Most of us have seen two banking system busts in a relatively short span of time.The 2008 crisis created by banks’ reckless lending practices resulted in a subprime mortgage crisis that caused many people to lose their houses, their jobs and life savings. The current crisis,due to Federal interest rate hikes, resulted in the recent bank run and subsequently, we suspect, resulted in people losing a significant portion of their future FIAT earnings.
There are both similarities and difference in these events that we will uncover here.
There are many articles on the events in 2008 that led to the mortgage crisis and the bailout of banks, if you need a refresher. Today, we’re witnessing another banking crisis which is somewhat similar in that interest rate hikes are significantly devaluing Treasury bonds that banks rely on as a central source of capital.
But how did we get here?
Let's go on a tangent here for a bit. Back in 2020, the central banks’ response to COVID-19 and loss of productivity came in form of printing money (increase of M2 supply and Interest rate freezes) to keep people happy. We don't believe distribution of this money and its impact on the system is what we're still feeling here. Most of the new money ended up in banks, there was no means to spend it (e.g. travel restrictions, shortage of supply, etc.) and some banks like Silicon Valley Bank (SVB) bet on interest rates being low and purchased long term Treasury Bonds.
What happens next breaks SVB. Generally speaking, in any economy, when productively decreases while demand increases, we see inflation. When able and previously employed people earn money, but don't go to work, it means they have free time and money to manage. Some put their money in banks, some consumed it through shopping, dining, some gambled with it in different ways and few smart ones purchased new assets.
The infusion of money created this problem we all know as inflation. So the central banks used their only tool to tame inflation by increasing interest rates. When the interest rate rises it impacts the value of the long-term debts such as Treasury Bonds. Banks who held these assets then lost a significant source of their capital over the time and by the time consumers found out and demanded their money, a large portion of it was already gone. This is a classic bank run.
But wait, it gets even worse. These events have a ripple effect in other parts of the monetary system that we're yet to uncover.
Government intervenes and guarantees all deposits at SVB and now has to deal with a much bigger issue as the value of these assets decline. They have a few options -- print more money, put the burden on the industry, and stop interest rate hikes so they won't break other banks. Unfortunately, all of these options will create further failures in the system and instead of a big bang, we'll see thousands of smaller busts. Although the impact is the same on the economy and people, the political narrative changes. Instead of a broken back bone, we'll see thousands of cuts.
But here is the good news. Bitcoin was created in response to a similar banking failure in 2008, and we should take advantage of it now.
In 2008, people walked away from houses when they couldn’t afford to pay its mortgage. The market was flooded with empty houses. People ended up losing their down payments, monthly principals paid plus all the future growth in their asset as we witnessed housing prices soar again in the next decade. However, this time government is guaranteeing their principal, and putting the burden on the banks. This creates a unique opportunity for people to convert their savings to Bitcoin.
Bitcoin network, not its price, has proven to be a consistent and reliable system for storing value.
Bitcoin has performed better than any other asset such as S&P500 or gold since its inception and although its market value fluctuates significantly, over the long term, is a predictable and secure place for storing value.
A big difference now is that we have Bitcoin that was created for this exact purpose back in 2008. It has the ability to store people’s hard-earned money in a decentralized system that is secure and immune from inflation, government politics, word politics and other elements that impact people’s wealth and are only decided by a few people at high seats.
This would be a good time for those of you who are still in denial of Bitcoin as a store of value. One difference between Bitcoin and another assets like gold or real estate is that it's traded 24/7, therefore, its price is subject to the highest frequency of investor reaction to news, emotions, and issues whereas the price of a house doesn’t have the velocity to react so quickly and on a daily basis. The BTC price continues to rise but along the way it will crash and rebound and this attribute is what has kept many people away from adopting it. People are not used to seeing the value of their houses change on a daily basis and because they are utilizing it, they actually may not care as long as they know at the end it’ll be worth the same or more than what they paid for.
Bitcoin is not a living necessity, but it is an investment necessity in our view.
The last banking crisis was unloaded to the people, but this time around consumers are given a short break to step out of this cycle if they choose to. This is not financial advice but if you are reading this, capitalize on this opportunity by buying some Bitcoin and saving on a regular basis while the prices are below the all-time high.