Bitcoin experienced unprecedented growth in early 2021, peaking at $58,000, nearly triple its 2017-2018 peak. We are entering an era where institutions are beginning to turn to bitcoin (BTC) as many countries around the world print unprecedented amounts of money to pay off growing debts. And worse, there is a risk of runaway inflation. This perfect storm of macro conditions means that institutions such as pension funds, hedge funds and high net worth individuals, with a combined value of several trillion dollars, are starting to become aware of and involved with bitcoin for the first time.
Unlike the 2017 bull market, the current run is driven less by hype and more by the fact that bitcoin is accepted in the traditional financial world as a rare asset class. Adoption of crypto assets by companies and institutions has been a major theme in 2021. Tesla has invested $1.5 billion in bitcoin, one of the most prominent examples of corporate adoption to date.
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In addition, major institutions recognize the importance of bitcoin as a store of value and many have added millions of dollars to their balance sheets, including Goldman Sachs, Standard Chartered, Square, BlackRock, Fidelity Investments, MicroStrategy and many others.
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But the crypto landscape must change if bitcoin is to truly penetrate the traditional world. Institutions cannot use private keys that can be easily lost, conduct transactions that involve long strings of letters and numbers, or hold funds on exchanges with high counterparty risk.
New regulations for cryptocurrencies in the United States make it easier and more acceptable to hold cryptocurrencies and provide greater security in various jurisdictions. Just last month, the Office of the Comptroller in the US provided much-needed regulatory certainty for cryptocurrency operations. Brian Brooks, deputy controller of the coin, explained that accessing blockchains like Bitcoin or Ethereum, storing coins from these rails directly or on behalf of customers, and operating public blockchain nodes are allowed. In other words, it allows banks to actively participate – a big step towards increasing the comfort level of institutions interested in conducting cryptographic activities.
We are also seeing new developments in the storage and management of digital assets, allowing even more institutional and business players to enter this space. Goldman Sachs recently filed an information request to investigate the bank’s plans to hold digital assets as part of a broader strategy to enter the stablecoin market. Although the details have yet to be worked out, these seismic moves by key institutions are adding fuel to the fire.
Next generation cryptography
While these institutions have huge teams to manage and oversee their new crypto holdings, smaller companies have also begun to experiment with adding bitcoin and other cryptocurrencies to their balance sheets. As large and small companies begin to own crypto, it is becoming increasingly clear that the next generation of companies will be more like investors who own and balance funds across multiple asset classes.
These include companies for which crypto and blockchain are non-core elements, changing the value proposition of the company itself: Now everything is a fund whose profits can be separated from the basic commercial offer. Smaller companies that just had cash on hand are now investors worried about their money. In the evolving world of decentralized finance, there are no limits to the complexity of asset management; you can buy and sell derivatives, participate in loans, etc.
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I envision a future where all companies have cryptocurrencies on their balance sheets and all companies are investors, whether it’s their core business or not. But this future depends on both user experience and regulation. Some companies and institutions that own cryptocurrencies are willing to take the risk by defining their own operational and financial safeguards to manage cryptocurrencies, while for others it is a non-starter. The traditional world will need storage solutions, a traditional user interface for transactions, management of crypto assets, etc.
For small businesses starting to hold cryptocurrencies, my advice is to keep it simple and not get distracted by all the volatility and noise of cryptocurrencies. The current crypto rally brings great excitement and growth opportunities, but companies need to do what makes sense for them. Adhering to a basic index approach to cash management of cryptocurrency companies – for example, holding 5% of funds in bitcoin, 95% of cash and cash equivalents, and rebalancing when the price rises or falls – allows access to the market while managing cash and maturities prudently.
Overall, the traditional world of financial management will change as institutions begin to take bitcoin seriously and the combination of regulation and user experience helps crypto become a more accessible and accepted asset class.
This article does not contain investment advice. There are risks associated with all investments and business transactions, and readers should do their own research before making a decision.
The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent those of Cointelegraph.
Arianna Flemming is COO of Unofficial Systems, a research organization that studies distributed systems and protocols. She has extensive experience in financial organization and operational leadership in the blockchain space, helping to develop and implement long-term financial and operational strategies.
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A projected balance sheet, also known as a pro forma balance sheet, shows the balances of specific asset, liability and equity accounts of a company at some point in the future. … The appendix also contains a log of fixed assets (non-current assets) and current assets.
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