The European banking system is struggling in the face of regulatory burdens and low interest rates. Banks are shifting business models to work within narrower margins.
In recent days, Deutsche Bank has contributed to the pooling fears over European Banking. Since July 2015, shares have decreased in value by more than 65%. Furthermore, net revenue dropped 21% in the first half of 2016 relative to 2015.
Deutsche Bank U.S. Stock Exchange Chart from Yahoo Finance
In addition to prior problems, a recent request from U.S. Department of Justice for $14 billion from Deutsche Bank has prompted media attention and concern. Bank officials have denied the need for a government bailout, yet limited investor confidence is reflected in the low share price, that has not experienced a strong rebound.
Meaning for Bitcoin
Bitcoin exists as an alternative to traditional banking systems. The weakening banking system validates the value that Bitcoin investors place on decentralization for two reasons. First, if Deutsche Bank’s initial failure is the product of a centralized system, Bitcoin is a good option for mitigating the risk of further future problems. Second, if Deutsche Bank’s failure is contagious because of a centralized system, Bitcoin is preferable because an internal failure would be largely limited to Bitcoin. These considerations have fueled excitement on Bitcoin forums such as Reddit as investors watch the European situation unfold.
In weighing these validating factors, it’s important to recognize that the comparison is somewhat between apples and oranges. Bitcoin and traditional banking systems are similar in that they facilitate the flow and storage of funds. However, they differ in prevalence and human interaction. The struggles of Deutsche Bank highlight issues associated with human error. In a hypothetical world in which Bitcoin is more prevalent than it exists today, regulatory burdens and government controls would contribute problems to Bitcoin, similar to those faced by the banking system.
A complete shift away from centralized systems and banks, as Bitcoin purists would have it, may seem like an extreme reaction to many investors. More likely, weakness in Europe serves as a motivator to place a stronger emphasis on diversifying through decentralized investing strategies, such as Bitcoin.