Title: The Institutional Crypto Cycle is Coming
Host: Ryan, Bankless
Guest: Eric Peters
Compiled & Edited: Janna, ChainCatcher
Eric Peters is the CEO of Coinbase Asset Management and the founder of One River Asset Management. This article is sourced from Bankless and his podcast interview, focusing on Eric's journey into the crypto space and the complete transition of the crypto market from being avoided by institutions to being gradually accepted by Wall Street, providing a historical perspective for more crypto enthusiasts to understand the industry development. ChainCatcher has organized and compiled the original content.
TL&DR:
By 2025, the recognition of cryptocurrencies will significantly increase; BlackRock's entry is a key inflection point, and traditional finance figures like Larry Fink acknowledge crypto as financial infrastructure, believing it has substantial value and is likely to rise in price in the future.
Traditional finance accepts crypto for profit motives, but the fundamental reason is that blockchain can solve issues of fast transactions, low costs, high transparency, and strong security, avoiding transparency loss issues similar to the 2008 financial crisis.
Cryptocurrencies have risen from the general public rather than Wall Street, and not being included in the traditional regulatory framework has led many senior professionals in large financial institutions to adopt a conservative avoidance stance, missing the trend.
The goal of traditional finance is to allow stablecoins to purchase traditional assets like bonds and stocks in digital native forms, with the relevant infrastructure built on Ethereum. Practitioners are genuinely excited about the technological reconstruction of financial infrastructure, rather than fantasies of Bitcoin replacing the dollar.
From 2023 to 2024, there was a crypto crackdown, making it difficult for crypto companies to gain banking partnerships. However, practitioners did not sell off assets but instead insisted on building, firmly believing that technological innovation will not be completely halted by politics, and that crypto can provide sources of truth for the AI era, looking favorably on the prospects of Ethereum combined with Layer 2.
The U.S. government's attitude towards crypto underwent a 180-degree turn within a year; the GENIUS Act is a key turning point, and the Hamilton Plan first clarifies the regulatory framework for stablecoins, starting with short-term government bonds and then promoting the integration of stablecoins with traditional financial products.
Crypto can integrate with traditional finance, using smart contracts to maintain the transparency of SEC disclosures while reducing costs associated with traditional financial documentation and listings. Crypto technology is a key step in the technological transformation of Wall Street, promoting more efficient and lower-cost finance.
Crypto ETFs are successful products but contradict the decentralized custody concept of cryptocurrencies; currently, Bitcoin ETFs account for 7% of Bitcoin's total supply, and large institutions like pension funds and sovereign wealth funds have not yet entered on a large scale.
In the next 5 years, the crypto industry may see entry from 401k funds, young people dissatisfied with traditional returns, the fusion of AI and crypto, and wealth transfer as four major driving factors.
In the next 5 years, coordination between the U.S. Treasury and the Federal Reserve will be more apparent, positively affecting crypto assets, and the fusion of AI and crypto will accelerate; short-term risks include the liquidation of treasury companies and vulnerabilities in traditional finance, but the industry’s infrastructure and regulatory environment have improved, making catastrophic declines unlikely and possibly leading to a 30% correction.
(1) The Motivation for Traditional Finance to Enter Crypto Investment
Ryan: I want to discuss the changes over the past five 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 openly discusses cryptocurrencies, Bitcoin ETFs have been launched, and it seems like cryptocurrencies have invaded Wall Street. What has happened in the past five years to cause 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 key inflection point. Generally speaking, someone like Larry Fink, of his age and wealth, might choose to retire comfortably, 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 share a similar view. These astute investors recognize cryptocurrencies because they see them as an important cornerstone of financial infrastructure, with more applications inevitably being built on top of it in the future. Moreover, when an asset has substantial value but few people hold it, its price is likely to rise in the future.
Ryan: Do you think this is mainly due to the shift in traditional finance practitioners' mindset, or because they can profit through tokenization, establishing treasury companies, and issuing ETFs?
Eric: If traditional finance practitioners do not see how blockchain technology can make financial system transactions faster, cheaper, more transparent, and more secure, they will not act even if there are profit opportunities. Historically, many financial crises erupted due to either inefficient transactions or lack of transparency. Counterparties could not assess each other's creditworthiness, and many companies were unaware of their own asset-liability situations. Blockchain technology and cryptocurrencies can solve these problems. Therefore, the fundamental reason for traditional finance's acceptance of cryptocurrencies is the solid value of the technology itself.
