Businesses should start using Bitcoin as a way to hedge risk, according to venture capitalist Tim Draper.
When Silicon Valley Bank (SVB) collapsed in March 2023, many cryptocurrency companies and technology companies suddenly found themselves unable to access funds.
The Silicon Valley bank specializes in serving venture capital-backed technology startups, including cryptocurrency companies. The stablecoin issuance circuit was one of its many clients. SVB held $3.3 billion in Circle Coin’s US dollar reserves (USDC) when they became illiquid, prompting the stablecoin to temporarily break down to $0.88.
The crisis was averted and USD/USD only recovered when it became clear that the US government was going to bail out SVB.
This event also proved to be a wake-up call for Draper, who suddenly learned that several companies in his portfolio had consolidated all of their capital into a single company.
“When Silicon Valley Bank failed, there was a huge panic because a third of our companies only did business with Silicon Valley Bank,” Draper explained at the AIM Summit in London in April.
Many couldn’t even pay their next salary because of the collapse.
“I have received all these phone calls, and in most cases I have been gracious and said okay, we will give you more money to pay your salaries, but know that it will be expensive and that we only pay one salary. (..) It was on Thursday that it stopped the bankruptcy of the Silicon Valley Bank – on Monday, bailed out by the government.”
History will repeat itself
Although the bailout was a source of relief for all parties involved, it did not end the matter. The possibility of a further collapse of the SVB looms over the banking sector.
In March, Emma Hagan, former risk director for Europe and the Middle East at SVB Bank, told London financial newspaper City AM that “this is bound to happen again.”
“Traditional banks, particularly those that have been slow to adapt, could find themselves particularly vulnerable,” she added.
But Draper doesn’t intend to suffer a recurring shock if the next bank fails.
“I told all my businesses that we now have to have a Treasury Department,” he said.
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Furthermore, Draper calls on companies to diversify away from the banking sector and invest a third of their capital in Bitcoin (BTC).
Risk management
Cointelegraph spoke with Danny Chung, co-founder of Tranchess, a yield-enhancing asset tracker, to better understand the importance of cash management.
Zhong, who has worked in traditional finance for many years, said that although part of the capital can be invested in high-interest financial products, intelligent cash management should always ensure that there is still “enough cash when you need it”.
“Most large companies, like Apple and Google, have strong cash flow. “They actually have a whole team just to manage cash flow,” Chung said.
Stressing the importance of a good mix, Chung points out that SVB’s collapse itself was due, in part, to poor cash management:
“One of the reasons for this collapse is that users were withdrawing their deposits, often very quickly, but (SVB) nevertheless secured a large part of these assets in long-term bonds.”
Worse still for SVB, these long-term bonds were not only somewhat illiquid, but their value had also declined.
Tim Draper’s Bitcoin Strategy
After SVB’s bankruptcy, Tim Draper set new rules for his portfolio companies, requiring them to divide their capital into three tranches.
“Put a third of your money in a big bank,” Draper said. Then, “Put a third of your money in a small bank” because “The US government can bail out a small bank” and finally, “Put a third of your money in Bitcoin”.
Explaining his thinking on Bitcoin, Draper added: “If there was a domino effect and all the banks were in trouble, you would have money to pay your salaries, and it would be in Bitcoin. »
“That’s pretty much the policy of the Draper Venture companies,” Draper concluded.
Although Draper Venture companies can now hold Bitcoin as a last line of defense, there is still a long way to go before owning Bitcoin becomes a popular risk aversion strategy.
As Chung says: “Some of the newer, more forward-looking companies have considered investing in cryptocurrencies or digital assets (…) but most institutions aren’t looking that far ahead. »
Diversify using cryptocurrencies or trading
The fall of the SVB revealed a surprising lack of financial planning within venture capital-backed companies, despite the existence of many financial products promising much better returns than a bank account.
Cointelegraph spoke with Paul Frambaut, CEO and co-founder of lending and borrowing platform Morpho, who revealed some of his strategies for protecting capital while increasing efficiency.
When it comes to growing Morpheu’s cash flow, “we only look at the returns with the lowest risk, even if that doesn’t mean the highest returns,” Frambout said.
“The money collected from investors is allocated to operations,” explains Frambaut. “So we need to make sure that we are able to operate as long as possible and profit from it (…) We cannot go into DeFi revenue farming with this capital.”
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For established crypto businesses, it is important to maintain traditional banking facilities, Frambaut said.
“We’re diversifying, and a lot of that (capital) is not in cryptocurrencies, but in bank accounts just to protect us from certain risks, and to hedge us against certain risks, like the risk of Ethereum even if it is very weak.
Like Draper, Frambout believes that diversification is one of the most important factors in a strong cash management strategy.
“We have several stablecoins, which have proven to be very useful in the past,” Frambaut said.
