Startups can hedge bank risk with Bitcoin — Tim Draper


Companies should start using Bitcoin as a way of hedging risk, according to venture capitalist Tim Draper.

When Silicon Valley Bank (SVB) collapsed in March 2023, many cryptocurrency and tech firms suddenly found themselves unable to access funds.

Silicon Valley Bank specialized in servicing venture capital-backed tech startups, including crypto firms. Stablecoin issuer Circle was among its many clients. SVB held $3.3 billion of Circle’s USD Coin (USDC) reserves when it became illiquid, prompting the stablecoin to temporarily depeg to $0.88.

The crisis was averted, and USDC recovered only when it became clear that the United States government would bail out SVB.

The event also proved to be a major wake-up call for Draper, who suddenly learned that many of the companies in his investment portfolio had dumped the entirety of their capital into a single institution.

“When Silicon Valley Bank went out of business, there was a huge panic because a third of our companies only banked with Silicon Valley Bank,” Draper explained at AIM Summit London in April.

Many couldn’t even make their next payroll due to the collapse.

“I got all these phone calls, and in most cases, I was magnanimous, and I said okay, we’ll give you some more money to make your payroll but know it’s going to be expensive, and it’s only one payroll that we’re covering [..] that was on Thursday when Silicon Valley Bank went out of business — Monday, the government bailed them out.”

History will repeat itself

Although the bailout was a relief for all concerned, it was not the end of the matter. The potential for another SVB crash hangs heavy over the banking industry.

In March, Emma Hagan, the former chief risk officer for Europe and the Middle East at SVB, told the London-based financial paper City AM that it is “inevitable this will happen again.”

“Traditional banks, especially those who have been slow to adapt, may find themselves particularly at risk,” she added.

But Draper does not intend to suffer a repeat shock when the next bank fails.

“I told all my companies you’ve got to have a treasury department now,” he said.

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In addition, Draper demands that the firms diversify beyond the banking sector and place a third of their capital in Bitcoin (BTC).

Risk management

Cointelegraph spoke with Danny Chong, co-founder of Tranchess, the yield-enhancing asset tracker, to gain further insight into the importance of treasury management.

Chong, who worked in traditional finance for many years, said that while a portion of capital may be invested in high-interest-bearing financial products, smart treasury management should always ensure there is still “ample liquidity when you need it.”

“Most big corporations, like Apple and Google, have a strong treasury. In fact, they have a whole team just to do treasury management,” explained Chong.

To highlight the importance of getting that mix right, Chong points out the collapse of SVB was itself, in part, due to poor treasury management:

“One of the reasons for the collapse was that users were basically withdrawing deposits very often on a very fast basis, but yet [SVB] has locked a lot of these assets into long-term bonds.”

To exacerbate matters for SVB, not only were these long-term bonds fairly illiquid, but they also decreased in value.

Tim Draper’s Bitcoin strategy

Following the collapse of SVB, Tim Draper instituted new rules for the firms in his investment portfolio, telling them to split their capital into three tranches.

“Put a third of your money in a big bank,” said Draper. Then, “put a third of your money in a small bank” because “the U.S. government can bail out a small bank,” and finally, “put a third of your money in Bitcoin.”

To explain his thinking on BTC, Draper added, “If the domino effect happens and all the banks are in trouble, you’re going to have the money to pay your payroll, and it’ll be in Bitcoin.”

“That is pretty much the overall policy among the Draper Venture companies,” Draper concluded.

While Draper Venture companies may now be hodling BTC as a last line of defense, there is still some way to go before Bitcoin ownership becomes a common risk aversion strategy.

As Chong states, “Some of the newer and more forward-looking firms have looked at investing in crypto or digital assets[…] but the bulk of the institutions are not so forward-looking.”

Diversification with crypto or tradfi

The fall of SVB exposed a surprising lack of financial planning within VC-funded companies, despite the fact there are a multitude of financial products that promise significantly better returns than a bank account.

Cointelegraph spoke with Paul Frambot, the CEO and co-founder of lending and borrowing platform Morpho, who revealed a few of his strategies for safeguarding capital while also maximizing its effectiveness.

When it comes to growing Morpho’s treasury, Frambot said, “We only look into the lowest risk yields, even though that does not mean the highest returns.”

“The cash raised from investors is dedicated for operations,” explained Frambot. “So we need to be sure we can operate for as long as we can and make use of this[…] we can’t go DeFi yield farming with this capital.”

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Frambot said that for a business so firmly embedded in crypto, it’s important to retain traditional banking facilities.

“We’re diversifying, and a good chunk of that [capital] is not in crypto, it is in bank accounts just for protecting ourselves from, and hedging ourselves from some risks, like Ethereum risk even though it’s super tiny.”

Like Draper, Frambot believes that diversification is one of the most important factors in a solid treasury management strategy.

“We have multiple stablecoins, which has proven very helpful in the past,” said Frambot.