Did The Lehman Brothers Bankruptcy Lead To The Rise Of Bitcoin? Absolutely
The 2008 financial crisis and the launch of bitcoin occurred around the same time. This week is the 10th anniversary of the events that triggered the 2008 financial crisis – the crisis that’s referenced in the genesis block of bitcoin. Is there really a connection between the 2008 financial crisis and the rise of bitcoin? Or was it purely a coincidence?
Christine Masters at Cryptovest recently tried to answer that question in an article titled, “The Lehman Brothers Bankruptcy: How It Triggered the Rise of Bitcoin.”
In the article, Masters highlights a number of factors in the 2008 financial crisis that led to – or at least contributed to – the rise of bitcoin in 2009 and onward.
So did the 2008 financial crisis contribute to the rise of bitcoin? Why does Masters believe the Lehman Brothers bankruptcy fueled the rise of bitcoin?
The reason is simple: the Lehman Brothers bankruptcy exposed shady practices among major financial institutions. These shady practices shattered our trust in centralized, mainstream financial institutions, leading people to trust decentralized institutions like bitcoin:
“The bankruptcy of Lehman Brother shed a light on the Credit Default Swap industry, a practice of wrapping up risky mortgages into investment products, and selling them with a high investment grade. Soon, it turned out that many other investment banks had onboarded vast amounts of CDS papers – and had to start the process of painfully writing off the value of those documents. Lehman Brothers had about $2 billion in subprime losses, but soon, the bill ballooned, for an estimated cost of around $400 billion, according to the Financial Times.”
This was just the beginning of the 2008 financial crisis.
Soon, the panic spilled over to the public. Banks lost faith in each other. Institutions that were supposed to protect value were no longer deemed safe. The crisis progressed, central banks had to intervene, and at the end of the crisis, banks received a bailout worth nearly $1 trillion. The bailout helped give banks the appearance of liquidity and stemmed panic from the public.
Satoshi Nakamoto was developing bitcoin during the height of this crisis. The bitcoin whitepaper was published online on October 31, 2008.
The bitcoin genesis block, which famously references a central bank bailout, was mined by Satoshi Nakamoto on January 3, 2009. That block cites a headline in the London Times saying, “Chancellor on Brink of Second Bailout for Banks.” The bitcoin blockchain has been processing transactions without fail ever since.
“So Bitcoin was born in an age when the financial sector divulged a dark secret, explains Masters, “and showed that trust in banks could falter. Trustless money was the answer of Satoshi Nakamoto.”
The bailout showed us that centralized financial institutions and central banks had mismanaged power. These institutions had enormous power over the economic fate of countries. The banks had so much power that they had become “too big to fail”. When these financial institutions played risky games and got caught, central banks were forced to bail them out at taxpayer expense. It’s a broken system that leaves banks in an enormous position of power over the country.
“In The End, Traditional Money Found Its Way Into Bitcoin”
It’s easy to see a connection between the 2008 financial crisis and the rise of bitcoin. It’s the battle between centralized financial institutions and decentralized technological solutions.
However, Masters takes this concept a step further by claiming that bitcoin experienced most of its growth during the recovery phase, and that now, traditional money and bitcoin are inexorably linked:
“But this is not the end of the story for Bitcoin. Born in turmoil, Bitcoin evolved during a decade that, paradoxically, saw an ongoing economic boom unroll, boosted by the extremely lax policy of central banks. Bitcoin was created as an alternative to traditional money – but in the end, traditional money found its way into Bitcoin.”
As bitcoin entered its peak bull market swing in 2017 and 2018, the entire global financial market was booming. Indices around the world were at an all time high. Financial markets were at a high level of liquidity after a decade of lax monetary policy from central banks. Money was looking for places to invest, and cryptocurrencies took their share of this money.
“One of the triggers of the 2017 boom was precisely the feeling of extra money flowing around, even trickling down to retail investors.”
Now, Masters believes this rosy picture is “showing signs of cracking”:
“Bitcoin, in its decade anniversary, may witness another crisis, or at least a downturn in the exuberance of the markets. Bitcoin and cryptocurrencies will once again have to test their mettle against the traditional financial sector. But this time, crypto coins are a decade old, and may become a factor in surviving the next move of the markets.”
It’s important to remember that crypto markets have never been through a significant economic downturn. The early days of bitcoin were the early days of the global economic recovery. Since 2009, economies worldwide have grown steadily, as have crypto prices and the crypto industry in general.
But what happens if stock markets plummet? What happens when the next economic downturn happens?
Some believe the next economic downturn will lead to a skyrocketing value of crypto prices – similar to how gold goes up in price during periods of economic turmoil. Others believe the next economic downturn will lead to a collapse in crypto prices as long-time hodlers liquidate their crypto fortunes to pay for real-world expenses.
Ultimately, it’s unclear where bitcoin and the global economy is going next. The history of bitcoin, however, is inexorably linked to the 2008 financial crisis.