The Great Recession was a steep decline in economic activity globally that initially started in 2007 and lasted several years, affecting countries across the globe. It is considered to be one of the most significant downturns since the Great Depression in the 1930’s.
The 2008 financial crisis and the creation of Bitcoin were both influenced by the economic downturn from 2007 to 2009 which was triggered by the bursting of the United States housing bubble, also called the subprime mortgage bubble. The elaborate concept of Bitcoin and cryptocurrencies, in general, first emerged during these times, as they aim to address the perceived issues of trust and stability in traditional economic systems by eliminating the need for banks and other centralized financial institutions and middlemen.
The whole world ended up in a recession and the United States’ housing market went from flourishing to bust within a matter of weeks. In the wake of its destruction, large amounts of mortgage-backed securities, derivatives, and other financial instruments plummeted in value swiftly. The pseudonymous Satoshi Nakamto sought to change this for once and for all with the creation of Bitcoin.
One of the core concepts of Bitcoin is its Proof of Work (PoW) consensus mechanism and encrypted blockchain technology. Together, they provide a transparent, secure, and trustless transaction environment for its users, while they can remain completely anonymous.
Incentives like Bitcoin mining have helped grow the network, while the concept of Bitcoin halving has controlled the digital currency’s supply, which ensures sustainability and scalability in the most optimal way possible.
It is without a doubt that Bitcoin’s creation has significantly influenced our (digital) economy, demonstrating the potential for other cryptocurrencies as both media of exchange and stores of value.
In this article, our Plasbit crypto experts will outline the 2008 financial crisis and the creation of Bitcoin in great detail. They will discuss how Satoshi’s creation had a huge impact on our economy as we still know it today and how this set rapid digitalization in motion in the beginning of the 2010’s.
How the Crisis Affected All of Us
The Overheated U.S. Housing Market
One of the main causes of the 2008 Financial Crisis was the heavily overheated housing market. In essence, it was stocked by unscrupulous lending practices that allowed lending to unqualified borrowers and the reselling of loans through poisonous financial instruments named mortgage-backed securities.
These financial instruments allowed banks to buy insurance policies against mortgages, creating a metaphorical house of cards, built on a foundation of homebuyers that would never be able to afford them.
Fannie Mae and Freddie Mac were two government-backed entities that underwrote most of these mortgages and resold them to greedy investors. Eventually, they were bailed out with taxpayer money and taken over by the U.S. government. However, although banks got bailed out, many ‘’regular’’ people lost their homes as home prices plummeted to incredibly low levels.
Global Spreading of the U.S. Economic Crisis
Initially, the Economic Crisis started in the United States. However, soon after, it spread to the rest of the world. Note that U.S. consumption accounted for over a third of the global consumption growth between 2000 and 2007, and that the rest of the world mainly relied on the U.S. consumer as a demand source for their income, product, or services.
Added to this, the toxic financial instruments we briefly discussed in the previous paragraph were owned by many corporate institutional investors across the globe. Financial instruments, such as derivatives and credit default swaps also heavily increased the linkage between large financial institutions.
Financial institutions were de-leveraged and assets were sold en masse to repay obligations that couldn’t be refinanced due to frozen credit markets. This logically led to an accelerated solvency crisis, leading to a decrease in international trade.
This decrease in international trade greatly reduced the growth rates of developing countries due to the significant falls in expert and general trade. As a result, commodity prices, cross-country remittances, and investments plummeted. Added to this, countries and geographical locations with fragile political systems feared that Western investors would withdraw their money and other investments.
U.S. Government and Treasury Interventions
One of the most significant solutions the U.S. government came up with to counter the 2008 financial crisis initially, was The Troubled Asset Relief Program (TARP). Tarp stabilized the U.S. and later global financial system through the government purchase of bank stocks and mortgage-backed securities, essentially buying up the poisonous financial assets financial institutions had been selling as ‘’great investment vehicles.’’ From 2008 to 2010, TARP bought a total of $426,4 billion into these assets.
Apart from the TARP, the FInancial Stability Oversight Council (FSOC), and the Consumer Financial Protection Bureau (CFPB) were established, to prevent the same from happening ever again. The main reason for this was the general notion that global banks were ‘’too big to fail,’’ which justified lawmakers of the Federal Reserve Bank to bail them out.
Additionally, congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which allowed for the creation of agencies like the Consumer Financial Protection Board (CFPB) and the Financial Stability Oversight Council (FSOC), that acted like Wall Street watchdogs.
Added to this, the Dodd-Frank act required banks with assets in excess of $50 billion to undergo regular stress tests and reduce their highly speculative bets.
The Great Recession was Avoidable.
Many people and organizations, including the Financial Crisis Inquiry Commission, believe the Great Recession of 2008 was avoidable. The commission compiled an extensive report, identifying the failure on the part of the U.S. government in regulating the financial industry.
