Blue Owl Capital’s (OWL) announcement this week that it would sell $1.4 billion in loans to boost liquidity for investors in a retail-focused private credit fund set off alarm bells across financial markets, with more than one prominent analyst directly comparing the two collapses of the Bear Stearns hedge fund to events that foreshadowed the 2008 financial crisis — and the same could be said for Bitcoin. For investors, the impact could be far-reaching.
While the major stock market averages are unscathed, Blue Owl shares are down about 14% this week and are now down more than 50% from a year ago. Other major private equity firms including Blackstone (BX), Apollo Global (APO) and Ares Management (ARES) also suffered sharp losses.
For those who lived through the 2008 global financial crisis (GFC), it stirred up some painful memories.
In August 2007, two Bear Stearns hedge funds collapsed after suffering heavy losses on subprime mortgage-backed securities, while BNP Paribas froze withdrawals from three funds on the grounds that it could not assess U.S. mortgage assets. Credit markets malfunctioned, liquidity evaporated, and seemingly isolated incidents turned into a global financial crisis.
“Is this a ‘canary in the coal mine’ moment, similar to August 2007,” asked Mohamed El-Erian, the former president of Pimco. “There are a lot of things to consider here, starting with the risks of investing in the phenomenon [artificial intelligence] El-Erian was quick to point out that while the risk may be systemic, it appears to be nowhere near the severity of the 2008 crisis.
Blue Owl’s issues may or may not be another Bear Stearns moment, but if so, what does it mean for Bitcoin?
First, private credit stress does not automatically mean Bitcoin rises. Indeed, in the short term, tighter credit conditions could harm risk assets, Bitcoin, and the broader cryptocurrency market. While Bitcoin didn’t exist during the 2008 financial crisis (more on that later), Bitcoin’s price action — down roughly 70% from mid-February to mid-March 2020 — as the COVID-19 crisis unfolded is instructive.
However, the U.S. government’s eventual response from the Federal Reserve may be strongly bullish on Bitcoin. Trillions of dollars were pumped into the economy in 2020, helping BTC rise from lows under $4,000 to over $65,000 about a year later.
The 2007-2008 strategy followed a similar trajectory: initial credit market stress, stock market rejection, banking contagion, then massive central bank intervention. If the Blue Owl represents “the first domino”—as Peter Lynch’s former partner George Noble suggested—then the sequence may repeat itself, with private credit replacing subprime mortgages as the trigger.
‘Chancellor on the verge of second bailout for banks’
One of the main results of the events of 2008 was the creation of Bitcoin.
The world’s original cryptocurrency It was born during the global financial crisis, in part because its mysterious creator, Satoshi Nakamoto, was frustrated that governments and central banks could conjure hundreds of billions or even trillions of dollars with just a few keystrokes on a computer.
Another major part of the world’s largest digital asset is the creation of a parallel digital currency that allows direct peer-to-peer online payments without the need for financial institutions or any government intervention. Essentially, the hope is to create a direct alternative to the traditional banking system, which has proven to be fragile enough to disrupt the global financial order through the intervention of centralized entities.
In fact, Bitcoin’s first-ever block, the so-called genesis block on January 3, 2009, was embedded by Satoshi Nakamoto, the “chancellor on the verge of a second bank bailout.” That was the top story in The Times of London that day, as the British government and Bank of England set out their response to ongoing problems in the country’s financial sector.
The value of Bitcoin at that time was basically zero, and unknown to everyone except a few “cypherpunks”, 17 years later, Bitcoin’s market value exceeded $1 trillion, and the world’s largest asset management company called it a near-essential asset for most investment portfolios.
Of course, the Bitcoin we know now is different from the original cryptocurrency in 2009. Today, the concepts of “store of value” and “digital gold” have come and gone. What was supposed to be anti-establishment has become part of the larger financial system. Big holders have piles of Bitcoin on their balance sheets, financial giants are making Bitcoin available to the masses through exchange-traded funds, and even some government entities are buying Bitcoin as their strategic reserves.
So, does Blue Owl’s failure mean a resurgence of Bitcoin’s original thesis and, by extension, another bull run? Time will tell, but if this event turns out to be El-Erian’s “canary,” heralding another massive crisis, the global financial system could be in for a rude awakening, and Bitcoin could be the solution, whatever form it takes 17 years later.
Read more: Bitcoin plunge heralds coming AI crisis, but massive Fed response will drive new highs: Arthur Hayes
