In its latest report, BitMEX research tries to answer the question of “When is the next global financial crisis going to happen?” In this report, BitMEX argues that the epicenter of financial risk has shifted from banks to asset management industry; and a “repeat of 2008” that is retail banking deposits and payment systems being under threat is unlikely. The fragility is rather most significant in corporate debt investment funds and unconventional debt investment vehicles.
It attempts to address the issue of Bitcoin and crypto enthusiasts and investors asking about the next crisis that is driven with the assumption that it will occur every decade or so, will have a positive impact on Bitcoin price and will result in questioning the integrity of banking and electronic payment systems. For Bitcoin price, it argues, if Bitcoin “does respond well in the next crisis (when liquidity is constrained), that will be a huge positive for Bitcoin and the store of the value investment thesis.”
Bank Balance Sheets in Developed Markets are Relatively Healthy
Over the last decade, bank management and regulators have operated in the shadows of 2008 and as a result, bank balance sheets and capital ratios have significantly strengthened. It further points out that main western banks have not expanded their balance sheets at all since the global financial crisis.
Growth in Leverage in the Asset Management Industry
The data show that, unlike the banking sector, the asset management industry has expanded considerably since 2008 and at the same time, leverage also appears to have increased.
New Corporate Debt Market Vehicles
The replacement of the role of the banks in the corporate debt markets has resulted in the rapid growth of interrelated, non-mutually exclusive investment structures. The non-bank mechanisms for providing corporates with financing viz. Collateralized Loan Obligations (CLOs), Leveraged Loans, Private debt deals, and Bond fund ETFs and mutual funds have grown considerably since the last global financial crisis.
Corporate Debt Markets Conditions
Corporate debt levels have increased considerably since 2008, with gross debt of Russell 3000 companies now totaling US$11 trillion, compared to just over US$8 trillion at the time of the last crisis. Corporations have taken advantage of the new investment products and low-interest rates to borrow money at record levels.
A Portfolio with a “Lesser Extent” of Bitcoin
Banks are more crucial to the financial system and society than asset managers, mentions the report and if asset managers come under pressure, retail and corporate deposits should be safe. This means the coming crisis could be less intense than in 2008. However, the “potential for government intervention to mitigate the impacts of the crisis may be more limited than in 2008.”
The data do not seem to suggest that we are necessarily right on the precipice of a major crisis, states BitMEX Research, “it could be several years away.” It concludes with the advice to adjust a portfolio with long-dated corporate bond ETF, hedge funds specializing in volatility, VIX calls, gold, and “maybe to a lesser extent, even Bitcoin.”