What happened at Silvergate, SVB, and Signature has exposed the flaws in the fiat system and larger crypto industry (digital assets sans bitcoin). Silvergate and SVB used government bonds, which have become a virtually worthless asset class, for hedging. The strategy backfired. Assets linked to the fiat system are exposed to high risk because they cannot outpace growing inflation. Central bank decisions can have dire consequences when interest rates change. This especially affects bondholders.
Silvergate and Signature have banked a number of crypto companies in an attempt to capitalise on the growing misallocation of capital — a consequence of low interest rates and excessive "money printing" over the past decade. There was so much money available that investors and institutions poured capital into precarious projects. That too backfired. We can expect the problems in the banking system to get worse from here. Crypto, with its fiat-like business practices, adds additional risk to intermediaries and an already shaky financial system. Crypto is a leading indicator of the larger systemic problems because the fringe nature of crypto is first to expose weaknesses in the fiat-based financial system.
Bitcoin is a solution to this problem because it is “sound” money. It leads to the development of strong business practices, appropriate capital allocation as bitcoin acts as a benchmark, and robust financial services models that extend to loans, IRAs, and equities (as more public companies will be exposed to bitcoin by mining it or holding it on the balance sheet).
The events of the past week underscore the importance of a Bitcoin strategy, as the Bitcoin Network operates outside of the fiat system and acts as a true hedge. When bitcoin is stored in cold storage, those bitcoin are the holders alone and are not at risk of default by third parties, including banks or exchanges, or rising monetary inflation and central bank decisions. Bitcoin price action since Friday (03/10/2023) shows that market participants are beginning to understand how to truly store their value. While banks are crashing, bitcoin grew in strength.
From conversations at SXSW in Austin last week, venture capitalists and tech companies in particular are beginning to understand the advantages of Bitcoin over the traditional banking infrastructure. Founders are starting to use bitcoin to protect part of their treasury from a banking system failure, preserving the value of their capital raises and riding the upside of a deflationary money.
Because bitcoin is highly volatile, it's important to use only a portion of a company's treasury to buy bitcoin (2-5% seems to be typical). This is not money that is needed to make payroll or pay vendors. A bitcoin stash is a long-term treasury management strategy outside of the traditional banking system’s current uncertainty. It is also ideal to have a holding horizon of 5-10 years as bitcoin appreciates in value over time.
Be it an individual or company, holding bitcoin can preserve the value of capital. It allows the individual to save and build wealth. With timing, it can boost a company’s balance sheet and allow for a higher multiple at exit.
- This article is an excerpt from the third edition of The Bitcoin Newsletter. A monthly newsletter I write -
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Leon A. Wankum
Bitcoin. Real Estate. Philosophy & Ethics. ⚡firstname.lastname@example.org npub1v5k43t905yz6lpr4crlgq2d99e7ahsehk27eex9mz7s3rhzvmesqum8rd9
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