admittedly, Bitcoin can also do well in a booming economy since investors have disposal money to invest.
What’s the next best thing? How about Bitcoin being solid security in the event of a financial crisis? You know, god forbid a crisis actually happening; but this is an event that occurs once every decade or so. An actual crisis may be an interesting development for Bitcoin crisis.
In conclusion, it may not a hundred percent scientific to suggest that Bitcoin prices will rise in this scenario. Nonetheless, it may very well be a smart calculation to hold onto your Bitcoin in the event this comes to pass. Diversification of your portfolio is a smart business move and with Bitcoin quite affordable at the moment. This will be an interesting market to track.