Similarities between the cryptocurrency liquidity crisis and the 2008 crisis

The current cryptocurrency market crisis is fundamentally a liquidity crisis. Unlike what happened in 2015 or 2018, it’s not just about price corrections. The market is indeed facing a series of collapses from companies that took high risks.

Celsius, Three Arrows Capital (3AC), Voyager Digital – these three companies have become the symbol of the current crisis. In common, they all had problems in loan protocols when liquidity disappeared from the market. With no resources to honor their commitments, the liquidation of their positions led to a domino effect of devaluations throughout the market.

In this sense, the current crisis has many parallels with another major financial crisis, which occurred in 2008. At that time, the traditional market experienced an unprecedented liquidity crisis that almost led the United States – and the world – to an economic collapse.

So, check now what are the main parallels between the two crises and, just as the 2008 crisis generated BTC, what the market can take positive from the current moment.

The 2008 crisis

Considered the worst financial crisis since the crisis of 1929, the financial crisis of 2008 occurred due to a housing bubble in the United States, caused by the increase in property values. However, this increase was not accompanied by an increase in the population’s income, which led to an unsustainable cycle of price increases.

Much of this movement was due to the US central bank, the Fed, which lowered interest rates in the years before the crisis. With lower interest rates, people were able to borrow more even with an income equal to or even lower than before.

In this sense, the crisis reached its peak when even those who did not have a good credit history were able to obtain loans. As the properties continued to gain in value, their owners could use them as collateral to raise more loans, creating a real snowball.

But when the bubble burst, banks cut all lending lines, suddenly removing liquidity from the market. With no new money coming in, people were unable to refinance their debts or buy new homes, which in turn lost value with the onset of the crisis.

Without sufficient guarantees, banks began to have problems with their balance sheets, as customers began to default on their payments. Then, on September 15, 2008, Lehmann Brothers went bankrupt and was not bailed out by the government, and this bankruptcy officially marks the beginning of the financial crisis.

Thousands of people lost their homes or had to abandon them because they could not repay their loans. The US financial system was seriously compromised and nearly collapsed with the bankruptcy of Lehmann Brothers, but the government stepped in to bail out most of the banks and prevent further collapse.

Similarities with cryptocurrencies

Unsecured credit, irresponsible leverage and retail investors suffering most of the consequences. The same scenario seen 14 years ago in the traditional market is reflected today in the cryptocurrency market.

Unlike 2008, the world today faces a scenario of rising interest rates, as inflation got out of control even in developed countries. The Fed, for example, has already made two sharp rate hikes, with the prospect of another sharp hike in late July.

This cycle of high interest rates removed liquidity from the market, that is, the abundant money and with little or no cost ended. Leveraged, funds and loan protocols had trouble honoring withdrawals.

Many of them went bankrupt or blocked customer withdrawals to avoid bigger losses. But there was no rescue by the government – ​​something that is even advantageous.

The current scenario is not new, it has happened before. Creditors line up at the courts in search of receiving what is rightfully theirs. Lawyers hired to defend their clients ask for high refunds.

When the 2008 crisis erupted, many criticized the current financial model. Others criticized state bailouts of banks and large companies. And an individual – or a group of people – has given the world an alternative to this system.

Two weeks after the Lehmann Brothers crash, Satoshi Nakamoto released the BTC white paper, whose blockchain would be released three months later. His work promised a more solid financial system, protected against crises and without the intervention of politicians and large institutions.

This was the world that would be left behind. Unfortunately, centralized credit institutions have brought the errors of human folly into a decentralized financial system. Bankruptcies are painful, but they are part of the necessary process of cleaning up the market.