Ryan: Overall, has traditional finance generally recognized that cryptocurrencies will exist long-term and become an important field, necessitating financial institutions to adjust their strategies accordingly and develop crypto-related strategies?
Eric: A major characteristic of the crypto market is that cryptocurrencies are the first financial innovation to emerge from the general public rather than Wall Street. Looking back at the development of the crypto industry, many of the issues that traditional finance practitioners find unsatisfactory and resist are largely due to the fact that it was born outside of Wall Street. From the beginning, it was not included in the traditional regulatory framework. The result of this is that those with deep qualifications and high positions in large financial institutions mostly hold a conservative avoidance stance towards cryptocurrencies, thus missing out on this huge trend.
(2) Traditional Finance's Perception of Cryptocurrencies
Ryan: Around 2016 to 2020, we thought traditional finance was beginning to understand cryptocurrencies, but that was the era of only discussing blockchain without mentioning Bitcoin. At that time, I felt that traditional finance was completely mistaken; they viewed cryptocurrencies merely as database technology or open ledger technology, but its essence is much deeper than that. We are now in the second wave of institutional acceptance of cryptocurrencies; do they truly understand now?
Eric: I believe most traditional finance practitioners do not view cryptocurrencies as currency. The core reason traditional finance has finally begun to understand cryptocurrencies is that they see stablecoins as a killer application. Traditional finance practitioners do not believe Bitcoin will replace the dollar or become the next generation payment system. They value the tool attributes of crypto technology: faster, cheaper, safer, more transparent, and programmable currency, which can be pegged to sovereign currencies like the dollar, pound, and euro. Only a very few traditional finance practitioners believe Bitcoin will dominate the world, but this perception is actually healthy for the industry. Governments accumulate power and rarely relinquish it voluntarily, 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 path to integrate crypto technology into the financial system, which is the stablecoin pegged to the dollar. 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. After the regulatory framework for stablecoins becomes clear, the direction we have been pursuing is to allow stablecoins to purchase bonds, stocks, commodities, and all traditional assets, and these assets will be issued in digital native forms, rather than simply attaching a token to a paper-based database system. What truly excites traditional finance practitioners is the prospect of this technological reconstruction of financial infrastructure, rather than the fantasy of Bitcoin replacing the dollar.
(3) The Shift in Government Regulatory Attitudes
Ryan: During that dark period from 2023 to 2024, the crypto crackdown left crypto companies shut out by banks, and the U.S. government fully opposed cryptocurrencies. What were you thinking during that tough time?
Eric: The crypto crackdown 2.0 is real. When OneRiver was acquired by Coinbase, we tried to use all our traditional financial connections to build banking partnerships and secure credit lines but repeatedly hit walls. This excessive government intervention completely violates ethical and democratic principles. But I never thought about selling off assets and leaving; instead, I kept insisting on building. My belief that crypto technology will eventually replace traditional financial infrastructure has never wavered. Throughout human history, technological innovation has never been completely halted by politics. I know this path will be difficult, but technology is always on our side. For instance, in the future, all financial infrastructure will ultimately be built on Ethereum, and combined with technologies like Layer 2, more reliable and anti-fragile applications will emerge based on this infrastructure. In the AI era, crypto technology can also provide sources of truth, helping us to discern what is real, what is trustworthy, and what is the truth.
Ryan: During that time, I was very surprised by the depth of the U.S. government's hostility towards cryptocurrencies, but this attitude turned 180 degrees in just one year. Over the past 12 months, what do you think has been the most significant event in terms of government regulation? For instance, the signing of the GENIUS Act, crypto companies no longer being denied service by banks, the official proposal for the U.S. to become a cryptocurrency capital, and the SEC's crypto initiatives led by Paul Atkins, as well as the asset tokenization pushed by SEC Commissioner Hester Peirce. Among many favorable developments, which one do you consider the most important?
