The narrative for crypto, which arose in the 2008 financial crisis, has been revived more than ever in the past days, and it shall be worth revisiting the case for crypto in light of the trends of the past years and the events of the past week. With quantitative easing (QE) and cheap, sometimes even free liquidity for more than a decade, the current crisis has been in the making for quite some time, creating a financial system at the mercy of interest rates, and an economy with an increasing share of zombies, companies that cannot generate revenues to repay their interest costs. The fallout of easy monetary decisions made in the past is felt multitudes more intensely just now, one year after the trend shifted to quantitative tightening (QT) and high funding rates. With the most recent event being the bailout of Credit Suisse, only to being taken over by UBS, which has been bailed out in 2008, we reached a new level of estrangement within traditional finance (TradFi), funded by taxpayers’ money. The result is a new “super bank” in Switzerland, twice the size of Credit Suisse or UBS alone, constituting a single point of failure for Switzerland, double the size. The result is the amplifications of a phenomenon that has taken place in the entirety of the financial system over the past years: an increased dependence on monetary policies, and central bank (CB) liquidity provision, effectively determining the returns of most asset classes, influencing the business cycles in a major way. With the banking landscape becoming more centralized and dominated by fewer institutions of larger size, the issue becomes more pronounced.

The recent takeover of Credit Suisse by UBS deserves a closer look, which will highlight the previously mentioned troubles. The solution for the financial distress of Credit Suisse was the following: UBS, the largest Swiss bank, buys Credit Suisse, the second-largest Swiss bank, for CHF 3b. In addition, UBS can draw on federal guarantees of up to CHF 9b if losses incurred from the acquisition exceed a threshold and the SNB grants both banks extraordinary liquidity assistance totaling CHF 200b (including a default guarantee). Emergency regulation prevented shareholders of both banks to have a say in this decision (NZZ). The deal has been brokered over the last weekend and resulted in a nearly 70% loss of the CS share price from Friday to Monday, bringing the share price sub 1 CHF, a far stretch from its high of more than CHF 80 in the early 2000s (onvista).

Internationally, the banking sector came under further pressure. The US-focused KBW bank index dropped last Friday back to where it was over two years ago. The last similar steep fall was the COVID crash March 2020 (TradingView). For European banks, the indices peaked end of February and are in decline since then (NASDAQ Europe Banks index -18%, STOXX Europe 600 Banks index -17%) (TradingView).

Is it 2008 all over again? The Times titled on 3 January 2009, “Chancellor on Brink of Second Bailout for Banks”. The headline sounds painfully familiar to headlines of Swiss and international newspapers describing what is happening to Credit Suisse today. The very headline is enshrined in the first block of the Bitcoin blockchain, which is widely interpreted as the stated raison d’être of Bitcoin: to become the bedrock of an internet-native monetary system whose monetary policy cannot be changed unilaterally, neither by governments nor central banks. All to preserve the most important characteristic to the most important good in society: trust in money.

As in 2008, the concept of Bitcoin might again be seen as an answer to the financial system troubles we face today, providing an antithesis to the inherent underlying flaws. The financial system has shifted towards larger, single points of failure, at the mercy of central bank and monetary policies. Contrary, Bitcoin is a decentralized, permissionless “financial system” that does not require central bank or monetary policy to fulfil its intended use case. Bitcoin hedges against inflation and prevents the loss of purchasing power in the long run and, being an asset with a low time preference (i.e., long duration and time horizon) it can be considered a pristine asset. The current troubles surrounding our financial system and the contagion revives the narrative and trend towards a trustless system, with decentralized platforms and governance, which are not at the mercy of the respective QE and QT cycles. The case for crypto can easily be observed by the adoption of Bitcoin taking place over the past week alone, throughout the time that the three crypto-friendly banks crashed, and Credit Suisse had to be bailed out, Bitcoin processed 600’000 transactions and settled roughly $33 billion in transaction volume. Furthermore, more than one million new addresses have been created (Glassnode).

It must be noted however, that the intention shall not be to create increased rivalry between TradFi and parts of CeFi but to rather attest to the merits of DeFi and Bitcoin overall, which will lead to a more balanced, robust financial system. Bitcoin and DeFi promise a freer, capitalist alternative to our current TradFi system, by removing the incentives that made TradFi drift off towards unfair capitalism favoring vested interests while trying to appear as a free, open market capitalism system. Of course, DeFi is not flawless either, as systematic contagion or bank runs can function the same way as in TradFi. However, those that carry the upside and reward potential in DeFi will ultimately also carry the downside, without bailouts by external, uninvolved parties.

When revisiting the narrative and case for crypto, the focus should be on TradFis too common absence of risk management, government bailouts funded by taxpayers’ money and granted by a system that is controlled by unelected officials, that do not bear the cost, nor cover the downside. The incentives in such a system are distorted and hard to repair. Bitcoin and the wave of DeFi adoption will create a competing financial and monetary system in parallel, that will force the current TradFi system to reinvent itself, operating on more honest terms, with those carrying the upside potential having to cover their respective downside risk.

Going forward, the current crisis presents itself as a tremendous chance for Bitcoin and the crypto industry, if it manages to avoid the mistakes of the current financial system.