Cryptocurrency is often criticized as a useless innovation because it lacks a problem to solve. Critics believe that this deficiency is cause for concern and another reason to remain hesitant about decentralized finance because it is centered around false value.

However, looking closer into the formation of bitcoin and why it exists reveals a clearer illustration of what decentralized finance is and how it protects users from more serious market manipulation like we saw in 2008. 

True ownership

Ownership and self-custody are the first major benefits listed when explaining the importance of bitcoin, but are usually taken for granted among most critics and users alike. Bitcoin, unlike all other altcoins, is described as the only asset that is under the total control of its owner. 

A part of bitcoin’s value lies in the fact that no one can control assets within a wallet without the private key, meaning that users are entirely protected from the irresponsible decision-making that caused investment banks to become insolvent following the subprime mortgage crisis. 

2008 financial crash

In 2008, the global economy was thrust into chaos when housing markets in the United States began to fall because homeowners were unable to pay their mortgages. The problem was created after banks lowered their standards on the requirements to qualify for a loan following the repeal of the Glass-Steagall Act in 1999. 

Loans were grouped together in what are known as Collateralized Debt Obligations (CDOs) and sold to investment firms that used them to leverage investments nearly 50 times over. This created a system that was able to create massive gains on small amounts of capital at an incredibly high risk.

Unfortunately, as lending became more lax, borrowers were unable to pay back their loans and, because the loans were so overcollateralized, losses quickly became exponential in September 2008. Suddenly, corporate giants Lehman Brothers and AIG went bankrupt and a financial crisis erupted. 

Birth of bitcoin

It is no coincidence that bitcoin was born four months later in January 2009. The fallout from the 2008 crash had global implications as businesses were unable to pay employees, homeowners lost their mortgages, and retirement funds vanished overnight. 

For the first time in history, people were now presented with an option to own their wealth entirely due to the blockchain’s ability to record value transparently and transfer liquidity peer-to-peer without a third party, such as a bank or government, being involved. 

Madoff ponzi scheme

Poor investment decisions weren’t the only things happening on Wall Street in 2008. At the same time, Bernie Madoff was earning billions and sending it to his personal bank account with his Ponzi scheme that collapsed shortly after the crash.

With pressure mounting on the public to secure their assets, Bernard L. Madoff Investment Securities experienced a quick bank run that ultimately exposed the fraud, leading to Madoff’s arrest and imprisonment. 

Over a decade and a half later (and after Madoff’s death), victims are still reeling from the fraud as the Justice Department has yet to restore the entirety of recovered losses to investors. 

FTX crash

Bitcoin and cryptocurrency doesn’t just protect users from fraud and mishandling involving fiat either. Ponzi schemes and other forms of fraud are just as common in web3 as they are in the traditional financial world.  

In Q4 of 2022, we saw FTX collapse in epic fashion, exposing a company that was using customer assets to fuel trading at their sister company with little to no oversight. Once exposed, the insolvency caused investors to lose all of their assets held on the platform. 

The bankruptcy was the final straw for many who had been burned throughout 2022, capitulating to the belief that crypto is essentially worthless; but, for the people who played by the rules of decentralization, there was less to worry about. 

Self-custody realized

In all three situations - the 2008 financial crisis, Madoff’s Ponzi scheme, and FTX’s collapse - cryptocurrency, and bitcoin especially, offers a solution. 

The 2008 financial crisis and FTX’s collapse both involved the mishandling of funds and poor investment strategies that eventually led to the loss of billions. A part of this problem was that customers were routinely feeding these companies with assets thinking they would be safe. 

Unfortunately, companies positioned liquidity into financial systems that customers were not aware of and by the time that they discovered the truth everything was gone.

The solution in both situations was to take control of the assets, placing them into bitcoin where self-ownership would have protected liquidity from being used against the will of the investor. 

While this wasn’t an option for people in 2008 because bitcoin had not been invented yet, it rings extra loud in the event of FTX when people were trading the crypto assets meant to protect them in the first place.  

Although prices for most cryptocurrencies went down following the FTX crash, the people who actually lost assets from the fraud were the ones that never took self-custody seriously by leaving liquidity on the exchange instead of a private wallet, believing that centralized services were immaculate. 

As for Madoff’s ponzi scheme, the other highlight of bitcoin is its ability to be 100% transparent to everyone at all times. With the power of a public ledger, investors are given a clear glimpse into how money is being managed and can help watchdog groups identify fraud, unlike Madoff’s Ponzi which took decades and a global financial meltdown to uncover. 

The next stock market crash

All of this is to say that - yes - bitcoin and cryptocurrencies do solve a problem, and it’s an extremely important problem at that. Global economics can fail, and they have many times in the past; yet the concept of self-custody has been lost to many because it never existed until now. 

Utilizing the blockchain allows us to exercise total ownership and remove ourselves from the corporate financial activities that clearly act against the best interest of customers.

While this article is not intended to be used as financial advice, it does stress the importance of financial security and encourages the general public to re-evaluate where their wealth is stored and who is ultimately in control of it. 

In the event that another economic collapse on the same magnitude as the 2008 financial crisis or Black Tuesday were to occur, the loss of billions (or trillions) would cause the perception of bitcoin to surge as net worth among bitcoin holders would remain intact compared to the losses realized in another stock market crash for people around the globe; however, it is important to note that this event is not something for bitcoin holders to hope for as it would destroy millions of lives.

Instead, it is more necessary than ever for bitcoin maxis and crypto enthusiasts alike to acknowledge the importance of self-custody and how decentralization creates an environment that protects wealth from wolves in sheep’s clothing.