Blue Owl Capital’s recent announcement regarding the sale of $1.4 billion in loans to bolster liquidity for investors in a retail-focused private credit fund has sent ripples through the financial markets, raising concerns reminiscent of the tumultuous events leading up to the 2008 financial crisis. Analysts have drawn direct comparisons between this situation and the collapse of two Bear Stearns hedge funds in 2007, which ultimately served as harbingers for the broader crisis that followed.
Despite the absence of immediate damage across major stock market averages, Blue Owl’s shares have plummeted roughly 14% this week and more than 50% over the past year. This downturn has also affected other significant private equity firms, including Blackstone, Apollo Global, and Ares Management, which all posted significant losses.
This turn of events has evoked memories of the 2008 global financial crisis for many investors. Notably, in August 2007, two hedge funds managed by Bear Stearns collapsed due to massive losses related to subprime mortgage-backed securities, triggering a freeze on withdrawals by BNP Paribas due to challenges in assessing U.S. mortgage assets. This series of events led to a liquidity crisis and severe disruptions in credit markets, turning what seemed like a localized issue into a global phenomenon.
Former Pimco CEO Mohamed El-Erian reflected on the situation, questioning whether it constitutes a “canary in the coal mine,” similar to the early warning signs preceding the 2008 crisis. He underscored the systemic risks currently present in financial markets, particularly in artificial intelligence investments. While he suggested that these risks bear some resemblance to past crises, he believes their current magnitude is significantly reduced compared to that of 2008.
The potential ramifications for bitcoin investors are particularly salient. It is essential to note that stress in private credit markets does not inherently lead to an uptick in bitcoin’s value. Historically, tighter credit conditions have adversely impacted risk assets, including both bitcoin and the broader cryptocurrency market. While bitcoin did not exist during the 2008 crisis, its behavior amid the COVID-19 pandemic—where it suffered a 70% decline at the crisis’s outset—offers some parallels.
However, the Federal Reserve’s responses during crises have often provided a substantial boost to bitcoin. The massive liquidity injections following the 2020 crisis allowed bitcoin to soar from a low of around $4,000 to more than $65,000 within a year.
The current situation echoes the 2007-2008 sequence of events: initial stress in credit markets, denial in equity markets, subsequent banking contagion, and eventual central bank interventions. If Blue Owl indeed signifies the “first domino,” as posited by former Peter Lynch associate George Noble, the financial sequence could repeat itself, with private credit taking the place of subprime mortgages as a triggering factor.
Historically, one of the most significant outcomes of the 2008 crisis was the birth of bitcoin, a response to disillusionment with government and central bank practices that allowed extensive money creation with minimal accountability. Bitcoin was designed to create a decentralized alternative to traditional finance, enabling peer-to-peer transactions without institutional interference. Its genesis block, created on January 3, 2009, famously contained a reference to a The Times headline about the U.K. government’s financial maneuvers.
Fast forward to today, bitcoin’s market cap has surpassed $1 trillion, attracting attention from major asset managers who now consider it a vital addition to diversified portfolios. The narrative around bitcoin has evolved dramatically; it is now recognized both as a “store of value” and “digital gold,” despite its early anti-establishment intentions. Large institutional holders have accumulated substantial quantities, and financial powerhouses are now making bitcoin accessible through exchange-traded funds.
The question remains: does the current predicament at Blue Owl signal a revival of bitcoin’s original ideals, potentially paving the way for another bull market? Only time will reveal the full impact of these unfolding events. Should El-Erian’s speculation prove accurate, the global financial system might be edging toward significant upheaval, with bitcoin emerging as a potential solution, adapted for the financial landscape of 2023.
