Will the upcoming financial crisis bring Bitcoin back to the spotlight

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Global financial crises

A global financial crisis affects people all over the world, but to very different degrees. Some people are lucky enough only to hear about it, while others are plunged into economic uncertainty, A _______ .

A crisis occasionally arises from sudden bad decisions, but the cause is usually a collection of bad policies operated over an extended period. The financial crisis of 2008 was a result of a loosening of rules among banks. Changes in those regulations began during the 1980s, В ______ financial transactions with little supervision.

The system of regulation became one of trust; it was up to the banks to behave wisely, and the governments would stay out of it. The regulation of banks was, in a sense, left up to the free market C ______ . It allowed for transactions to flow more freely, which did in fact help economies grow during the 1980s and 1990s.

When the financial markets first ran into trouble, large banking institutions failed altogether, D _______ . A small number of the worlds most wealthy people suffered greatly. But overall, the middle class and the poor suffered the worst of the crisis.

The 2020 Eurozone crisis is thought to be connected to the 2008 one. Governments that had borrowed enormous amounts to pay for problems caused two years earlier suddenly found themselves unable to support the debt. The Eurozone crisis was as severe as the one in 2008 E _______. More people would suffer as a result.

There is little that can be done to immediately fix a global financial crisis. Individuals can prepare for such an event by F _______ . Naturally, everyone must fight to make sure governments put sensible banking policies in place before problems occur.

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1. keeping money in savings and making sure they stay out of debt
2. and many policymakers felt this would be sufficient
3. and added yet another layer of uncertainty to world financial markets
4. resulting in the loss of their job, home or livelihood
5. which many people had saved for a number of years
6. which caused a domino effect that spread around the world
7. a decade when governments decided to let banks carry out

A-4; B-7; C-2; D-6; E-3; F-1

Global financial crises

A global financial crisis affects people all over the world, but to very different degrees. Some people are lucky enough only to hear about it, while others are plunged into economic uncertainty, resulting in the loss of their job, home or livelihood.

A crisis occasionally arises from sudden bad decisions, but the cause is usually a collection of bad policies operated over an extended period. The financial crisis of 2008 was a result of a loosening of rules among banks. Changes in those regulations began during the 1980s, a decade when governments decided to let banks carry out financial transactions with little supervision.

The system of regulation became one of trust; it was up to the banks to behave wisely, and the governments would stay out of it. The regulation of banks was, in a sense, left up to the free market and many policymakers felt this would be sufficient. It allowed for transactions to flow more freely, which did in fact help economies grow during the 1980s and 1990s.

When the financial markets first ran into trouble, large banking institutions failed altogether, which caused a domino effect that spread around the world. A small number of the worlds most wealthy people suffered greatly. But overall, the middle class and the poor suffered the worst of the crisis.

The 2020 Eurozone crisis is thought to be connected to the 2008 one. Governments that had borrowed enormous amounts to pay for problems caused two years earlier suddenly found themselves unable to support the debt. The Eurozone crisis was as severe as the one in 2008 and added yet another layer of uncertainty to world financial markets. More people would suffer as a result.

There is little that can be done to immediately fix a global financial crisis. Individuals can prepare for such an event by keeping money in savings and making sure they stay out of debt. Naturally, everyone must fight to make sure governments put sensible banking policies in place before problems occur.

Origin of Bitcoin: A brief history from 2008 crisis to present times

Though people might have some idea about Bitcoin, I still frequently notice people asking ‘Why was Bitcoin created?’. Well, to answer this question, I’ll have to give you a brief history about the banking system that existed at the time Bitcoin was created and the problems that surrounded the system.

Now, what do you do when you have money? Obvious answer – you store it or you spend it. You store it in your bank account and then you can spend it on whatever you wish later. But have you ever wondered what banks do with the money you deposit with them? Banks invest our money in various projects and they offer loans to people in need. But what happens when the banks lose the very money people trusted them to keep safe?

The answer lies in five words – “The Financial Crisis of 2008”. At this moment, you might be wondering why it’s necessary to know about the Financial Crisis to know more about the origin of Bitcoin. Simple, the Financial Crisis brought out the inherent shortcomings of banks and other financial institutions. After the Financial Crisis, people started to wish for a new system of money that would not have the shortcomings of regular currencies.

