The Lehman Brothers Bankruptcy: How it Triggered the Rise of Bitcoin

 In Bitcoin

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This week marks the 10th anniversary of the events that triggered the 2008 financial crisis, which was reflected indirectly in the Genesis block of Bitcoin.

The story of Bitcoin will soon span a decade, and this would be one very dramatic decade for the financial markets. This September 15 marks the tenth anniversary of the bankruptcy of Lehman Brothers, the first investment firm that had to take the blow of toxic securities.

The bankruptcy of Lehman Brother shed a light on the Credit Default Swap industry, a practice of wrapping up risky mortgages into investment products, and selling them with a high investment grade. Soon, it turned out that many other investment banks had onboarded vast amounts of CDS papers – and had to start the process of painfully writing off the value of those documents. Lehman Brothers had about $2 billion in subprime losses, but soon, the bill ballooned, for an estimated cost of around $400 billion, according to the Financial Times.

But this is not the whole story – soon, the panic spilled over, and banks lost faith in each other. The institutions that were supposed to protect value were no longer deemed safe. As the crisis progressed, central banks had to intervene, injecting billions to give banks an impression of ample liquidity, and stem panic.

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It was during that time of peak distrust in banks that Satoshi Nakamoto proposed the Bitcoin white paper, and subsequently mined the Genesis block, bearing a news headline now famous: “Chancellor on Brink of Second Bailout for Banks”.

The headline from The Times concerned the British central bank, but it was not the only bank to intervene. Both the Fed and the European Central Bank started altering their policies to negate the effects of the 2008 financial crisis.

So Bitcoin was born in an age when the financial sector divulged a dark secret, and showed that trust in banks could falter. Trustless money was the answer of Satoshi Nakamoto.

But this is not the end of the story for Bitcoin. Born in turmoil, Bitcoin evolved during a decade that, paradoxically, saw an ongoing economic boom unroll, boosted by the extremely lax policy of central banks. Bitcoin was created as an alternative to traditional money – but in the end, traditional money found its way into Bitcoin.

During the peak bull market in 2017 and 2018, the entire global financial market was booming, with stock indices not only at an all-time high, but with a near-record unbroken bull market. Financial markets saw what came to be known as extremely high liquidity – a feature of one decade of lax monetary policy on the part of central banks. Money sought a place to be invested – and cryptocurrencies took their share. One of the triggers of the 2017 boom was precisely the feeling of extra money flowing around, even trickling down to retail investors.

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However, this rosy picture is showing signs of cracking. It is possible that Bitcoin, in its decade anniversary, may witness another crisis, or at least a downturn in the exuberance of the markets. Bitcoin and cryptocurrencies will once again have to test their mettle against the traditional financial sector. But this time, crypto coins are a decade old, and may become a factor in surviving the next move of the markets.

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