Title: (The Institutional Crypto Cycle is Coming)
Host: Ryan, Bankless
Guest: Eric Peters
Organized & Translated by: Janna, ChainCatcher
Eric Peters is the CEO of Coinbase Asset Management and the founder of One River Asset Management. This article is based on a podcast interview with Bankless, covering Eric's journey into cryptocurrency and the complete transition of the crypto market from being avoided by institutions to gradually being accepted by Wall Street, providing a historical perspective for more crypto enthusiasts to understand the industry's development. ChainCatcher has organized and translated the original content.
TL;DR:
By 2025, the recognition of cryptocurrency will significantly increase. BlackRock's entry is a critical juncture, and traditional financial figures like Larry Fink recognize crypto as financial infrastructure, believing it has substantial value and a high probability of price increase in the future.
Traditional finance's acceptance of crypto has profit motives, but the fundamental reason is that blockchain can solve the problems of fast transactions, low costs, high transparency, and strong security, thus avoiding the transparency issues similar to the 2008 financial crisis.
Cryptocurrency rose from the general public rather than Wall Street, and not included in the traditional regulatory framework, leading many senior practitioners in large financial institutions to adopt a conservative avoidance attitude and miss the trend.
The goal of traditional finance is to allow stablecoins to purchase traditional assets like bonds and stocks in digital native form, with related infrastructure built on Ethereum. Practitioners are genuinely excited about the technological reconstruction of financial infrastructure, rather than the fantasy of Bitcoin replacing the dollar.
In 2023-2024, there will be a crypto chokehold action, making it difficult for crypto companies to obtain banking cooperation. However, practitioners have not sold off assets but instead insisted on building, firmly believing that technological innovation will not be completely obstructed by politics, and that crypto can provide truth sources for the AI era, optimistic about the prospects of Ethereum combined with Layer 2.
The US government's attitude toward crypto has changed 180 degrees within a year; the GENIUS Act is a key turning point. The Hamilton plan first clarifies the regulatory framework for stablecoins, starting with short-term government bonds, and then promotes the integration of stablecoins with traditional financial products.
Cryptocurrency can integrate with traditional finance, using smart contracts to retain the transparency of SEC disclosures while reducing the costs of traditional financial documentation processing and listing. Crypto technology is a crucial next step in Wall Street's technological transformation, driving finance to be more efficient and low-cost.
Cryptocurrency ETFs are successful products but contradict the decentralized custody concept of cryptocurrencies. Currently, Bitcoin ETF holdings account for 7% of Bitcoin's total supply, and large institutions like pension funds and sovereign wealth funds have not yet entered the market on a large scale.
The crypto industry may have four driving factors in the next 5 years: the entry of 401(k) funds, dissatisfaction of young people with traditional returns, the integration of AI and crypto, and wealth transfer.
In the next 5 years, the collaboration between the US Treasury and the Federal Reserve will be more evident, benefiting crypto assets, while the integration of AI and crypto will accelerate. The short-term risks are the liquidation of treasury companies and security vulnerabilities in traditional finance. The industry infrastructure and regulatory environment have improved, the probability of a catastrophic crash is low, and there may be about a 30% correction.
(1) The motivations of traditional finance to enter crypto investment
Ryan: I want to talk about the changes over the past 5 years. In 2020, as a well-known institutional asset manager in Connecticut, buying Bitcoin, which was seen as a gray area, was considered a career risk. But by 2025, Larry Fink publicly discusses cryptocurrency, Bitcoin ETFs have been launched, and cryptocurrency seems to have invaded Wall Street. What happened in the past 5 years that led to such a significant shift in attitude? Can you describe this process from the perspective of core industry participants?
Eric: I believe BlackRock's entry is a critical juncture. Generally speaking, someone of Larry Fink's age and wealth might choose to retire, but he keenly realized that crypto technology could disrupt the ETF industry, thus making the bold decision to enter. Many outstanding individuals in traditional finance hold similar views. The reason these savvy investors recognize cryptocurrency is that they view it as an essential cornerstone of financial infrastructure, with many more applications to be built on it in the future. Moreover, when an asset holds substantial value but few people own it, its price will likely rise in the future.
Ryan: Do you think this is mainly due to a shift in the mindset of traditional financial practitioners, or because they can profit through tokenization, establishing treasury companies, and issuing ETFs?
Eric: If traditional financial practitioners cannot see that blockchain technology can make financial system transactions faster, cheaper, more transparent, and more secure, then even if there are profit opportunities, they will not take action. Many financial crises in history have occurred either because of low transaction efficiency or lack of transparency. Counterparties are unable to assess each other's creditworthiness, and many companies do not even know their own asset-liability situation. Blockchain technology and cryptocurrency happen to address these issues. Therefore, the fundamental reason for traditional finance's acceptance of cryptocurrency is the solid value of the technology itself.