What happened during the financial crisis of 2008?

In early days, people did not earn much. And whatever they earned was stored in their house for safe keeping. When people started earning more money, they needed assurance that their money would be safe, as their homes could be broken into and robbed. Realizing the need for security, people started to turn to various banks to deposit their money. These banks also started attracting customers by offering various plans on their deposits.

Now, I am about to take you back to the financial crisis of 2008. What happened in the USA was that the banks had started to give out risky loans to people to attract new customers and consequently, banks had to face significant defaults on such loans. Due to the inability of the people to pay back the money, many banks collapsed and filed for bankruptcy. Parallel to giving out risky loans, the banks were using the people’s money to invest in various opportunities.

Some of these investments did not pay off and the banks lost all the money that the customers had trusted them to keep safe. Thus, many financial institutions went bankrupt. Noticing the widespread bankruptcy, the American Government tried to save some financial institutions from bankruptcy by bailing them out, so that they might be able to resume regular functions. Now, here’s the fun part – the banks lost the money that the customers deposited with them, leaving the customers no way of recovering back the amount.

Then the money offered by the Government to the banks was also the people’s money, which had been paid in taxes. The actions of the American Government led to customer dissatisfaction across the entire country. Since the global economy is interconnected, the events that took place in the USA also affected the world, bringing the world’s economy to a standstill. The financial crisis also brought out the problems associated with having to store your money with a central authority.

How do the actions of your Government affect your money?

A government of a country spends money for the development of its country. The Government receives money from the various types of taxes the people pay. Now, what happens in most of the cases is that the expenditure of the Government exceeds its income. To deal with it, Governments ask the central bank of that country to print more money. This way, the Government tries to make more money available to the public. Another fact to note is that there is no fixed limit to the amount of money that a Government can print.

But though this pumps more money into the country’s economy, it reduces the value of money that was already in circulation in the country. Let me explain this with the help of an example – Imagine there is Rs. 100 in circulation in the market and you own 1 Rupee. In mathematical terms, you own 1% of the money in the country. If the Government prints more money and now the total amount of money in circulation goes up to Rs. 200, the value of your money would go down to 0.5% of the entire market share. That’s a decrease of 50% in the value of your saved money.

Now, these are just hypothetical terms, but the concept remains the same and the value of our money goes down whenever the Government spends more money than it earns. Because of this, we’re forced to work incessantly all our lives to earn money, so that the decrease in the value of money doesn’t affect us too much.

The core idea behind Bitcoin

After the Financial Crisis, people were demanding a currency that would not be controlled by a central authority. When the people put their trust in a bank, the bank had lost the customers’ money and as a firefighting measure, the Government printed more money, which in turn, reduced the value of money already in circulation in the country. Since there was no maximum limit placed on the amount of money that could be printed by the Government, there was always some unpredictability and uncertainty regarding the decrease in the value of people’s money.

Bitcoin solved this problem by fixing the maximum number of Bitcoins that could ever be in circulation and the rate at which new Bitcoins would be produced. The maximum number and the rate of production cannot go beyond the set limit because of the coding used in its design. Also, to ensure that no more Bitcoins would be produced, this code is made visible to everyone for easy verification.

This way, the value of each Bitcoin was dependent only on the supply and demand in the market and was free from all kinds of Government intervention like when the Government artificially alters the value of a currency for various reasons.

Now, whenever we make a transaction from our stored money, we are dependent on a third-party vendor (i.e. a bank) to verify and validate our transaction. There is no guarantee that the vendor won’t get greedy and make risky investments with our money, like what happened in the Financial Crisis of 2008. Bitcoin has eliminated the need for third party intermediaries by allowing users to directly transact with one another.

To store your Bitcoins, you simply need to create a Bitcoin account (called a Bitcoin Wallet) on your computer or your smartphone. This wallet acts less like a bank and more like your physical wallet. In this case, you are your own banker and the wallet cannot take decisions on its own as our traditional banks do. Although the wallets are maintained by various companies, the coding used in their design is made visible and accessible to anyone who wishes to review it. This assures the customers that their deposits would remain safe.

How to release new Bitcoins and who will receive them?