This failure included the Fed’s inability in stopping banks from handing out loans and mortgages to people with bad credit risk. Additionally, most banks and other financial institutions simply took on too much risk.
According to the report, excessive consumer and corporate borrowing, together with the fact that lawmakers did not fully comprehend the situation, created the housing market bubble, with the most significant cause being the extension of mortgages at too low interest rates to unqualified borrowers that simply weren’t able to ever repay them.
Bitcoin's Role in Solving the Crisis
The Creation of Bitcoin as a Solution
The 2008 Financial Crisis and the creation of Bitcoin are undoubtedly interlinked. Bitcoin’s early days are as mysterious as they are revolutionary at the same time. Coming into existence shortly after the 2008 financial crisis, it’s aim was to provide a safe and secure way to hold value and transact with anyone, without any intermediaries, such as banks, payment providers, card issuers, and other ‘’unnecessary middlemen.’’
Although Bitcoin’s creators had undoubtedly introduced something groundbreaking to the world, they decided to go by a pseudonym – Satoshi Nakamoto. It was under this name that various posts regarding cryptography and digital security began to surface on the Bitcoin.org forums and in the mailing lists of privacy advocates, such as the Cypherpunks.
Back in those days, they exhibited great frustration at how online transactions were conducted and how people dealt with their online privacy. Satoshi Nakamoto, on the other hand, felt that an alternative method was needed so that people could preserve control over their own funds in the digital age they were heading towards. In particular, he wanted digital transactions to be as simple to conduct as person-to-person cash transactions.
Bitcoin as a Potential Safe Haven
Before we discuss Bitcoin as a potential safe haven, let's first briefly look into what a safe haven actually entices. A safe haven asset, in essence, is an asset that can be used to offset the risk of an investor’s portfolio and limit their exposure, especially during market downturns and periods of financial turmoil.
Most people agree that Bitcoin can be seen as ‘’digital gold’’ nowadays and that it acts as a hedge to inflation. Especially the fact that it doesn’t require any bank, financial institution, or other third-party middlemen to send or receive it, make it attractive for most of us, including but not limited to digital nomads and the unbanked.
Especially Decentralized Finance or DeFi in short, takes human greed out of the equation by preventing mistakes that the banks made that led to the crisis. In Defi, all transactions occur according to set protocols, with no human intervention at all.
What is Decentralized Finance and Why is it the Future of Finance?
In the cryptocurrency world, you will often encounter terms like DeFi and TradFi, and it could be that you are wondering what these terms mean, and what the difference is between them. Let’s start with TradFi or Traditional Finance, to start with.
TradFi ecompasses all aspects of the traditional financial system as we know it, including the stock market, venture capital, the banking industry, and financial institutions, such as hedge funds and money managers.
Decentralized finance or DeFi emerged as an alternative, enabling people to trade, lend, borrow, buy, and sell financial instruments without relying on any intermediaries or so-called ‘’centralized intermediaries.’’
Although some crypto maximalists suggest that one type of finance will prevail over the other in the long run, they can perfectly exist alongside each other and function symbiotically. The main reason for this is that our current financial system is built on central points that allow us to regulate global trading, lending, and asset management.
Quite frankly, our traditional financial system has always flourished because it works. In extent, our financial system works because of the many regulatory requirements individuals and corporations face when conducting business in the financial sector. Additionally, governments and financial institutions alike provide consumer protection to individuals all over the world.
However, there are also some downsides to our traditional finance or TradFi model, which have given rise to a new, alternative way of conducting business – the Decentralized Finance (DeFi) model. To start with, DeFi markets, models, and systems aren’t regulated by centralized entities.
Instead, they fully rely on automated market maker (AMM) models, using algorithms and liquidity pools to facilitate trades and other transactions. Most oftenly, decentralized applications (dApps) allow individuals and corporations alike to create assets for others to trade or invest in without any regulatory hurdles.
DeFi platforms, services, and other infrastructures are often built around cryptocurrencies or other digital tokens instead of traditional currencies, which can, in turn, be used to facilitate transactions, including trades, payments, loans, and investments.
In addition, DeFi systems and organizations don’t have to comply with the often strict regulations imposed by traditional financial (TradFi) services, lowering the entry barrier for anyone interested in participating in its infrastructures.
Although the level of regulation is significantly lower in decentralized ecosystems, financial watchdogs, such as the Securities Exchange Commission (SEC) have ramped up their efforts in regulating cryptocurrencies, NFTs, and other decentralized financial instruments, assets, and practices.
In contrast to decentralized finance ecosystems, traditional financial institutions must adhere to loads of state, federal, national, and international laws and regulations. For instance, most, if not all, traditional finance systems are required to hold a certain amount of capital before being able to conduct business in the financial sector. Added to this, they must maintain a high enough liquid balance to ensure they can meet all of their client’s obligations.