Ryan: Overall, has traditional finance generally recognized that cryptocurrency will exist long-term, will become an important field, and that financial institutions must adjust their strategies to adapt and develop crypto-related strategies?
Eric: One major characteristic of the crypto market is that cryptocurrencies are the first financial innovation to rise from the general public rather than originating from Wall Street. Looking back at the development of the crypto industry, many of the issues that traditional financial practitioners find unsatisfactory and resist stem largely from the fact that it was born outside of Wall Street. From the very beginning, it was not included in the traditional regulatory framework. The result of this is that many senior and high-ranking practitioners in large financial institutions generally adopt a conservative avoidance attitude toward cryptocurrencies, thus missing out on this massive trend.
(2) The understanding of cryptocurrency by traditional finance
Ryan: From around 2016 to 2020, we thought traditional finance was beginning to understand cryptocurrency, but that was a time when they only talked about blockchain and not Bitcoin. I felt then that traditional finance completely misunderstood. They treated cryptocurrency merely as a database technology or open ledger technology, but its essence is much deeper. Now we are in the second wave of institutional acceptance of cryptocurrency; do they really understand it now?
Eric: I believe most traditional financial practitioners do not view cryptocurrency as money. The core reason traditional finance has begun to understand cryptocurrency is that they view stablecoins as a killer application. Traditional financial practitioners do not believe Bitcoin will replace the dollar or become the next generation payment system. They value the tool-like properties of cryptography: faster, cheaper, safer, more transparent, and capable of programmable currency, which can be pegged to sovereign currencies like the dollar, pound, euro, etc. Only a very small number of traditional financial practitioners believe Bitcoin will dominate the world, but this perception is actually healthy for the industry. Governments accumulate power and rarely voluntarily relinquish it, and creating currency is one of the core powers of government. Even now, I still believe the government has the ability to prevent Bitcoin from replacing the dollar.
Now, the smart people in the industry have found a way to integrate crypto technology into the financial system, which is pegged to the dollar stablecoin. With the implementation of the GENIUS Act (Guidance and Establishment of a National Stablecoin Innovation Act), the trading volume of stablecoins has even surpassed that of Mastercard or Visa. Once the regulation of stablecoins is clarified, the direction we have been advancing is to allow stablecoins to purchase bonds, stocks, commodities, and all other traditional assets, with these assets issued in a digital native form rather than simply adding a token on top of a paper-based database system. What traditional financial practitioners are genuinely excited about is the prospect of this technological reconstruction of financial infrastructure, rather than the fantasy of Bitcoin replacing the dollar.
(3) The change in government regulatory attitude
Ryan: During the dark period from 2023 to 2024, the crypto chokehold action kept crypto companies out of banks, and the US administration had a comprehensive hostility towards cryptocurrency. During that difficult time, what were you thinking?
Eric: The crypto chokehold action 2.0 is real. When OneRiver was acquired by Coinbase, we tried to use all our traditional financial connections to build banking relationships and secure credit lines, but we continually hit walls. This kind of excessive government intervention goes against ethical and democratic principles. However, I never thought about selling assets and leaving; instead, I have continued to build. My belief that crypto technology will eventually replace traditional financial infrastructure has never wavered. Throughout human history, technological innovation has never been completely obstructed by politics. I know this road will be tough, but technology will always be on our side. For example, all future financial infrastructure will ultimately be built on Ethereum, and combined with technologies like Layer 2, more reliable and resilient applications will be born based on this infrastructure. In the AI era, crypto technology can also provide sources of truth, helping us discern what is real, what is credible, and what the truth is.
Ryan: The depth of the US government's hostility towards cryptocurrency at that time surprised me, but this attitude turned 180 degrees in just a year. Over the past 12 months, what do you think was the most significant event in terms of government regulation? For example, the signing of the GENIUS Act, crypto companies no longer being denied service by banks, the official proposal for the US to become a cryptocurrency capital, and the SEC's crypto plan under Paul Atkins' leadership, as well as the tokenization of assets promoted by SEC commissioner Hester Peirce. Among all these positives, which one stands out to you?
Eric: The current SEC chairman and the crypto plan are also very impressive. The US did not have this mechanism before. When we first entered the crypto space, we viewed it as a macro trading target, but the existing DeFi applications at the time were hard to scale to the mainstream market. Therefore, we built a set of infrastructure that could compliantly issue digital native securities, enabling regulatory agencies to accept it. This infrastructure was initially called OneBridge (meaning connecting crypto with traditional finance) and was later renamed the Hamilton Project. We invited former SEC chairman Jay and current members of the Trump administration, Kevin, to join the board.
