Since the Great Recession, cryptocurrency has grown in popularity as investors have become sceptical of centralised institutions. While this expansion isn’t inherently an issue, it has manifested as such. The rise in popularity of cryptocurrencies has tempted financial firms to invest in the hope of making a profit. The coins are then rehypothecated by financial institutions as collateral. As a result, cryptocurrencies have laid the stage for the next recession by placing the market in a situation eerily similar to that of the Great Recession.
What had happened previously when there was a recession?
- After the great depression, the government made sure there were no bank runs involved.
- After the great recession, the Dodd-Frank regulations act was formed.
- By regulating banks and their operations, these rules were meant to prevent future panics from devolving into recessions. However, unlike the FDIC, this legislation had little impact on the fundamental causes of the Great Recession since shadow banks were not regulated. Shadow banking and rehypothecation continue to thrive, using a variety of collateral, including cryptocurrencies.
How was the concept of cryptocurrencies created?
In fact, it was while witnessing the Great Recession and its consequences that Satoshi Nakamoto published a white paper on Bitcoin, a revolutionary peer-to-peer financial system. Nakamoto said that banks had failed the average investor and that he wanted to build a new money system that was independent of banks and governments. Instead, he desired for his system to avoid typical interactions with people.
One of the primary selling points of cryptocurrencies, when they were originally introduced, was that the miners and nodes were not concentrated in a single location, such as a bank. As a result, Bitcoin was designed to bypass traditional institutions and give individuals authority over their own money.
What are the steps that a government can take to prevent a recession?
- The financial markets should be more open. People didn’t know which banks were collapsing, which exacerbated both the Great Recession and the Great Depression. The suggested approach should attempt to improve Bitcoin Revolution platform transparency to promote information symmetry and reduce needless or dangerous rehypothecation.
- People lost faith in their banks and the stock market during both the Great Recession and the Great Depression. The concept of confidence will be divided into two categories:
internal and outward confidence. Internal confidence refers to the financial system’s belief in itself. There’s also external confidence, which refers to ordinary people’s belief in the market. The Great Depression was sparked by a lack of external confidence.
- Because FDIC guaranteed deposits, there was a long period of continuous growth between the two market waves of panic and downturns. This improved public trust since ordinary people didn’t have to worry about their funds being wiped out if bankers made disastrous investments or loans.
So, what is the main issue with cryptocurrencies and the market?
Most consumers and owners of cryptocurrencies are suspicious of the technology and its price, thus the market is neither transparent nor reassuring. Furthermore, financial institutions buy volatile and risky coins and rehypothecate them, even though they know the value is speculative and unbacked. This results in very unpredictable values that might fall at any time, triggering a bank run and a new catastrophic recession or depression.
Meanwhile, present rules aimed at increasing cryptocurrency transparency and stability are either ineffectual or inconsistently applied.
Conclusion
Despite the high volatility and its consequences for confidence, proponents of cryptocurrency refer to the tokens’ continuing positive market as proof that they are information-insensitive. Nonetheless, these allegations have not been fully investigated and will not be until a market panic or shock occurs.
