From Lehman Brothers to First Republic Bank: Bitcoin’s rise in uncertainty

With the recent banking turmoil, ongoing recession and ‘signs of another global economic crisis,’ cryptocurrencies are – once again – emerging as an alternative way to hold one’s assets, with bitcoin being one of the most popular ones. 

As financial institutions falter, customers increasingly seek alternative monetary avenues, with bitcoin frequently reaping the rewards.

Last month’s upswing of the leading cryptocurrency, for instance, followed a recent banking upheaval, which included First Republic Bank (FRB), Silvergate Bank, SVB, and Signature Bank crises.

Consequently, Bitcoin’s optimistic narrative has been thrust back into the limelight. 

However, one aspect remains unequivocal: between the financial crisis of 2008 and 2023, the world’s first cryptocurrency has evolved into a mainstream asset. 

Blast from the past

The 2008 financial crisis manifested as a confluence of elements, culminating in the disintegration of prominent financial establishments, a steep stock market decline, and an ensuing worldwide recession. The contributing included:

• The subprime mortgage bubble: The ebb and flow of the US housing market was driven by an influx of subprime lending, which encompassed loans extended to borrowers with less than stellar credit ratings. As housing prices began their descent in 2006, numerous subprime borrowers defaulted on their loans, resulting in a swift escalation of foreclosures.

• Reckless risk-taking by financial institutions: Banks and other financial entities engaged in risky endeavors, including heavy investments in mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). The housing market’s collapse led to a sharp decline in the value of these assets, inflicting substantial losses upon the institutions in possession of them.

• Insufficient regulatory measures: The financial sector functioned within a feeble regulatory framework that neglected to address the hazards posed by intricate financial products and the interconnectivity of international financial institutions. This oversight deficiency exacerbated the crisis’s gravity.

The tumultuous period saw the bankruptcy of esteemed financial organizations, such as Lehman Brothers, alongside extensive government bailouts and a global recession. 

The International Monetary Fund (IMF) reported a 0.6% contraction in the global economy in 2009, with advanced economies facing a 3.4% contraction. The crisis precipitated widespread job losses and impacted economic growth and income inequality.

The birth and evolution of Bitcoin

Amid the 2008 crisis, the innovative concept of Bitcoin emerged. In October of that year, an individual or collective operating under the pseudonym Satoshi Nakamoto published the seminal Bitcoin whitepaper, unveiling a decentralized, peer-to-peer (P2P) electronic cash system.

This digital currency was ingeniously crafted to operate autonomously from central banks and governments, providing a potential alternative to the traditional financial infrastructure that had proven so fallible.

One of the primary advantages of Bitcoin was its capacity to bolster financial stability by mitigating the risks associated with centralized financial institutions. 

By functioning on a decentralized network, Bitcoin could eradicate single points of failure, rendering it less vulnerable to crises akin to those that beleaguered the conventional banking system in 2008.

Bitcoin garnered attention primarily from a niche community of technologically adept enthusiasts and early adopters in its embryonic phase. 

Nevertheless, after the 2008 crisis, Bitcoin gradually gained traction as a digital asset and an alternative to conventional currencies.

The currency’s inaugural real-world transaction transpired in 2010 when a programmer named Laszlo Hanyecz procured two pizzas for 10,000 bitcoin. 

By 2013, bitcoin’s value had soared past $1,000, and it continued to garner attention as an alternative investment vehicle.

Bitcoin’s potential as a safeguard against economic uncertainty became increasingly evident during the European debt crisis. 

As nations such as Greece, Italy, and Spain confronted severe financial challenges, bitcoin witnessed a surge in demand from investors seeking to shield their wealth from the instability of traditional markets.

By 2013, the volume of daily bitcoin transactions had swelled from a mere few hundred to over 50,000, reflecting the burgeoning interest in this digital currency. 

Since that time, the landscape has evolved considerably. As of May 16, bitcoin has recorded 526,379 transactions per day, suggesting that the cryptocurrency has grown increasingly stable and resilient over time.

The 2023 banking crisis

The recent banking crisis witnessed the downfall of three of the largest US banks, marking the most significant failures since the Great Depression. The causes of their collapse were manifold and can be primarily attributed to the following factors.

First, all the banks suffered substantial losses on their balance sheets due to bad loans, investments in high-risk assets, and diminishing market values. 

Second, as the economy grappled with uncertainty and low-interest rates, banks’ income from interest and fees dwindled steadily, impairing their ability to generate profits. 

Finally, the public’s trepidation and waning confidence in the banks resulted in a run on deposits as customers withdrew their funds, further undermining the banks’ financial standing.

The disintegration of Silicon Valley Bank and Signature Bank reverberated throughout the global financial system, precipitating widespread economic chaos. 

The stock market experienced a cataclysmic crash as the collapse of these banks incited a massive selloff, causing the Dow Jones Industrial (DJI) and the S&P 500 indices to plummet by over 20% in the ensuing weeks.