My initial thought was to issue complex digital native securities, but Jay suggested starting with the simplest short-term government bonds, as they are boring but safe assets. He believed that the first step must be to clarify the regulatory framework for stablecoins, and then integrate stablecoins with traditional financial products, starting from the most liquid and simplest tools. Once the financial system builds confidence and sees returns, it can gradually expand to complex securities. The GENIUS Act is the first key step in all of this.
(4) The best combination of cryptocurrency and traditional finance
Ryan: In a tokenized world, there is insufficient disclosure information, and the information in traditional finance is lagging. It requires processing a large amount of paperwork, and the listing fee for a treasury company on NASDAQ or the NYSE can reach tens of millions of dollars. However, with smart contracts, all of this can be digitized, retaining the transparency of SEC disclosures while reducing costs through technology. Do you think this ideal combination world can be realized?
Eric: It's entirely possible, and that is our direction. The integration you describe is essentially about empowering the traditional financial system with crypto technology rather than disrupting it. The reason the US capital market is the deepest and most liquid in the world is due to its complete regulatory framework: investors believe the government will not arbitrarily confiscate assets and that in the event of disputes, regulatory agencies will back them up, with fair courts resolving litigation. Without these, a deep liquidity market cannot exist. The crypto industry will not abandon these advantages but will make them more efficient. For instance, the tens of millions of dollars in listing costs you mentioned are clearly unreasonable and will not be the case in the future. With smart contracts in financial structure design, all disclosure documents can be embedded or linked to smart contracts, saving computation and storage costs while ensuring transparency.
In the future, there will indeed be law firms dissatisfied due to reduced fees, but looking back at financial history, no industry has invested more money in technology than the financial services industry. For decades, Wall Street has been using technology to transform the industry: transaction speeds have increased significantly while costs have continued to decline. Crypto technology is just the next critical step that will push this efficiency and low cost to new heights. The ideal combination you describe is the future of finance.
(5) The upward potential of crypto assets in the next 5 years
Ryan: Let's talk again about successful cases of integration between traditional finance and cryptocurrency, ETFs. How do you view the impact of crypto-native ETFs on the traditional financial market? What effects do these ETFs have on the crypto market and traditional finance, respectively?
Eric: Crypto ETFs are indeed extremely successful products, but they contradict the decentralized custody and anti-centralization concepts of cryptocurrencies. Their scale is astonishing; currently, Bitcoin ETF holdings account for 7% of Bitcoin's total supply. However, from my perspective, truly large institutions have not yet entered the market on a large scale, such as large pension funds, large endowment funds, insurance companies, and sovereign wealth funds. The major institutions I have primarily interacted with throughout my career have still not truly ventured into cryptocurrency; they missed the opportunity before and now face significant cognitive dissonance. In 2021, many top institutions globally established digital asset working groups to explore how to enter the market. However, when the crypto bear market arrived, these institutions completely halted all plans. Now that cryptocurrency has returned to its peak, they are simply too late to build positions. For these professional investors, the first step now is to invest in infrastructure and allocate funds to crypto ventures, rather than directly buying crypto assets.
However, this is good for the market; you can clearly see who will take over at higher prices in the future. These institutions will gradually enter the market, possibly starting with increased infrastructure investment, and will eventually hold a certain scale of crypto tokens. They will not replace the dollar but will become part of the monetary backing, like gold or other commodities. This narrative will ultimately attract more large institutions to enter at higher prices, so the current absence of institutions makes the future even more promising.
Ryan: How high do you think the prices of crypto assets like Bitcoin and Ethereum can rise? At what stage do you think we are currently in this journey?
Eric: When I entered the crypto space at the end of 2020, I set a 10-year investment cycle. Now it seems it may not take that long, but at the time my judgment was that the public misunderstanding of crypto assets would need about 10 years to clarify, and it would also take 10 years to build the infrastructure to eliminate the friction of acquiring crypto assets. Ten years later, the valuation logic for crypto assets will align with other assets in the economy. We are currently in the middle of this 10-year cycle because there have been many developments in the industry, including stablecoin legislation being implemented, and subsequent steps like traditional assets being tokenized are also advancing.
