Original Title: The Institutional Crypto Cycle is Coming

Host: Ryan, Bankless

Guest: Eric Peters

Compiled & Edited 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 the podcast interview between Bankless and him, discussing Eric's entry into cryptocurrency and the transformation of the crypto market from a gray area avoided by institutions to one gradually accepted by Wall Street, providing a historical perspective for more crypto enthusiasts to understand industry development. ChainCatcher has compiled and edited the original content.

TL&DR:

• By 2025, the recognition of cryptocurrency will significantly increase, with BlackRock's entry being a key milestone. Traditional finance figures like Larry Fink acknowledge crypto as financial infrastructure, believing it has substantial value and that prices are likely to rise in the future.
• The acceptance of crypto by traditional finance is profit-driven, but fundamentally, blockchain can solve issues of fast transactions, low costs, high transparency, and strong security, avoiding transparency issues similar to the 2008 financial crisis.
• Cryptocurrency has emerged from the general public rather than Wall Street, and its exclusion from traditional regulatory frameworks has led many senior professionals in large financial institutions to adopt a conservative avoidance attitude, 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 the fantasy of Bitcoin replacing the dollar.
• From 2023 to 2024, there will be a crypto chokehold, making it difficult for crypto companies to obtain banking cooperation. However, practitioners have not sold off assets but instead continue to build, firmly believing that technological innovation will not be completely hindered by politics and that crypto can provide a source of truth in the AI era, with a positive outlook on Ethereum combined with Layer 2.
• The U.S. government's attitude towards crypto has changed 180 degrees within a year, with the GENIUS Act being a key turning point. The Hamilton Plan first clarifies the regulatory framework for stablecoins, starting with short-term treasury bonds, and then promotes the integration of stablecoins with traditional financial products.
• Crypto can integrate with traditional finance, using smart contracts to maintain the transparency required by the SEC while reducing costs associated with traditional financial documentation and listings. Crypto technology is a crucial step in Wall Street's technological transformation, promoting more efficient and lower-cost finance.
• Crypto ETFs are successful products but contradict the decentralized management 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 the market on a large scale.
• In the next five years, the crypto industry may see four driving factors: the entry of 401k funds, dissatisfaction of young people with traditional returns, the integration of AI and crypto, and wealth transfer.
• In the next five years, collaboration between the U.S. Treasury and the Federal Reserve will become more evident, benefiting crypto assets, with the integration of AI and crypto accelerating; short-term risks include treasury company liquidations and traditional financial security vulnerabilities. The industry's infrastructure and regulatory environment have improved, making catastrophic declines unlikely, with a potential correction of around 30%.

(1) Motivations for Traditional Finance to Enter Crypto Investment

Ryan: I want to talk about the changes over the past five years. In 2020, you, as a well-known institutional asset manager in Connecticut, buying Bitcoin, which was seen as a gray area, was considered a career risk at the time. But by 2025, Larry Fink is openly discussing cryptocurrency, Bitcoin ETFs have been launched, and it seems like cryptocurrency has invaded Wall Street. What happened in the past five 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 key milestone. 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, leading him to make the bold decision to enter. Many outstanding individuals in traditional finance share a similar view. These savvy investors recognize cryptocurrency because they see it as an important cornerstone of financial infrastructure, with more applications inevitably built on 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 a shift in mindset among traditional finance practitioners, or is it 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, then even with profit opportunities, they would not take action. Historically, many financial crises have erupted either due to low transaction efficiency or a lack of transparency. Counterparties cannot assess each other's creditworthiness, and many companies are unaware of their own asset-liability situations. Blockchain technology and cryptocurrency can precisely solve these problems. 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 accordingly and develop crypto-related strategies?

Eric: A significant characteristic of the crypto market is that cryptocurrencies are the first financial innovation to emerge from the general public rather than from Wall Street. Looking back at the development of the crypto industry, many of the issues that traditional finance practitioners are dissatisfied with and resist largely stem from its birth outside of Wall Street. From the beginning, it was not included in traditional regulatory frameworks. The result is that many senior and high-ranking professionals in large financial institutions tend to adopt a conservative avoidance attitude towards cryptocurrency, thus missing this massive trend.

