Bitcoin’s purpose stems from a desire to offer an alternative to banks and the traditional financial institutions. A fundamental aim was to offer a decentralised and secure way to store and transfer value.
Bitcoin was created in 2008 by an anonymous individual or group of individuals under the pseudonym Satoshi Nakamoto. The stated purpose of Bitcoin was to create a decentralised, digital currency that would be free from government or financial institution control.
Bitcoin was created in the aftermath of the 2008 financial crisis, which many people saw as a result of the excessive greed and risk-taking of banks and other financial institutions. Bitcoin’s decentralised nature was intended to prevent such abuses from happening again.
Amongst the group of early developers there was a focus to create a more efficient and secure payment system. Bitcoin transactions are processed and recorded on a distributed ledger called a blockchain. This makes them much more transparent and secure than traditional electronic payments, which can be expensive and slow.
The Global Financial Crisis
The 2008 financial crisis, or Global Financial Crisis (GFC), was the worst financial crisis since the Great Depression of the 1930s. It originated in the United States subprime mortgage market and subsequently spread throughout the world.
Causes
Regulators, particularly in the United States failed to properly monitor the activities of banks and other financial institutions. In the years leading up to the crisis, banks and other financial institutions engaged in excessive risk-taking. They lent money to borrowers with poor credit histories. These loans were packaged into complex financial instruments that were difficult to value.
The housing bubble was another key factor that contributed to the crisis. The value of homes soared in the years leading up to the crisis, and many people took out loans to buy homes that they could not afford. When the housing bubble burst, these borrowers were unable to repay their loans, and the banks that had lent them the money were left holding large losses.
Impact of the Crisis
The financial crisis had a devastating impact on the global economy. It led to a sharp decline in economic growth, a surge in unemployment, and a decline in the value of stocks and bonds. The crisis also caused a number of bank failures, and it led to a loss of confidence in the financial system.
Response
Governments around the world responded to the crisis with a number of measures, including:
- Bailouts: Governments bailed out a number of large financial institutions that were on the verge of collapse. The bailouts prevented these institutions from failing, but they also led to a significant increase in government debt.
- Stimulus: Governments also provided stimulus packages to try to boost the economy. These stimulus packages included tax cuts, spending increases, and infrastructure projects.
- Regulation: Governments also took steps to regulate the financial system more tightly. This included measures to increase transparency, to reduce risk-taking, and to protect consumers.
Today’s Global Financial System
Even with the measures put in place since 2008/2009, global debt levels have reached record highs.
Raining interest rates coupled with slowing economic growth makes it very difficult for borrowers to repay debts. As with the case in 2008/2009 this could lead to a surge in defaults causing severe instability.
The global financial system is also facing a number of geopolitical risks. Wars in Ukraine and Middle East coupled with the trade tensions between the United States and China. These risks can disrupt trade and investment flows, and they can also lead to increased volatility in financial markets.
Former chief North American economist at Merrill Lynch David Rosenberg sees parallels between current market sentiment and the period leading up to the 2008 housing and financial crisis.
In an interview with the business insider in October 2023, Rosenberg emphasised the main similarities between the two periods. He noted that stocks and property are now more overvalued relative to income and earnings than they were during the bubble of the mid-2000s. He also pointed to rising delinquencies on credit cards and auto loans, as well as troubling debt levels in the shadow banking sector.
Overall, Rosenberg warns that history is repeating itself, and predicts a recession will occur in the next few quarters, not years. He predicted a sharp increase in the number of job losses, a rise in the number of non-performing loans, faster disinflation and a new bull market in government securities.
Financial outlook in 2024
Inflation is expected to remain elevated in 2024, according to he IMF. Central banks around the world are raising interest rates in an effort to combat inflation, but this could also slow economic growth.
The US-China trade war is another major risk to the global economy. The two countries have imposed tariffs on each other’s goods, which has disrupted trade and investment flows. A further escalation of the trade war could damage the global economy.
The ongoing wars in Ukraine and the Middle East is a major risk to the global economy. Supply chains have been disrupted causing energy prices to soar. The longer these wars and unrest continue, the greater the risk of a wider economic slowdown.
The global economy is a complex system, and it is difficult to predict with certainty how it will evolve. The most important lesson we can learn from history is that we don’t seem to learn from it. The banking world is in disarray for the second time in 15 years.
Bitcoin has been controversial since its beginnings however it is clear that it has captured the imagination of many people, most notably the largest fund managers in the world and it is likely to continue to play a significant role in the future of finance.
Protection against another crisis is something to be considered; just in case history repeats itself, again.
