The 2008 Crisis and the History of Bitcoin

Written by Krisztian L.

April 23, 2020

It is not a coincidence that Bitcoin was created in the aftermath of the 2008 financial crisis. Actually, the crisis was a motivating factor in its creation for several reasons. 

Satoshi Nakamoto created a new payment system and he showed the world a better technology without those problems the banking system had.

Before the crisis bad regulation and over-financialisation tendency together co-created an extremely vulnerable system (the bank sector started to pursue investment banking rather than cultivating a more effective and efficient intermediator role as before).[1]

Regular people deposited and stored their savings on their bank accounts for safety reasons. Then the banks invested their money to make profits on it. For example they gave loans to people or bought risky loans, so actually the people’s money were not physically in the bank. This would be all right as long as they do it responsibly and keep your savings safe. However, this was not the case by 2008 which resulted in the financial crisis. In the USA the banks were offering cheap, risky loans to almost everybody without liquidity and without performing background check order to get new customers. When the real estate bubble burst, plenty of customers were not able to pay back the money while the banks spend and invested the deposited amounts from other customers. This resulted in bankruptcy of banks and many financial institutions while the customers could not recover their deposited money as the banks lost them. To save the banks the government stepped in with aids at the expense of the taxpayers, but that could not save them either. From the USA the crises spread through the world and brought down economies. The financial crises led to dissatisfaction of customers and the trust in central authorities had shaken.[2]

In the USA the reserve requirement is generally 10% which means the banks are required to hold only this percentage of your deposits on hand and it is allowed to invest the rest. This is called the fractional reserve banking which works until the customers are not trying to access their funds all at the same time. During market shocks and instability if the customers starts to withdraw at once, sometimes the banks cannot stay liquid and this is when the problem begins like in 2008. They lost their customers money due to wrong investment decisions such as offering high risk subprime mortgages.[3]

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During the crisis people lost their trust and faith – which was established during the gold standard, as I mentioned earlier – in financial institutions, as well as in the government. This was combined with the uncertainty and unpredictability of the decreasing value of money as there was not and still is not a limit on the amount of money that can be printed (this was not possible yet when money was pegged to gold). Whenever the central banks printed more money so as to the government could inject it into the economy, the value of money was decreasing. 

As most of the cryptocurrencies have a limited total supply there would not be inflation. Although, this indicates the need of an international crypto monetary system and a complete change in our mind-sets (e.g.: a loss-minimizing capitalism instead of a profit-oriented one).

For the financial crisis the creation of Bitcoin was the answer. It has a total supply that can be in circulation and new bitcoins cannot be made if it reaches the limit which is coded in the algorithm. The code is also visible for further verification. The limitation of the supply means that the value of a Bitcoin is only depends on the supply and the demand in the market and no governmental intervention can influence it. It also cuts out the mediator when we make a transaction as it allows to transfer money directly. This way the money stays in the owner’s hand (bitcoin wallet) which eliminates the risk of losing your funds as it happened in the financial crisis due to the banks incompetence.[4]

Amid todays’ coronavirus the history may repeat itself…

During the crisis people lost their trust and faith – which was established during the gold standard, as I mentioned earlier – in financial institutions, as well as in the government. This was combined with the uncertainty and unpredictability of the decreasing value of money as there was not and still is not a limit on the amount of money that can be printed (this was not possible yet when money was pegged to gold). Whenever the central banks printed more money so as to the government could inject it into the economy, the value of money was decreasing.

As most of the cryptocurrencies have a limited total supply there would not be inflation. Although, this indicates the need of an international crypto monetary system and a complete change in our mind-sets (e.g.: a loss-minimizing capitalism instead of a profit-oriented one)..

For the financial crisis the creation of Bitcoin was the answer. It has a total supply that can be in circulation and new bitcoins cannot be made if it reaches the limit which is coded in the algorithm. The code is also visible for further verification. The limitation of the supply means that the value of a Bitcoin is only depends on the supply and the demand in the market and no governmental intervention can influence it. It also cuts out the mediator when we make a transaction as it allows to transfer money directly. This way the money stays in the owner’s hand (bitcoin wallet) which eliminates the risk of losing your funds as it happened in the financial crisis due to the banks incompetence.[4]

Amid todays’ coronavirus the history may repeat itself…

Reference

[1] Christopherson, S. – Martin, R. – Pollard, J.: Financialisation: Roots and Repercussions. Cambridge Journal of Regions, Economy and Society, Vol. 6, 2013 pp. 351-357, https://doi.org/10.1093/cjres/rst023

[2][4] Baghla, S.: Origin of Bitcoin: A brief history from 2008 crisis to present times, Analytics India Magazine, 2017, https://www.analyticsindiamag.com/origin-bitcoin-brief-history/

[3] Noogin: The Financial Crisis and History of Bitcoin, Medium, 2018, https://medium.com/@noogin/the-financial-crisis-and-history-of-bitcoin-27ebdb932b99

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