(2) Traditional Finance's Understanding of Cryptocurrency

Ryan: From around 2016 to 2020, we thought traditional finance was beginning to understand cryptocurrency, but that was the era of only discussing blockchain without mentioning Bitcoin. I felt at the time that traditional finance completely misunderstood it, treating cryptocurrency as merely a database technology or open ledger technology, but its connotation is much deeper. Now, in the second wave of institutional acceptance of cryptocurrency, do they really understand it?

Eric: I believe that most traditional finance practitioners do not view cryptocurrency as money. The core reason traditional finance has finally begun to understand cryptocurrency 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. What they value is the tool-like properties of crypto technology: faster, cheaper, safer, more transparent, and programmable currency that can be pegged to sovereign currencies like the dollar, pound, or euro. Only a very small number of traditional finance practitioners believe Bitcoin will dominate the world, but this understanding 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 that 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 stablecoins pegged to the dollar. With the implementation of the GENIUS Act, the "Guidance and Establishment of a National Innovation Framework for U.S. Stablecoins," the trading volume of stablecoins has even surpassed that of Mastercard or Visa. After the regulatory framework for stablecoins is clarified, the direction we have been promoting 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 adding a token on top of a paper database system. What traditional finance 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 Shift in Government Regulatory Attitudes

Ryan: During the dark period from 2023 to 2024, the crypto chokehold made it difficult for crypto companies to gain access to banks, and the U.S. administration was completely hostile towards cryptocurrency. What were you thinking during that difficult time?

Eric: The crypto chokehold 2.0 is real. After One River was acquired by Coinbase, we tried to leverage all our traditional finance connections to build banking partnerships and secure credit lines, but we repeatedly hit walls. This excessive government intervention completely violates ethical and democratic principles. However, I never thought about selling off assets and leaving; instead, I 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 hindered by politics. I know this path will be difficult, but technology is always on our side. For example, in the future, all financial infrastructure will ultimately be built on Ethereum, and combined with Layer 2 and other technologies, more reliable and anti-fragile applications will emerge based on this infrastructure. In the AI era, crypto technology can also provide a source of truth, helping us discern what is real, what is trustworthy, and what is the truth.

Ryan: I was quite surprised by the depth of the U.S. government's hostility towards cryptocurrency during that time, but this attitude changed 180 degrees in just a year. In the past 12 months, what do you think has been 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 U.S. to become a cryptocurrency capital, and the SEC's crypto plan under Paul Atkins, as well as the asset tokenization promoted by SEC Commissioner Hester Peirce. Among all these positives, which one is the most important to you?

Eric: The current SEC chair and the crypto plan are also excellent. The U.S. previously did not have such a mechanism. When we first entered the crypto space, we viewed it as a macro trading target, but the existing DeFi applications at the time were difficult to scale to the mainstream market. So we built a set of infrastructure that could compliantly issue digital native securities, making it acceptable to regulators. This infrastructure was initially called OneBridge (meaning connecting crypto and 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 treasury bonds because they are boring but safe targets. He believed that the first step must be to clarify the regulatory framework for stablecoins, and then allow stablecoins to integrate with traditional financial products, starting with the most liquid and simplest tools. Once the financial system builds confidence and sees returns, we can gradually expand to more complex securities. The GENIUS Act is the first key step in all of this.

(4) The Best Combination of Crypto and Traditional Finance

Ryan: In a tokenized world, there is not enough disclosure information, and information in traditional finance is lagging, requiring the processing of a large amount of paperwork. Moreover, a treasury company listing on NASDAQ or the NYSE incurs listing fees of up to tens of millions of dollars. However, with smart contracts, all of this can be completed digitally, preserving the transparency required by the SEC while using technology to reduce costs. Do you think this ideal combination is achievable?

Eric: It's entirely possible, and that's our direction. The integration you described essentially empowers the traditional financial system with crypto technology 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 won't arbitrarily seize assets, that there are regulatory bodies to back them up in disputes, and that there are fair courts to resolve litigation. Without these, a deep and liquid market cannot exist. The crypto industry will not abandon these advantages but will make them more efficient. For example, the tens of millions of dollars in listing costs you mentioned are clearly unreasonable and will not be the case in the future. In financial structure design, all disclosure documents can be embedded or linked to smart contracts, saving on 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 in technology than the financial services industry. For decades, Wall Street has been transforming the industry with technology: trading speeds have increased while costs have continued to decline. Crypto technology is just the next critical step that will elevate 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 the integration of traditional finance and cryptocurrency, 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, respectively?

