Tim Draper Advocates Bitcoin Adoption for Risk Mitigation Amid Banking Crises
Summary:
Venture capitalist Tim Draper advises companies to adopt Bitcoin as a risk mitigation strategy following the Silicon Valley Bank's liquidity crisis in March 2023. The crisis highlighted the need for companies to have treasury units and diversify their capital holdings. Accordingly, Draper's investment portfolio companies now distribute their capital between large and small banks and Bitcoin. However, this approach of Bitcoin as a risk aversion strategy is yet to be widely accepted among traditional institutions.
Venture capitalist Tim Draper suggests enterprises should adopt Bitcoin for risk mitigation in light of the Silicon Valley Bank (SVB) fall in March 2023, which left crypto and tech businesses struggling to get their funds. SVB, known for working with venture capital-supported tech startups including crypto enterprises, had Circle, the issuer of stablecoin, as one of its several patrons. At the time of its liquidity crisis, SVB had $3.3 billion of Circle's USD Coin (USDC) reserves, causing USDC to slide temporarily to $0.88. Stability was restored and USDC bounced back after it became apparent the U.S. government would intervene to bail out SVB.
The SVB incident became a reality check for Draper, who found that many companies he invested in had put all their money in one banking institution. When the SVB bankruptcy caused panic due to the fact that a third of the companies he had invested in banked with SVB, Draper stepped in to help with the immediate payroll. However, he clarified that the help would come at a cost and could only cover one payment cycle. Thankfully, the U.S. government intervened and bailed SVB out in a few days.
The SVB bailout was well received but it didn't eliminate the risk of another banking crisis of the same nature. Emma Hagan, the former chief risk officer for Europe and the Middle East at SVB, predicted that such a crisis would recur. Furthermore, she forecasted that banks slow to innovate would be in particular jeopardy.
In a bid to avert a similar shock in future, Draper advised all his companies to set up treasury units. Also, he insisted they diversify their capital holdings, encouraging them to put a third of their resources into Bitcoin (BTC) for risk management.
Discussing the importance of treasury management, Danny Chong, co-founder of Tranchess, the asset tracking platform, stressed the need for having "ample liquidity when you need it". He attributed SVB's collapse, in part, to poor treasury management; clients withdrew deposits rapidly while SVB had locked many assets into long-term bonds which were not only illiquid but also depreciated in value.
Following the SVB incident, Draper laid down new guidelines for the entities in his investment portfolio, advising them to distribute their capital into three sections. He advised keeping one third in a large bank, a third in a small bank (since the U.S. government can bail out a small bank) and the remaining third in Bitcoin. His rationale being that if all banks face problems, Bitcoin would secure payroll. The companies in Draper Ventures now follow this policy.
However, mainstream acceptance of Bitcoin as a risk mitigation strategy is some distance away. As per Chong, while some progressive entities have considered investing in crypto or digital assets, most institutions tend not to be so forward thinking.
The SVB debacle highlighted the insufficient financial planning in VC-funded firms. Paul Frambot, CEO and co-founder of lending and borrowing platform Morpho, shared a few of his tactics for securing capital while maximizing its effectiveness. Frambot emphasized the need for risk diversification and advised having a mix of crypto and traditional banking facilities. Frambot also stressed on diversification as a critical aspect of an effective treasury management strategy.
Published At
6/6/2024 5:15:00 PM
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