Since the total number of Bitcoins that could ever be produced was fixed, the next most important question was regarding the rate at which the new Bitcoins were to be released, along with the question of ownership of the newly created Bitcoins.

It was decided that the new Bitcoins would be released at a rate that was constantly decreasing. This means that as the number of Bitcoins in the world increases, the number of newly created Bitcoins would decrease and creation would become rarer.

This was done to provide more incentives to early adopters and people who came to try out Bitcoin first. The initial rate of release was decided to be 50 Bitcoins every 10 minutes. This was decided randomly and it was also decided that this rate would get halved every 4 years (also chosen randomly). When you do the math, it adds up to a total of 21 million Bitcoins that would be in circulation by the year 2140.

Now that the rate of release of Bitcoins was decided, the next question was ‘Who will receive the newly created Bitcoins?’

When you make a transaction with your money that you have stored in a bank account, the bank essentially records the transactions and maintains your balance for future reference. These records act as a proof of transfer in case someone claims otherwise. Bitcoin performs the same function of storing a record of all transactions and account balances on a database. It requires a computer to validate and save these transactions onto the Bitcoin database. Now, unlike banks (where the process of recording transactions is done by a specific authority), in Bitcoin’s case, anyone can offer their computers to record the transactions onto the database.

Bitcoin has made this process extremely simple. All you need to do is run a software provided by the Bitcoin development team and run it. The people who offered their computers for this purpose were called ‘Miners’ and the process of recording transactions was called ‘Mining’. These ‘Miners’ were the ones who were awarded with the newly created Bitcoins. People who offered more computational powers i.e. more powerful computers were awarded with more Bitcoins.

This successfully solved the problem of Bitcoin distribution. Now that the miners started earning lots of Bitcoins, they eventually started to trade with it. Gradually, as Bitcoin gained popularity, it started being accepted by various merchants and transactions in Bitcoin became popular. Since the number of Bitcoins in circulation was growing slower as compared to the people who started using Bitcoin, its price started to increase.

Present scenario

Though Bitcoin started off at 0.0001 USD, the present value is 1248.94 USD (at the time of publishing the article). Bitcoin has a bright future ahead of it as its popularity and acceptance continue to grow. Merchants from various geographies and numerous industries are now starting to settle invoices in Bitcoin. Considering the complications it solved and the advantages it offered, it is also called ‘The next big thing after the Internet.’

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Sahil Baghla

Sahil Baghla, started his entrepreneurial journey while he was still a student at IIT. Before Darwin Labs, Sahil co-founded two companies – Bluegape and Murmur out of which Bluegape was started as a college dorm room project and both the projects went on to raise multiple rounds of investments from 30+ investors. Sahil’s passion and belief in a decentralized world drive him to solve real world problems using the Blockchain technology.

The Next Big Financial Meltdown Is Around the Corner, Many Voices Warn

“The economy is looking great,” how many times have they told you that? And why do you usually hear it when you are late on a mortgage payment or during a downsizing purge at your company? Relying on your senses is always a safer bet than trusting the wishful thinking of those who invested political capital in failed solutions. The chorus of voices warning about the next ‘Big One’ has become hard to ignore.

A Pending Disaster, Worse Than the Last Crash

It looks like the next big financial crisis is coming, and while cycles are a natural feature of market economies under normal circumstances, this one is promising to be a bit different. The global economy has been somewhat expanding for the better part of the past decade, although many experts would say that governments and central banks have only reinflated the bubbles that popped in 2008. Indeed, what quantitative easing and record low interest rates mostly did was to mitigate the symptoms, not cure the disease.

The financial meltdown we had over 10 years ago was mostly caused by debt. But instead of addressing the core issue in a way that would allow a lasting solution, policy makers around the world led their economies into deeper debt by printing more money via quantitative easing (QE) and cutting interest rates to previously unseen low levels, below zero in some cases. The result of these futile efforts is a skyrocketing debt which actually dwarfs the pre-crisis borrowing.

Stock broker and financial commentator Peter Schiff, one of those who accurately predicted the Great Recession, believes the upcoming quake will be epicentered around sovereign debt and a crisis with the U.S. dollar, which has been the world’s reserve currency for many years. Borrowing now is greater than during the height of the last critical period, in 2009 – 2020. Thanks to Trump’s tax cuts for the wealthy, the United States government is running a billion-dollar-a-month budget deficit. Trade deficits are at record highs as well.