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; currently, Bitcoin ETFs account for 7% of Bitcoin's total supply. However, from my perspective, the truly large institutions have not yet entered on a large scale, such as major pension funds, large endowment funds, insurance companies, and sovereign wealth funds. The large institutions I have primarily interacted with in my career have not genuinely ventured into cryptocurrency; they missed the opportunity before and are now facing significant cognitive dissonance. In 2021, many top global institutions established digital asset working groups to explore how to enter the market. But then the crypto bear market hit, and these institutions completely halted all plans. Now that cryptocurrency has returned to a high point, 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 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, possibly starting with increased infrastructure investments, 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 cycle. Now it seems that it may not take that long, but at the time, my judgment 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. Ten years from now, the valuation logic of crypto assets will converge with that of other assets in the economy. We are currently in the middle of this 10-year cycle, as there are many developments in the industry, including the legislation of stablecoins, and subsequent steps like traditional assets being tokenized are also progressing.

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 401k plans to allocate to crypto assets, which means that the friction for buyers entering the market will continue to decrease, leading to a continuous influx of funds and subsequently driving prices up. More importantly, the crypto market is a reflexive market; taking Bitcoin as an example, its 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 young people dissatisfied with the 7% annualized returns of traditional index funds, leaning more towards chasing the 100-fold returns of crypto assets; third, the integration of AI and crypto, where AI needs crypto technology to solve authenticity verification, and the high-speed financial interactions between AI agents will also require a crypto payment system without intermediaries; fourth, the transfer of wealth from the baby boomer generation to younger people. The overlap of these themes could potentially create extreme market conditions.

From a probabilistic standpoint, 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 funds flooding in, driving prices significantly higher; a 50% chance that Bitcoin will fluctuate between $50,000 and $250,000; and a 25% chance of being below that range, possibly due to unforeseen risk events, but this probability may actually be lower. Ethereum is more of a trading 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 and making its volatility characteristics more pronounced.

(6) Macroeconomic Trends Supporting Crypto Investment in the Next 5 Years

Ryan: Do you think crypto treasury companies are a positive or negative for the market? Are there risks involved?

Eric: I believe that these treasury companies are unhealthy in the long run, but we are still in the early stages, and they have not yet caused substantial harm. Vitalik's previous response to this issue was very insightful; he believes 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 begun 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 excessive leverage in 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 liquidation, damaging the credibility of the underlying crypto assets. But currently, these companies are still small in scale and do not pose a systemic risk.

Ryan: Returning to the 10-year crypto investment cycle you mentioned, five years have passed, and in the remaining five years, what certain macro trends do you think will support crypto assets? Which trends are you willing to bet on?

Eric: First, the collaboration between the U.S. 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 policy, the government has a strong incentive to merge fiscal and monetary policy. The core logic of this collaboration being favorable for crypto assets is that with the government facing massive debt, it will choose moderate inflation to dilute the debt: stimulating high economic growth while maintaining low interest rates essentially amounts to taxing savers. In a low real interest rate environment, this is traditionally very favorable for non-yielding risk assets like crypto, and 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 U.S. and globally, allowing the economy to operate in a high-growth, low-interest-rate environment, creating conditions for inflation to dilute debt; at the same time, AI needs crypto technology to solve content authenticity verification, such as using blockchain to certify videos and data, and the high-speed financial interactions between AI agents will 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 tokenization of traditional assets and the proliferation of stablecoins will gradually 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 too simple, which makes one worry that we might overlook risks. What risks could potentially overturn 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 too large and highly leveraged, a 30% market correction could trigger a chain liquidation, leading to a 70%-90% drop in crypto asset prices and damaging the credibility of the underlying assets. Currently, these companies are still small, but they could 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, thereby undermining market confidence. Overall, in the next five years, the crypto market will inevitably experience a correction of around 30%, but the probability of a catastrophic decline is very low. The current industry infrastructure, regulatory environment, and institutional acceptance are far beyond what they were in previous cycles.

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