Despite the European Central Bank’s claims in late 2022 that Bitcoin and crypto were going to zero, Bitcoin is sitting around $30k USD, while the rest of the crypto market has looked resilient even in the aftermath of the FTX fallout.
Bitcoin reclaimed the $30k mark for the first time in over 10 months in early April, leading many to wonder if crypto is back out of hibernation. Let’s take a look at what’s happened to spur the recent resurgence of digital assets.
Central Banks in Crisis
In early March, Silicon Valley Bank, the 20th largest bank in the US, along with a few other smaller sized banks in the US, collapsed. Depositors were unable to withdraw funds, while FDIC insurance also failed to cover any depositor with over $250k USD, as that is the limit of coverage for FDIC coverage. As a result, the banks had to be bailed out, in a similar vein to what happened during the mortgage crisis of 2008 that spurred the creation of Bitcoin. This bailout was actually more dollars than the one in 2008, for reference.
The events showed weakness in the banking system while also reducing faith in them. This combination caused the weakest banks to face investor scrutiny, resulting in a European bank, Credit Suisse, to face serious issues as well. Credit Suisse has since been merged with UBS (Union Bank of Switzerland), in a deal that has not yet been completed but mostly sees Credit Suisse absorbed without much if any employee retention. The deal was also forced by the Swiss government, not a deal UBS necessarily wanted to take.
While the bleeding for central banks has stopped for the moment, it was certainly a wake up call for those who had faith in the traditional finance system. Many people are beginning to wonder whether they can trust banks with their money seeing as the bank tends to turn around and loan out your money, meaning it may not be there when you need it. This is especially true if a lot of people go to withdraw money at the same time, a bank run as it were. While crypto systems such as Terra collapsed because of a bank run, this was because the system had no central authority to stop it. The reality is that if there’s a bank run on US banks, most of them won’t be able to survive either. So, what’s the solution?
Crypto and Blockchain Fundamentals
Better monetary policy (such as not printing money every time there’s a problem) would be a good step towards solving the current issues surrounding traditional finance and banks. However, we’ve already reached a point where fiat money printing is causing issues that will be difficult to fix. For example, during the 2008 financial crisis, the US federal budget was about $2 trillion. Today, 15 years later, it’s over $10 trillion, meaning that they’ve printed 5 times the money that was in the system in that short period of 15 years. Combine that with the US national debt and we may have a problem sooner than later.
Bitcoin, crypto, and blockchain may be the solution we need. While there are many who decry Bitcoin and other digital assets, the reality is that they’re deflationary, and considering the increasing digitization of society, it no longer seems far-fetched to think of digital money as legal tender. It’s unlikely you ever really see your money as anything other than a number on a screen anyways. Governments may like the idea of Central Bank Digital Currencies (CBDCs), but they won’t change the fiat problem, while also giving them even more control over whether you can access your money.
Generally, the fundamental principles behind Bitcoin and digital assets are decentralization, transparency, and limited supply. Decentralization is important for many reasons, not the least of which is that Bitcoin cannot be controlled. The government can’t stop you from sending a Bitcoin transaction if they want to unless they prevent access to the internet.
Transparency is another factor that the traditional financial system lacks. It’s not like you can just watch every transaction your bank makes with your funds, or audit them by looking at a block explorer. Both of these things are possible with crypto.
Limited supply, while not the entire point of crypto, is one of its more attractive qualities. Without being able to just print more of a crypto asset, it allows purchasing power and value to increase over time, rather than decrease, which is what’s happening right now with fiat money. It also helps with investment decisions because you can invest in an asset without worrying more will come into the system and affect value.
Consumer Price Index and Inflation
It’s unlikely that you need to be informed about inflation and rising prices for everyday goods. You’re already feeling those issues every time you go shopping for everything from eggs to cars and everything in between. While the COVID pandemic certainly didn’t help stop any of these issues, it’s not like pricing really made sense before COVID either. Even before COVID there were many food items that were double the price they were just 5 years ago.
Meanwhile, wages haven’t kept up with pricing, leading to people having less purchasing power. Then maybe the minimum wage increases, but so then do prices. It’s a vicious cycle that seems nearly impossible to get out of unless there is serious systemic change. Even with banks offering seemingly high interest rates for savings accounts, that percentage isn’t outstripping the inflation year over year. Sure, you’ll have more money than you did last year, but it’s most likely that you won’t be able to buy as much as a year ago with your principal deposit.
Closing Thoughts: Interesting Times
Then what can you do? Well, it’s hard to say without systemic change. You can certainly invest in crypto as many are now, but really that depends on your current situation, as not everyone can afford to invest in this current economic climate.
Perhaps the best thing you can do is start talking to your local politician, as change will need to be made at a governmental level, lest we require some sort of French Revolution, which seems unlikely in modern society.