While the strict regulations that emerged following the 2007–2008 financial crisis drew fire from many industry participants, they may have had an unintended consequence: making bitcoin more appealing to investors.
Following the crisis, regulators created a complex framework of rules and regulations designed to ensure the continued stability of the global financial system. The new framework affected many different facets of the financial services industry, including financial institutions involved in trading.
These clearinghouses then take this cash and lend it out for safe assets, such as German bunds or US Treasury bonds, through the repurchase agreement or 'repo' market, which enables them to make short-term loans.
This entire process has had the effect of making certain safe assets – specifically high-quality government bonds – increasingly scarce.
And this situation could potentially grow more severe, Yves Mersch, member of the European Central Bank's Executive Board, warned recently.
He stated during a January speech:
While clearinghouses have been snapping up safe assets, they are certainly not alone in this respect. Central banks around the world have been acting similarly, purchasing trillions of dollars worth of bonds following the financial crisis.
One major objective of this quantitative easing (QE) was placing downward pressure on interest rates in an attempt to bolster lending and stimulate economic growth.
These efforts have been largely successful, as interest rates have stayed very low for several years.
The search for yield
While QE has helped create an environment of low interest rates (and therefore modest borrowing costs), it has had an unintended consequence of placing downward pressure on yields.
The current environment has caused many investors to embark upon a search for yield, which in turn has drawn investors to bitcoin, according to several analysts who spoke with CoinDesk.
Tim Enneking, chairman of Crypto Asset Management, spoke to this aspect of the digital currency, saying, "It's not so much a shortage of safe haven assets, so much as low yields in all asset classes" that makes bitcoin appealing.
The low-yield environment is "driving the appetite for crypto currencies across the board", he added.
Jacob Eliosoff, a cryptocurrency fund manager, also spoke to the key need created by the current lack of high-yielding investment opportunities, as well as how he believes the situation is fueling demand for bitcoin:
Should the economy fall into recession, or the stock market decline, bitcoin prices could benefit significantly. While investors tend to seek out safer securities during times of economic turmoil, the general lack of such assets could prompt them to flock to bitcoin instead.
Harry Yeh, managing partner of investment manager Binary Financial, has been preparing for such an event, recently telling CoinDesk: "Our new fund specifically targets high net worth clients and institutions so they can park their money in an alternative asset."
Other analysts offered a more complicated assessment, with Eliosoff emphasizing that, while a downturn would "likely" provide bitcoin with tailwinds, it might depend on what factors caused the downturn to materialize in the first place.
Michael Moro, CEO of Genesis Global Trading, added further detail to the situation, emphasizing that "safe" is a relative term. He also noted that geography can play a key role in investors' decisions.
Historically, bitcoin prices have not correlated with those of other assets – a point raised by Moro.
Should a recession or financial crisis take place, this is another aspect that could make the digital currency very attractive. During times of crisis, investors frequently panic, selling off many different assets and causing several different kinds of securities to lose value simultaneously.
Should such panic selling take place, investors may find that bitcoin, with its status as as a unique and uncorrelated asset class, is even more appealing than it would be otherwise.
Disclaimer: CoinDesk is a subsidiary of Digital Currency Group, which owns Genesis Trading.
Cup trick image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.