The U.S. debt surpasses $21 trillion, while the pace with which all debt grows is many times greater than the growth rate of GDP. According to the Lending tree website, collectively Americans owe 26% of their income to consumer debt, compared to 22% in 2020. The indicator is higher than during the credit boom in the mid-2000s. According to Ron Paul, a famous libertarian and a staunch critic of the federal government in Washington and its fiscal and tax policies, as the U.S. financial system unravels, “the seriousness of it will become evident to all, as the need to pay for our extravagance becomes obvious.”

This will make the country much poorer, [while] the elite class that manages such affairs will suffer the least.

In a video, published on the Liberty Report platform last year, Paul noted that by the time the QE ended, the central banks of the world had increased their balance sheets by $8.3 trillion, with only $2.1 trillion worth of GDP growth compensating. “This left 6.2 trillion dollars of excess liquidity in the banking system that did not go where the economic planners had hoped,” the former congressman remarked. And the result is that central banks now own almost $10 trillion of negative interest yielding bonds.

“The financial system has been left with a bubble mania financed by artificial credit and unsustainable debt,” Paul noted. The inflationary policy, he pointed out, is generated by the belief that there’s no benefit in allowing the needed economic correction to the problems generated by the Federal Reserve to occur. “The correction is what the market requires, not the resumptions and the dangerous inflationary policy that caused the bubble economy,” the maverick politician stressed.

Tell-Tale Signs That a Big One Is Coming

Many others say the financial system today is even more fragile than in 2007 and 2008. The cheap money the Fed and other central banks printed and gave out to commercial banks inflated the stock and bond market, instead of increasing the capital available to small businesses that are still driving the economy in many developed countries. Interest rate cuts have been creating another bubble in the real estate sector. Meanwhile, consumer debt has risen back to pre-crisis levels and corporate borrowing has soared. While some governments have reduced annual deficits, they continue to sit on mountains of debt.

The signs that many things aren’t going well have been mounting. The property market in the U.S., which triggered the previous crisis, is hurting again. The number of mortgage applications has been falling, despite the drop in the average interest rate, and existing home sales, which form about 90% of U.S. home sales, declined over 5% this spring from a year ago. At the same time, the 1.5 million new vehicles sold in the U.S. in June represent a decline of 4.7% from May and 2.8% year over year. Passenger car sales fell 9.5%, according to the automotive industry portal Marklines. Even iPhone sales fell 17% during the year’s first quarter.

It’s been reported that by April of this year, U.S. retailers had announced the upcoming closure of almost 6,000 stores, which exceeds the number for the whole of 2020. Meanwhile, credit card and auto loan delinquencies have hit a seven-year high. The number of unemployed Americans rose to 6 million in June, while those U.S. citizens, 16 years and over, that for various reasons are not in the labor force has increased to more than 96 million. The total of 102 million who don’t have a job exceeds the numbers during the recession. At the same time, many of the newly added jobs are not well paid as wage growth remains very slow. More than half a million people in the U.S. are homeless as they can’t afford to buy or rent a home.

Other early warning signs of upcoming troubles were highlighted by Sheila Bair, who headed the Federal Deposit Insurance Corporation (FDIC) during the 2008 crisis. She was among those who predicted the subprime mortgage crash and argued against bailing out the big banks. This time, she raised the alarm about several major areas of concern including the reduced bank capital requirements, federal budget deficit, private debt and also student loan debt. Bair is not an enemy of bitcoin and she thinks the U.S. dollar and other fiat currencies don’t have intrinsic value, either. “Let the market figure out what it’s worth,” she said about bitcoin during an interview with Barron’s last year.

Not a Single Problem Solved Since the Great Recession

Cryptocurrency is among the assets that can be used to protect your wealth when the next big crisis hits, according to Marc Friedrich, a finance strategy consultant and best-selling author based in Germany. He believes real assets limited by nature, such as land, real estate, and precious metals like gold and silver, can help you diversify your holdings, “but also Bitcoin, which is limited by math.”