Eric: The current SEC Chair and the crypto plan are also excellent. The U.S. previously lacked such mechanisms. Initially, when we entered the crypto space, we treated it as a macro trading target, but the existing DeFi applications at that time were difficult to scale to the mainstream market. So, we built a set of infrastructure capable of legally issuing digital native securities, making it acceptable to regulatory bodies. This infrastructure was initially called OneBridge (meaning connecting crypto with traditional finance) and was later renamed the Hamilton Project. We invited former SEC Chair Jay and current Trump administration member Kevin to join the board.
My initial idea was to issue complex digital native securities, but Jay suggested starting with the simplest short-term government bonds, as short-term government bonds are boring yet safe assets. He believed the first step must be to clarify the regulatory framework for stablecoins and then integrate stablecoins with traditional financial products, starting with the most liquid and simplest tools. Once the financial system builds confidence and sees returns, it can gradually expand into complex securities. The GENIUS Act is the first key step in all this.
(4) The Best Combination of Crypto and Traditional Finance
Ryan: In a tokenized world, there is insufficient disclosure information, and information in traditional finance is lagging. Handling a large volume of documentation is required, and a treasury company listing on NASDAQ or NYSE could cost tens of millions of dollars. With smart contracts, all these processes can be digitized, maintaining the transparency of SEC disclosures while using technology to reduce costs. Do you think this best combination of worlds can be achieved?
Eric: It is entirely possible, and this is indeed our direction. The integration you describe is essentially crypto technology empowering the traditional financial system, rather than disrupting it. The reason the U.S. capital markets are the deepest and most liquid in the world lies in their robust regulatory framework: investors trust that the government will not randomly confiscate assets and that there are regulatory bodies to back them up in case of disputes, with fair courts to resolve litigation. Without these, a deep and liquid market cannot exist. The crypto industry will not discard these advantages but will aim to make them more efficient. For instance, the tens of millions of dollars in listing costs you mentioned are clearly unreasonable and will never be the case in the future. In financial structure design, smart contracts can embed or link all disclosure documents, 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 are getting faster while costs continue to decline. Crypto technology is just the next key step that will push this efficiency and low cost to new heights. The best combination you described is the future of finance.
(5) The Upside Potential of Crypto Assets in the Next 5 Years
Ryan: Let's talk about successful cases of combining traditional finance and cryptocurrencies, such as 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?
Eric: Crypto ETFs are indeed extremely successful products, but they contradict the decentralized custody and anti-centralization principles of cryptocurrencies, yet their scale is astonishing; Bitcoin ETFs currently hold 7% of Bitcoin's total supply. However, from my perspective, the truly large institutions have not yet entered the market on a large scale, such as large pension funds, major endowment funds, insurance companies, and sovereign wealth funds. The large institutions I have mainly interacted with in my career have still not truly ventured into cryptocurrencies; they missed the opportunity before and are now facing significant cognitive dissonance. In 2021, many top institutions globally established digital asset working groups to explore how to enter the market. But then the crypto bear market arrived, and these institutions completely halted all plans. Now that cryptocurrencies are back at highs, they simply cannot build their positions in time. For these professional investors, the first step now is to invest in infrastructure and venture capital in crypto, rather than directly buying cryptocurrencies.
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, perhaps first increasing investment in infrastructure, and eventually holding a certain scale of crypto tokens. They will not replace the dollar but will become part of the currency backing, like gold or other commodities. These narratives 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 are we currently in this journey?
Eric: When I entered the crypto space at the end of 2020, I set a 10-year investment horizon. Now it seems it may not take that long, but my judgment at the time was that the misunderstandings people have about crypto assets would take about 10 years to clarify, and it would also take 10 years to build the infrastructure to eliminate the friction of acquiring crypto assets. After 10 years, the valuation logic of crypto assets will converge with that of other assets in the economy. We are currently halfway through this 10-year cycle, as the industry has many developments, including the implementation of stablecoin legislation and subsequent steps like traditional assets being tokenized.
The core logic of the crypto market is supply and demand-driven, but there are still structural frictions in the market. For example, Trump's recent executive order allows 401k plans to allocate to crypto assets, which means that the friction for buyers entering the market will continue to decrease, leading to sustained capital inflow and subsequent price increases. More importantly, the crypto market is a reflexive market; for instance, Bitcoin's value has no fixed anchor point, and there is currently no mature valuation model. In the next five years, multiple themes will jointly drive the crypto market: first, the entry of 401k funds; second, income inequality, with younger individuals dissatisfied with the 7% annualized returns of traditional index funds, preferring to chase the 100-fold returns of crypto assets; third, the fusion of AI and crypto, where AI needs crypto technology for authenticity verification, and high-speed financial interactions between AI agents require a crypto payment system without intermediaries; fourth, the transfer of wealth from the baby boomer generation to younger individuals. These overlapping themes may give rise to extreme market conditions.
