Blue Owl Capital’s (OWL) announcement this week that it would sell $1.4 billion in loans to raise liquidity for investors in a retail-focused private credit fund has set off alarm bells across the financial markets, with more than one prominent analyst drawing direct parallels to the two Bear Stearns hedge fund collapses that heralded the 2008 financial crisis and bitcoin. investors, the consequences can be profound.
While there was no damage across the major stock market averages, Blue Owl shares fell about 14% for the week and are now down more than 50% year-to-date. Other major private equity players, including Blackstone ( BX ), Apollo Global ( APO ) and Ares Management ( ARES ), also suffered significant declines.
It brought back some painful memories for those who suffered through the 2008 Global Financial Crisis (GFC).
In August 2007, two Bear Stearns hedge funds collapsed after suffering heavy losses on subprime mortgage-backed securities, while BNP Paribas froze withdrawals in three funds, citing an inability to value US mortgage assets. Credit markets seized, liquidity evaporated, and what seemed like an isolated incident spiraled into the global financial crisis.
“Is this a ‘canary-in-the-coal-mine’ moment, similar to August 2007,” asked former Pimco chief Mohamed El-Erian. “There is a lot to think about here, starting with the risks of an investment phenomenon [artificial intelligence] markets that have gone too far,” he continued. El-Erian was quick to point out that while the risks could be systemic, they do not appear to be anywhere near the scale of the 2008 crisis.
Blue Owl’s problem may or may not be another Bear Stearns moment, but if it is, what could it mean for bitcoin?
First, private credit stress does not automatically mean bitcoin rally. In fact, in the short term, tighter credit conditions could hurt risk assets, bitcoin and the broader crypto market among them. Although bitcoin was not present during the meltdown of 2008 (more on that later), the price action as the Covid crisis unfolded – about a 70% drop from mid-February 2020 to mid-March – is illuminating.
However, the US government’s Federal Reserve’s final response could be strongly bullish for bitcoin. In 2020, trillions of dollars were injected into the economy, helping to send BTC from a low of under $4,000 to more than $65,000 about a year later.
Playbook 2007-2008 followed a similar trajectory: initial stress in the credit market, denial of the stock market, contagion in the banking sector, and then massive central bank intervention. If Blue Owl represents the “first domino” — as former Peter Lynch associate George Noble suggested — the sequence could be repeated with private credit replacing subprime mortgages as the trigger.
“Chancellor on brink of second bailout for banks”
One of the main outcomes of the 2008 event was the creation of Bitcoin.
The world’s original cryptocurrency was born during the global financial crisis, in part because its mysterious creator (or creators), Satoshi Nakamoto, was disillusioned with governments and central banks conjuring up hundreds of billions, if not trillions, of dollars with little more than a few keystrokes on a computer.
Another major part of the world’s largest digital asset was to create a parallel digital currency that would allow direct peer-to-peer online payments without the need for a financial institution or any form of government intervention. In essence, the hope was to create a direct alternative to an old banking system that had just proved fragile enough to break down the global financial order through the meddling of centralized entities.
In fact, Bitcoin’s first ever block, the so-called Genesis Block on January 3, 2009, was embedded by Satoshi with “Chancellor on rand of second bailout for banks.” That was the headline in The Times of London on the day when the British government and the Bank of England prepared a response to the ongoing problems in the country’s financial sector.
Worth essentially zero that day and unknown to all but a small handful of “cypherpunks,” bitcoin, 17 years later, has a market cap of over $1 trillion and has the largest asset managers on the planet calling it a near-essential asset to own for most portfolios.
Bitcoin, as we now know it, is obviously different from the original cryptocurrency in 2009. Today, the term “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. Large owners are hoarding huge amounts of bitcoin on their balance sheets, financial giants are offering bitcoin to the masses via exchange-traded funds, and even some government entities are buying for their strategic reserves.
So does the Blue Owl fiasco mean another resurgence of Bitcoin’s original thesis and, in turn, another bull run? Time will tell, but if this event turns out to be El-Erian’s “canary” signaling another significant crisis, the global financial system may be in for a rude awakening, and Bitcoin may just be the solution, in whatever form it has taken 17 years later.
Read More: Bitcoin’s Plunge Signals Coming AI Crisis, But Massive Fed Reaction Will Set New Record High: Arthur Hayes