Another important aspect of traditional finance institutions is that they must adhere to strict know your customer (KYC) regulations and verify the identities of all individuals and corporations using their services. KYC regulations have been introduced to prevent money laundering and fraudulent activities globally.
Until now, these strict regulations have been an attractive reason for private and institutional investors to invest their funds in them as they believe they are more likely to remain safe with them compared to newer, decentralized systems.
Key Reasons for DeFi to Overtake TradFi
There are a couple of important reasons why our experts think DeFi will overtake TradFi rather sooner than later, including but not limited to lower barriers of entry, the limited innovation, and high transaction fees of TradFi institutions.
Lower Entry Barriers of DeFi
DeFi ecosystems often are completely permissionless, meaning everyone can take part in them. Distributed ledger technologies also have low fees, and offer low-cost investment opportunities, allowing anyone to participate, even those generally underserved by traditional finance ecosystems.
Limited Innovation of TradFi
Most traditional finance ecosystems are relatively slow with embracing new technologies as they need to adhere to strict regulations, and pass company changes through all levels of their organizational hierarchies. Additionally, the have to invest large amounts of funds to upgrade their technologies and infrastructures.
High Transaction Costs of TradFi
Usually, the transaction costs of traditional finance ecosystem-related transactions are relatively high compared to DeFi. In most cases, banks, brokers, and other financial institutions tend to make transaction-based profits. DeFi ecosystems, on the other hand, generally fully automate these features and roles, resulting in lower costs overall.
Not your keys, not your coins
To understand this famous saying in the cryptocurrency world, one would need to be familiar with how private and public keys work on the blockchain. First of all, you have to understand that Bitcoin and other cryptocurrencies aren’t really stored on a crypto wallet.
On the other hand, crypto is stored on the blockchain, with the specific amount of crypto stored at each blockchain address recorded immutable by each so-called ‘’node’’ on the network. Essentially, your crypto wallet only stores your private key.
If this sounds like abracadabra to you, allow our experts to explain. Each blockchain address is associated with a key pair, consisting of a private key and a public key. The private key, as the word suggests, should be kept private and allows you to manage the assets stored at a specific address.
The public key, on the other hand, serves as your account’s unique identifier and can be given to anyone else in the same fashion you can essentially give your bank account number away to anyone in order for them to deposit funds into it.
Anyone with access to your private key can access the funds stored in the associated crypto wallet, no matter where or who they are. For this reason, handing over your private keys means sharing access to your cryptocurrency assets.
Basically, if you have your Bitcoin or other cryptocurrencies stored at an exchange or software wallet, you do not have control over your private keys. For this reason, the wallets connected to these types of accounts are often called ‘’custody wallets.’’
If you want to take full control over your digital assets, the best idea would be to purchase a hardware wallet or store your digital assets in a secure cold wallet. Doing so enables you to stay in full control over your Bitcoin and other tokens by not sharing the private key with anyone else. In essence, this, combined with conducting DeFi transactions only, is the single true way to cut out unnecessary middlemen like banks during financial transactions.
Our Stance on Self-custody, Fund, and Asset Control
Our experts often get asked whether crypto can replace banks. We at Plasbit are firm believers of self-custody and fully believe that you should take full control of your funds from the traditional banking system.
For this reason, it is our mission to provide our community with the right tools that will help them achieve full financial freedom and self-sovereignty. Additionally, we think it is an unalienable right to defend your wealth from inflation and the government.
Whether you use a hot, cold, software, or hardware-based wallet, with cryptocurrencies and other digital assets in a DeFi ecosystem, you take matters into your own hands, and are in total control of your own assets.
Added to this, we think the fees charged by many traditional finance systems and corporations are simply too high and out of this time, compared to the many DeFi possibilities available globally today.
Apart from lower fees and self-custody, we also put a strong emphasis on sustainability, and, therefore, advocate for further digitalization of the current global financial system. Hence we don’t live in the Stone Age anymore, it is time for rigorous change, where ‘’everyday folk’’ get to have full control over their financial assets, digital privacy, and other basic human rights related to asset and financial ownership.
The 2008 Financial Crisis and the Creation of Bitcoin - Conclusion
The solutions the United States government had to the 2008 financial crisis have deep rooted, long-term implications, and show us the usually bad side of a centralized financial system. Additionally, they also highlight the benefits of decentralized finance and Bitcoin over the centralized system and fiat money.
In essence, at Plasbit, we share Satoshi’s vision on Bitcoin’s creation to full extent, agreeing with his stance on the global banking system and politics. Being the sole beneficiary owner of your own assets and finances and not having to rely on third-party intermediaries whenever you wish to conduct transactions with other people or corporations should be the new norm, definitely in today’s digital day and age.