From a probability perspective, I believe there is a 25% chance of Bitcoin experiencing a bubble-like surge in the next five years, with reduced entry friction and passive capital inflows driving prices up sharply; a 50% chance that Bitcoin will fluctuate between $50,000 and $250,000; and a 25% chance of falling below that range, possibly due to unforeseen risk events, but that probability may be even lower. Ethereum is more of a trading asset; the higher the price of Ethereum, the higher the on-chain transaction costs, which will push for technological innovations like Layer 2 to reduce costs, potentially suppressing Ethereum prices and making its volatility more pronounced.
(6) Macroeconomic Trends in Crypto Investment for the Next 5 Years
Ryan: Do you think crypto treasury companies are beneficial or detrimental to the market? Are there any risks?
Eric: I believe these treasury companies are unhealthy in the long term, but we are still in the early stages and have not yet caused substantial harm. Vitalik's previous answer to this question was very insightful; he believed these companies are essentially creating a hybrid of options and derivatives based on crypto assets. Wall Street tends to financialize, leverage, and amplify any asset. Currently, these treasury companies are already beginning to use various tools for leveraged operations, which is indeed effective in the short term. However, the long-term risk is that Wall Street may embed excessive leverage into these treasury companies while charging high management fees, which is detrimental to ordinary investors; and once the market experiences a 30% correction, high leverage could trigger a chain of liquidations, further damaging the credibility of underlying crypto assets. But currently, these companies are still small and do not pose systemic risks.
Ryan: Returning to the 10-year crypto investment cycle you mentioned, five years have already passed, and in the remaining five years, what certain macro trends do you believe will support crypto assets? What trends are you willing to bet on?
Eric: First, the collaboration between the U.S. Treasury and the Federal Reserve will become more apparent and transparent. When the debt scale is too large, and the interest on that debt is determined by Federal Reserve policies, the government has a strong incentive to merge fiscal and monetary policy. The core logic behind this collaboration being favorable for crypto assets is fiscal dominance; facing massive debt, the government will choose mild inflation to dilute that debt: stimulating rapid economic growth while maintaining low interest rates essentially taxes savers. And the low real interest rate environment is traditionally very beneficial for non-yielding risk assets like crypto; this trend is expected to continue in the future.
Second, the fusion of AI and crypto will accelerate, which is a rare technological resonance in economic history. AI is expected to significantly enhance productivity in the U.S. and globally, allowing the economy to operate in a high-growth, low-interest-rate environment, creating conditions for inflation to dilute debt. Meanwhile, AI needs crypto technology to solve content authenticity verification, such as using blockchain to authenticate videos and data. High-speed financial interactions between AI agents also require a crypto payment system without intermediaries. This technological complementarity will greatly enhance the actual demand for crypto assets. Additionally, the compliance innovations initiated by the GENIUS Act will continue to advance, and the gradual tokenization of traditional assets and the popularity of stablecoins will eliminate friction in the use of crypto assets, all of which are long-term positives for the crypto market.
Ryan: But all of this seems too clear and simple, which makes me worry that we might overlook risks. What risks could potentially overturn the current optimistic expectations?
Eric: There are primarily two categories of short-term risks: first, the liquidation risk of highly leveraged treasury companies. If a certain type of treasury company is too large and highly leveraged, a 30% market correction could trigger a chain of liquidations, leading to a 70%-90% drop in crypto asset prices, damaging the credibility of the underlying assets. Currently, these companies are still small, but they may become a risk point in 2-3 years. Second, there are security vulnerabilities after traditional finance enters the market. As traditional financial institutions enter the crypto space, if some institutions build their own infrastructure while neglecting security, it could lead to large-scale hacking or asset theft, thus undermining market confidence. Overall, the crypto market will inevitably face about a 30% correction in the next five years, but the probability of a catastrophic decline is very low, as the current industry infrastructure, regulatory environment, and institutional acceptance are far superior to previous cycles.
