Startups can hedge banking risks with Bitcoin — Tim Draper
According to venture capitalist Tim Draper, businesses should start using Bitcoin as a way to hedge risk.
The bankruptcy of Silicon Valley Bank (SVB) in March 2023 left many cryptocurrency and technology companies suddenly without access to funds.
Silicon Valley Bank specializes in serving venture capital-backed technology startups, including cryptocurrency companies. Stablecoin issuer Circle was one of its many customers. SVB held $3.3 billion of Circle’s USD Coin (USDC) holdings when they became illiquid, causing the stablecoin to be temporarily stuck at $0.88.
Crisis was averted and USDC recovered only after it became clear that the US government would bail out SVB.
The event also served as an important wake-up call for Draper, who suddenly discovered that many of the companies in his investment portfolio had invested their entire capital in a single institution.
Draper explained this at the AIM Summit London in April: “When Silicon Valley Bank went out of business, there was a huge panic because a third of our company was banking only at Silicon Valley Bank.
Many people were unable to even pay their next salary due to the collapse.
“I get all these calls and most of the time I am generous and will give them more money to help them make their salaries, but I know it is going to cost a lot of money and there is only one salary we can do,” he said. We covered again what happened on Thursday when Silicon Valley Bank went out of business. On Monday the government bailed them out.”
history will repeat itself
The bailout brought relief to all involved, but it did not end the problems. The possibility of another SVB crash has major implications for the banking industry.
In March, Emma Hagan, SVB’s former chief risk officer for Europe and the Middle East, told London-based financial newspaper City AM: “It’s inevitable that something like this will happen again.”
“Traditional banks, especially those that are slow to adapt, may be particularly at risk,” she added.
But Draper doesn’t intend to suffer a repeat shock if the next bank fails.
“I said every company should now have a finance department,” he said.
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Draper also calls for companies to diversify beyond the banking sector and deploy one-third of their capital in Bitcoin (BTC).
crisis management
Cointelegraph spoke with Danny Chong, co-founder of Tranchess, a yield-boosting asset tracker, to gain additional insight into the importance of financial management.
Chong, who has worked in traditional finance for many years, said while some of the capital may be invested in high-interest financial instruments, smart financial management should always ensure there is “sufficient liquidity when needed.”
“Most large companies like Apple or Google have strong treasuries. We actually have a team dedicated solely to financial management,” Chong explained.
To emphasize the importance of getting this mix right, Chong points out that SVB’s collapse itself was partly caused by financial mismanagement.
“One of the reasons for the collapse was basically that users were withdrawing their deposits very quickly and very frequently, but (SVB) had a lot of these assets locked up in long-term bonds.”
What makes SVB’s problems even worse is that not only are these long-term bonds quite illiquid, but they have also fallen in value.
Tim Draper’s Bitcoin Strategy
After SVB collapsed, Tim Draper instituted new rules for the companies in his investment portfolio, telling them to split their capital into three tranches.
“Put a third of your money in a big bank,” Draper said. Then, “Put a third of your money into small banks because the U.S. government can bail them out,” and finally, “Put a third of your money into Bitcoin.”
To explain his thoughts on BTC, Draper added, “If there is a domino effect and all the banks are in trouble, they will have money to pay salaries and it will be in Bitcoin.”
“This is pretty much the overall policy of the Draper Venture company,” Draper concluded.
The Draper Venture company now holds BTC as its last line of defense, but there is still a long way to go before Bitcoin ownership becomes a common hedging strategy.
As Chong said, “Some new, forward-looking companies have considered investing in cryptocurrencies or digital assets (…) but most institutions are not very forward-looking.”
Diversification through cryptocurrencies or Tradfi
SVB’s downfall exposed a surprising lack of financial planning within VC-funded firms, despite the availability of numerous financial products that promise far better returns than bank accounts.
Cointelegraph spoke with Paul Frambot, CEO and co-founder of lending and borrowing platform Morpho. He revealed several strategies to maximize efficiency while protecting capital.
Regarding Morpho’s financial growth, Frambot said, “We only look at the lowest risk return, not necessarily the highest return.”
“The cash we raise from investors is used for operations,” Frambot explained. “So we need to make sure we can operate for as long as possible and be able to leverage it (…) You can’t do DeFi yield farming with this capital.”
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Frambot said that for businesses that are firmly entrenched in cryptocurrencies, it is important to maintain traditional banking facilities.
“We are diversifying and a lot of it (capital) is not in crypto but in bank accounts to protect and hedge ourselves against some risks, even if they are very small, such as Ethereum risk.”
Like Draper, Frambot believes that diversification is one of the most important elements of a sound financial management strategy.
“We have several stablecoins that have proven to be very useful in the past,” Frambot said.
