Bitcoin has seen unparalleled growth in early 2021, reaching highs of over $58,000, almost triple its peak of the 2017–2018 boom. We are entering an era where institutions are starting to turn to Bitcoin (BTC), as many countries worldwide have been printing unprecedented amounts of money to service mounting debt. And to make matters worse, they are also facing the risk of unmanageable inflation. This perfect storm of macro conditions means institutions like pension funds, hedge funds, as well as high-net-worth individuals with trillions of dollars in combined value are starting to pay attention and learn about Bitcoin for the first time.
Unlike the 2017 bull run, this current run is driven less by hype and more by Bitcoin being accepted in the traditional financial world as a scarce asset class. Enterprise and institutional adoption of crypto assets has been the driving theme of 2021, with Tesla investing $1.5 billion in Bitcoin, one of the most prominent examples of corporate adoption to date.
Additionally, large institutions are recognizing the importance of Bitcoin as a store of value, with many adding millions of dollars of the asset to their balance sheets, including Goldman Sachs, Standard Chartered, Square, BlackRock, Fidelity Investments, MicroStrategy and more.
But the crypto landscape needs to change to truly allow Bitcoin to move into the traditional world. Institutions can’t use private keys that can easily be lost, transact with long strings of letters and numbers, or store funds on exchanges with high counterparty risk.
New crypto regulation in the U.S. is making it easier and more acceptable to hold cryptocurrencies by providing more certainty across jurisdictions. Just last month in the U.S., The Office of the Comptroller of the Currency provided much-needed regulatory certainty regarding crypto activities. Brian Brooks, acting comptroller of the currency, stated that access to blockchains, such as Bitcoin or Ethereum, the holding of coins from these rails directly or on behalf of clients, and the running of nodes for a public blockchain is permitted. In other words, this allows banks to get actively involved — a huge step in the direction of improving the comfort level of institutions interested in holding crypto.
We are also seeing more developments in terms of the custody and management of digital assets, which allows even more institutional and corporate players to enter the space. Goldman Sachs recently issued a request for information to explore the bank’s digital asset custody plans, part of a broader strategy in entering the stablecoin market. While the details aren’t yet firm, these seismic moves by key institutions are fueling the fire.
The next generation for crypto
While these institutions have huge teams to manage and oversee their new crypto holdings, smaller companies have also started to experiment with adding Bitcoin and other cryptocurrencies to their balance sheet. As companies, big and small, start to hold crypto, it is becoming increasingly clear that the next generation of companies will act more like investors holding and balancing funds in multiple asset classes.
This includes companies for which crypto and blockchain is not their core business, reshaping businesses’ very value proposition: Everyone is now a fund whose returns may be decoupled from their core business offering. Small companies that may have only been holding cash are now investors concerned about their liquidity. In the emerging world of decentralized finance, the sky’s the limit to how complex asset management can become; you can buy and sell derivative products, engage in lending and much more.
I envision a future where all companies hold crypto on their balance sheet, and every company is an investor, whether that is their core business offering or not. But this future is dependent on both user experience and regulation. Some companies and institutions holding crypto are willing to take risks by figuring out their own operational and financial security measures to manage their crypto, while for others, this is a non-starter. The traditional world will require custody solutions, a traditional UX for transactions, crypto wealth management and more.
For smaller companies starting to dip their toes into holding crypto, my advice is to keep it simple without getting too distracted by all the crypto volatility and noise. The current crypto rally brings great excitement and opportunity for growth, but companies need to do what makes sense for them. Keeping a basic index approach to corporate crypto treasury management — for example, holding 5% of funds in Bitcoin, 95% cash and equivalents and rebalancing when the price increases or decreases — allows you to gain exposure to the market while being smart with cash and runway.
Overall, as institutions start to get serious about Bitcoin and the combination of regulation and user experience helps to make crypto a more accessible and accepted asset class, the traditional world of financial management will evolve.