In a recent edition of the Geopolitics & Empire podcast, Friedrich discussed the imminent financial recession and how we got to this point. “Since the 2008 crisis, we did not solve a single problem. We lowered the interest rates to a record low level and we flooded the world with cheap money. The central banks created one financial bubble after the other and now we have the biggest bubble in history,” he said. The analyst thinks the bubble is everywhere now, not only in the financial market, but in government bonds as well.

Trillions of dollars spent to solve the problem just created a new mess, a bigger bubble and when this one bursts, 2008 will look like a kindergarten. This one will be epic.

The economist, who wrote one of Germany’s most successful business books in 2020, “The Crash is the Solution: Why the Ultimate Collapse is Coming and How You Can Protect Your Wealth,” warned that societies today have problems everywhere, from the homelessness issues in the U.S. to the refugee crisis in Europe. Marc Friedrich thinks the coming recession can bring the end of the euro, a monetary union between economies with significant differences.

“We have a historically low interest rate. It’s been 0% for three years since 2020,” he remarked, pointing out that Mario Draghi is the first president of the European Central Bank who never raised the interest rate during his term. “Australia has the lowest interest rates in history, at 1%, the Chinese national bank cut the rates lower than ever before, even during the 2008 financial crisis, at 3.5%. It’s a race between dying currencies,” Friedrich stated. He also warned that the recipe used to deal with the last recession – printing money and cutting interest rates – will not work this time.

“We already see a recession on the horizon and this time they won’t be able to print it away, because we have more debts than ever and the banks are more fragile, especially in Europe. This is not healthy and sustainable. We’ll see negative interest rates, first in Europe and then elsewhere. A major bank will collapse and create a massive avalanche,” the financial consultant told news.Bitcoin.com. “Last time the central banks and China bailed out the banks but who is going to bail the central banks out next time? Our monetary system is about to die and they won’t be able to save it because people will lose trust in politics, governments and fiat money,” he elaborated.

Marc Friedrich thinks the next monetary system will be digital and says we also need decentralized alternatives like Bitcoin, “because central banks will issue CBDCs and they will control us all, seize our freedom and wealth. They need negative interest rates and they can only achieve that when the fiat money moves into the digital world and they abolish paper money,” he commented. The German economist expects the next world currency to come from China. He believes that will be a digital yuan backed by gold and potentially other real assets. “Bitcoin will be an alternative outside of governments, like gold today,” Friedrich predicted.

No Tools to Deal With the Next Crisis

Former Federal Reserve Chair Janet Yellen shares similar fears: “I think it is a real concern that the Fed might not have all the tools that are needed in order to respond [to a new crisis]. The fundamental reason why it’s a problem is that even before the financial crisis, the general level of interest rates in most developed economies, including the United States, had been drifting down,” she said in an interview with Yale Insights this past December.

While financial cycles are a natural occurrence in a market economy, political cycles are pertinent to liberal democracy. Unfortunately, as it turns out, both can bring suffering to the individual. During the post-recession years, the Federal Reserve gradually raised the interest rate in the U.S. to 2.5%. In the eve of the 2020 presidential elections, however, pressure from the White House is mounting for a cut. Maintaining that the Fed is independent from the executive power, the Chairman of the Federal Reserve Jerome H. Powell, nevertheless, admitted that the central bank is weighing whether another rate reduction will be necessary.

“We are in a big, fat, ugly bubble,” Donald Trump said back in 2020, when his bid to take over the White House was on the line. Now, in the eve of 2020, which ironically has been coined by pundits as the Year of the Next Big One, the fight is to keep the White House. And he is probably hoping that a rate cut would provide a pre-election boost to the economy. Although such a move might yield short-term results in the form of economic and political capital, many like Marc Friedrich fear it would only temporarily inflate a stock market bubble.

The rising prices of cryptocurrencies in the past few months indicate that more and more investors, but also many ordinary people, see in these decentralized digital assets an opportunity to hedge against the upcoming fiat crash. Getting into the ecosphere has its challenges but crypto companies have been successfully developing services that make it easier. For example, Bitcoin.com can help you buy both bitcoin cash (BCH) and bitcoin core (BTC) in a few easy steps, using a credit card and without the need to visit a crypto exchange.

Do you think the next big financial crisis is coming in 2020? Share your thoughts on the subject in the comments section below.

Images courtesy of Shutterstock.

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