By CHRIS ILLING
The current plight of the banks brings back memories of the 2008 financial crisis. Calls for alternatives are getting louder. Bitcoin supporters are feeling encouraged.
There has been a clear pattern on the crypto markets in recent years, which is when stocks weaken, Bitcoin, Ether and company also lose value. When share prices fell, investors reduced their risks. Since crypto assets are classified as highly risky, especially by institutional investors, this asset class has regularly been trampled on when stocks rattled.
But the recent stock market weakness, triggered by the collapse of Silicon Valley Bank in the US and exacerbated by the near-collapse of Credit Suisse, broke this pattern. While Germany’s Dax stock market index has fallen by almost 5 percent since March 8, the day before the US bank quake, the crypto currencies Bitcoin and Ether have gained 28 and 13 percent, respectively. Bitcoin is approaching the $30,000 mark again.
One might think that with the recent banking crisis, the typical narrative of crypto fans is alive and well in which the banking system - based on central bank money - is doomed to fail. Even if such statements usually lack substance, the loss of credibility for the banking sector that is manifested in them should be taken seriously.
In fact, it is difficult to convey that only 14 years after the financial crisis, banks are again collapsing and state aid is being mobilised to stabilize the system. Many people wonder what is so special about banks that the state always must bail them out with taxpayer monies.
Banks play a central role in our financial system as financiers, asset managers and operators of the payment system. As a rule, large banks are also considered to be of systemic importance, since in the event of insolvency all the bank’s debts would become due from one day to the next. This would lead to chain reactions due to the worldwide networking with almost all economic sectors. For example, companies that have deposited their money in a collapsing bank would no longer have access to their assets, and would no longer be able to pay their employees.
This is exactly what was feared with Silicon Valley Bank. Lending would also be restricted, resulting in a slump in investment spending. In addition, investors would consume less in the face of losing their savings, and there would be a downward spiral of falling demand and rising unemployment.
According to the prevailing view, there is therefore no alternative to rescuing systemically important banks. Crypto supporters, on the other hand, claim that blockchain-based concepts do offer an alternative while decentralised crypto currency could make the system more stable and make such bailouts obsolete.
The basic idea is to replace national currencies, which staunch crypto fans believe are the root of all evil, with Bitcoin and its fellow travellers. However, many crypto supporters have the idea that national money – and also an exchange guarantee – will disappear completely, and that cryptos will prevail as a unit of account with people carrying out transactions directly via the blockchain.
But, until we get to this point, blockchain technology still must eliminate issues such as transaction volumes and reliability. But crypto fans are definitely experiencing a revival after the recent turmoil in DeFi (decentralised finance) land.