The core logic of the crypto market is driven by supply and demand, but there are still structural frictions in the market. For example, Trump's recent executive order allows 401(k) plans to allocate to crypto assets, which means the friction for buy-side entry will continue to decrease, funds will continue to flow in, and prices will rise accordingly. More importantly, the crypto market is reflexive; for instance, Bitcoin has no fixed anchor point for its value, and there is currently no mature valuation model. In the next 5 years, several themes will jointly drive the crypto market: first, the entry of 401(k) funds; second, income inequality, where young people are dissatisfied with the 7% annualized returns of traditional index funds and are more inclined to pursue the 100x returns of crypto assets; third, the integration of AI and crypto, where AI needs crypto technology for authenticity verification, and high-speed financial interactions between AI agents also require a crypto payment system; fourth, the transfer of wealth from the baby boomer generation to young people. These overlapping themes may create extreme market conditions.
From a probabilistic standpoint, I believe there is a 25% chance Bitcoin will experience a bubble-like surge in the next 5 years, with reduced entry friction and passive funds flooding in, driving prices significantly higher; a 50% chance Bitcoin will fluctuate between $50,000 and $250,000; and a 25% chance it will fall below the aforementioned range, possibly due to unforeseen risk events, though this probability may actually be lower. Ethereum is more of a tradeable asset; the higher the price of Ethereum, the higher the on-chain transaction costs, which will force innovations like Layer 2 to reduce costs, potentially suppressing Ethereum's price, leading to more pronounced characteristics of boom and bust.
(6) Macroeconomic trends in crypto investment in the next 5 years
Ryan: Do you think treasury companies in the crypto space are a positive or negative for the market? Are there risks involved?
Eric: I believe these treasury companies are unhealthy in the long run, but they are still in the early stages and have not yet caused substantial harm. Vitalik's previous response to this issue was very insightful; he believed these companies are essentially creating a hybrid of options and derivatives based on crypto assets. Wall Street's tendency is to financialize, leverage, and amplify any asset. Currently, these treasury companies have started using various tools for leveraged operations, which are indeed effective in the short term. However, the long-term risk is that Wall Street may embed excessively high leverage in these treasury companies while charging high management fees, which is unfavorable for ordinary investors. Once the market experiences a 30% correction, high leverage may trigger a chain liquidation, damaging the reputation of the underlying crypto assets. But currently, the scale of these companies is still small and has not constituted systemic risk.
Ryan: Returning to the 10-year crypto investment cycle you mentioned, 5 years have passed, and in the remaining 5 years, what certain macro trends do you think will support crypto assets? What are the trends you are willing to bet on?
Eric: First, the collaboration between the US Treasury and the Federal Reserve will become more evident and public. When the debt scale is too large and the interest on the debt is determined by Federal Reserve policies, the government has a strong incentive to integrate fiscal and monetary policy. The core logic of this collaboration being favorable for crypto assets is that the government faces enormous debt and will choose mild inflation to dilute that debt: by stimulating high economic growth while maintaining low interest rates, it essentially taxes savers. A low real interest rate environment is traditionally very favorable for non-yielding risk assets like crypto. This trend will continue in the future.
Second, the integration of AI and crypto will accelerate, which is a rare technological resonance in economic history. AI is expected to significantly enhance productivity in the US and globally, allowing the economy to operate in a high-growth, low-interest environment, which creates conditions for diluting debt through mild inflation. Additionally, AI needs crypto technology to verify content authenticity, like using blockchain to certify videos and data. High-speed financial interactions between AI agents also require intermediary-free crypto payment systems. This technological complementarity will greatly enhance the actual demand for crypto assets. Furthermore, the compliance innovations initiated by the GENIUS Act will continue to advance, and the gradual tokenization of traditional assets and the popularization of stablecoins will eliminate the friction of using crypto assets, all of which are long-term positives supporting the crypto market.
Ryan: But all of this seems too clear and simple, which makes people worry that we may overlook risks. What risks might disrupt the current optimistic expectations?
Eric: The short-term risks mainly fall into two categories: first, the liquidation risk of highly leveraged treasury companies. If a certain type of treasury company becomes overly large with high leverage, a 30% market correction could trigger a chain liquidation, leading to a 70%-90% drop in the price of crypto assets and damaging the credibility of the underlying assets. Currently, these companies are still small, but in 2-3 years they could become a risk point. Second, there are potential security vulnerabilities once traditional finance enters the crypto space. If some institutions build their own infrastructure but neglect security, it could result in large-scale hacking or asset theft, undermining market confidence. Overall, I believe there will inevitably be about a 30% correction in the crypto market in the next 5 years, but the probability of a disastrous crash is low. The current industry infrastructure, regulatory environment, and institutional acceptance are no longer comparable to previous cycles.
(This article is for reference only and does not constitute any investment advice)
