Bitcoin (BTC) and cryptocurrencies are going through a new “crypto winter”. In this market, several phenomena, already experienced on a global scale during the economic crisis of 2008, seem to repeat themselves.
In the search for parallels between the 2008 crisis and the cryptocurrency market, the first coincidence is in the birth year of Bitcoin. It was in 2008 when Satoshi Nakamoto presented the White book “Bitcoin: A User-to-User Electronic Cash System”. The rest is history.
In the mortgage crisis of that year, although there were multiple causes that led to the fall of the markets worldwide, CDOs or collateralized debt obligations they were the ones that paved the way for the explosion of the crisis.
These instruments allowed banks to offer loans and sell debt to investors. Originally they consisted of multiple types of credits, including cards and student debt. Also included were loans backed by mortgages created by lewis ranieri. For the year 2006, the CDOs that were on the market only included mortgage loans.
The characteristic of this instrument allowed the payment that each borrower gave of his credit, not to go to the bank, but to the investor who had bought that debt through a CDO.
As it is a market considered safe and low in volatility, such as the real estate sector, CDOs were soon in tremendous demand. In response to this, banks offered mortgages to people with lower credit levels. This was known as mortgages subprime, due to the high risk of non-payment they had. Many of the CDOs that were sold before the crisis were made up of mortgages subprime.
The high number of CDOs generated through this type of mortgage ended up creating a bubble. Such was its level, that an escalation in credit defaults, caused by an adjustment in interest rates in 2007, caused the crisis to explode.
Many companies and mutual funds with exposures to billions and billions of dollars in CDOs They had huge losses. This completely undermined the system of trust that had been built on real estate investments. Ranieri himself apologized for its creation.
Similarities with the current cryptocurrency market
CDOs were the spark that started the collapse, but synthetic CDOs were the dynamite. A synthetic CDO was a CDO packaged inside another. This made it possible to “hide” the mortgages subprime that constituted them in order to be sold on the market as if they were very low-risk investments. That attracted much more capital.
Currently, within the cryptocurrency ecosystem, this type of “synthetic” instrument has already begun to be seen and they have created their own crisis by bankrupting projects. One of the most striking synthetic tokens was Terra USD or UST, a stablecoin that sought to maintain parity with the US dollar through the burning or issuance of another cryptocurrency.
The issuance or burning of UST was based on LUNA, the native token of the Terra network. If one LUNA was equal to 30 USD, the algorithm burned 1 LUNA and issued 30 UST. Otherwise, you could burn 30 UST and emit 1 MOON.
In addition to this system of synthetic tokens, a decentralized finance (DeFi) platform within Terra, called Anchor, offered returns of up to 20% per year just for depositing UST. A fairly high amount compared to other DeFi.
In mid-May, massive withdrawals caused Anchor to become insolvent, imploding the UST emission and burning system. This reduced the prices of crypto assets on the Terra network by more than 99%..
A synthetic token, based only on trust and speculation, could not end up withstanding massive outflows. UST could be considered as the equivalent to CDOs on the Terra network. An adjustment in demand brought down the system.
Synthetic CDOs were volatile assets, supposed to reduce volatility, and were tied to another volatile asset. Same story for UST.
Cryptocurrencies have their own Lehman Brothers
Lehman Brothers was one of the largest and oldest investment banks in the world, founded in 1850, which managed to accumulate a capital of over USD 65,000 million. However, mismanagement of it due to prior exposure to CDOs caused it to go bankrupt in 2008. This was one of the most iconic events of said crisis as it left around 25,000 people jobless.
A case very similar to that of Lehman Brothers is being Celsius, a lending and investment platform in cryptocurrencies that has decided to block all withdrawals claiming a “liquidity failure”. Situation that has even led him to consider bankruptcy.
As it has become known, part of the liquidity failure suffered by Celsius is due to the exposure that its investment portfolio had to synthetic tokens. In this case it was stETH, a token from the Lido platform for Ethereum 2.0 staking.
Every time a user wants to stake Lido, they must deposit ether (ETH) and receive stETH in return. This token has a price on a 1:1 scale with ETH or at least that is what it tries to simulate, since its price fluctuates with the market, and there have already been multiple occasions in which it has lost parity. The returns that Lido generates with staking are deposited to stETH holders.
The objective of this token is to offer liquidity to the user in case they want to withdraw their ETH from staking, taking into account that all ETH deposited in staking cannot be withdrawn until Ethereum 2.0 is finally released. The user can sell them and recover their investment.
Because locked ETH cannot be withdrawn, the only option being to sell stETH for ETH on platforms like Uniswap, Curve or 1inch, makes Celsius find itself in a liquidity problem. In a scenario of massive withdrawals from the platform (which has at least 50% of its portfolio in ETH converted to stETH)the option to sell stETH for ETH would collapse the parity, causing Celsius to assume losses.
A rather curious point between Lehman Brothers and Celsius is how sudden the operational pause turned out to be, beyond the fact that its fall was predicted by many due to the business model. In the case of the bank, it was once declared insolvent, under English law, it should immediately stop all its operations.
None of the investors with capital deposited in Lehman could withdraw their funds, it was a total collapse. For Celsius, the story is unfolding in a similar way. On June 13, he decided to stop all withdrawals and exchanges, due to his liquidity crisis, and to date they have not made any announcement of when they will resume operations.
Cryptocurrencies in the new crisis of 2022, will they continue to repeat patterns?
The parallels that can be found between the 2008 crisis and the current cryptocurrency market are still being quantified. But, although it is true that the fall of the market is not only due to a factor specific to crypto assets, the global economy is entering a tremendous recession, which could send cryptocurrencies down a similar path.
One of the most iconic and popular characters of the 2008 crisis was Dr. Michael Burry, who worked as a market analyst, and was one of the first to predict it. Despite his low profile on social media, this has warned again the crisis that is coming. Which has already begun to present the first symptoms, with inflation rates in the US and Europe never seen in 40 years.
Bitcoin (BTC) and cryptocurrencies, meanwhile, are breaking down price patterns. Some analysts predicted that by these dates, BTC would be trading above USD 72,000. However, no analysis considered a global pandemic and a war that would affect the commodity market.
Bitcoin, at this moment, is proving that it is not invulnerable to global economic crises. It is not, for now, an escape from the recession. However, it is worth noting that this can be a litmus test for bitcoin to prove its stability.
