Bitcoin Coming Of Age
Pantera Blockchain Letter, March 2021
Dear Investors,
When the impact of the virus was dawning on all of us last year, I wrote in our March 2020 investor letter:
Bitcoin was born in a financial crisis. It will come of age in this one.
When I was a bond trader, I was conscious how the terminology sounded upside down. The “best” times for bonds were the worst times for everybody. Recessions and depressions are “great” for bonds.
Unfortunately, I believe that’s what’s happening in our market — cryptocurrency.
As governments increase the quantity of paper money, it takes more pieces of paper money to buy things that have fixed quantities, like stocks and real estate, above where they would settle absent an increase in the amount of money. I think they will do that. The corollary is they’ll also inflate the price of other things, like gold, bitcoin, and other cryptocurrencies.
The United States entered this crisis with an unprecedented structural deficit. Spending 31% more than it takes in. Prior to the emergence of the SARS-CoV-2 virus, the Congressional Budget Office expected a budget deficit of over a trillion dollars. It could now be triple that.
“A billion here, a billion there, and pretty soon you’re talking real money.”
— Attributed to U.S. Senator Everett McKinley Dirksen
Now that we’re in the trillions, the deficit just simply has to have a positive impact on the price of things not quantitatively-easable — stocks, real estate, cryptocurrency relative to the price of money. Said another way, the BTC/USD cross-currency rate will rise.
The price of bitcoin may set a new record in the next twelve months. It’s not going to happen overnight. My best guess is that it will take institutional investors 2–3 months to triage their current portfolio issues. Another 3–6 months to research new opportunities like distressed debt, special situations, crypto, etc. Then, as they begin making allocations, those markets will really begin to rise.
That has happened. It took a few months to stabilize. A few months for the rally to build steam. Now it’s full on.
My instinct from trading many cycles over 35 years is that crypto prices are going to melt-up.
We’ll see much higher prices before this cycle is over.
HALVING STOCK-TO-FLOW PROJECTION
In our April 2020 letter, we published a potential framework for projecting the impact of bitcoin halvings on price based on an analysis of the bitcoin stock-to-flow ratio across each halving.
We forecast that if bitcoin experienced the historical stock-to-flow impact — scaled to the smaller size of this halving — it would rally along the following monthly path:
Bitcoin is now ahead of our April 2020 forecast schedule — to hit $115k this summer.
FUND PERFORMANCE
Since publishing our March 2020 investor letter, which outlined our core thesis that unlimited money printing will push up the price of things whose quantity cannot be eased, Pantera Funds are up immensely.
In addition, the power of DeFi is emerging in the returns of our hedge funds. DeFi assets are out-performing even the remarkable performance of bitcoin.
We believe we are at the beginning of a multi-decade transformation.
Pantera funds are open to accredited investors.
All of our funds can take investments via IRAs. We support a dozen providers, including Kingdom Trust, Millennium Trust Company, and Pacific Premier Trust Company.
Click on a Fund below for more information.
Please visit our website to learn more about Pantera and our offerings. If you need additional assistance, please contact our Capital Formation team at +1.650.854.7000 or by email at ir@panteracapital.com.
LAUNCHING OFFSHORE VERSON OF LIQUID TOKEN FUND
We are excited to announce that Pantera Liquid Token Fund will be available for non-U.S. investors on May 1. The strategy is identical to the onshore version:
Pantera Liquid Token Fund is a multi-strategy vehicle that typically invests in 10–15 liquid tokens at any point in time. The Fund is predominantly driven by a discretionary strategy focused on decentralized finance and adjacent assets. Currently 25% of the Fund uses a quantitative strategy, trading on an hourly frequency.
If you are interested in this offering, please reach out to our investor relations team at ir@panteracapital.com for further information.
INFLATION
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
— Milton Friedman, 1970, The Counter-Revolution in Monetary Theory
Inflation is always and everywhere a monetary phenomenon — but not all inflation is the same.
Investors often ask why we haven’t seen inflation show up. The answer is: It totally depends where you look.
The Consumer Price Index won’t show it. The Federal Reserve’s CPI target includes mostly things of infinite supply — flat screen TVs, flip flops. With the massive slack in the global economy, it will be very hard to see inflation in those things. That’s why I’m convinced the Fed and other central banks will keep their foot on the gas pedal way past the time…
Lockdowns and stimulus packages have left rich-world consumers with considerable savings and pent-up demand. In the United States, the savings rate soared to 16.0% in the third quarter of 2020 and 13.4% in the fourth from 7.6% in 2019.
There will be massive inflation in things where quantity cannot be eased: gold, real estate, bitcoin, etc. The best proof of this thesis are shares of the S&P 500. Q2 2020 earnings were down 32.3% from a year prior. But, the S&P500 rallied to a new record. Entirely a monetary phenomenon.
There’s a finite supply of shares. However, Fed Chair Powell has clearly stated there is literally “no limit” to QE money. He went on to say:
“When it comes to this lending, we’re not going to run out of ammunition. That doesn’t happen.”
— Jerome Powell, March 26, 2020
It’s like Rambo. The U.S. budget deficit for fiscal year 2020 was $14,500 per adult. To put that into perspective, that’s 1,000x the cost of a vaccine dose ($14.50).
UNLIMITED DOLLARS
What happens when you flood the market with massive quantity of your product? The price drops. Here’s the price of the dollar:
That’s the Federal Reserve’s inflation-adjusted and trade-weighted value of the dollar. It goes back to the Econ 101 supply and demand graph.
Bitcoin’s monetary policy is mathematical by design — it cannot be “Quantitatively Eased” by any central authority. One might amend the old line — replacing “land” with “bitcoin”:
“Buy land; they’re not making it anymore.”
- Mark Twain
MORGAN STANLEY ON CRYPTO
I’ve been preaching bitcoin for the better part of a decade. In the early days it was like preaching in the desert. The last few years it’s been more fun preaching to a growing choir. The choir now has a beautiful voice — I’ll let them sing on their own:
Morgan Stanley, February 9, 2021
Ruchir Sharma, Head of Emerging Markets & Chief Global Strategist
Why Crypto Is Coming Out of the Shadows
“Governments have been slow to recognize this evolution. When the pandemic hit, the dollar ruled the world as the favored medium of international trade, the anchor against which other nations value their currencies, and the ‘reserve currency’ most central banks hold as savings. Before the United States, only five great powers had enjoyed the coveted ‘reserve currency’ status, going back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Britain. Those reigns lasted 94 years on average. At the start of 2020 the dollar’s run had endured 100 years, which was reason enough to question how much longer it could continue….
“Moreover, led by the Fed, every major central bank has been printing money madly to keep economies afloat during the pandemic, undermining confidence in all national currencies. Twenty percent of all dollars in circulation were printed in 2020, and that binge was a huge boost to the appeal of Bitcoin, which was designed with a gradual process for ‘mining’ new coins and a limited supply. In effect, central banks conspired unintentionally to fuel the rush into cryptocurrencies, which have long been pitched as decentralized, democratic options to dollar dominance….
“Bitcoin was not only the hottest investment of 2020, it was the hottest investment of the decade ending in 2020, up more than 200 percent a year on average. The Bitcoin market now totals around $690 billion, and represents a growing share of the $1.1 trillion cryptocurrency market. But it is still tiny compared to a more traditional inflation hedge like gold, which is a $12 trillion global market. That leaves plenty of room to grow….
“One irresistibly practical EM application for cryptocurrency is the $470 billion market for remittances — the money ex-pat workers send home to low- and middle-income countries. These transfers typically take one to five days, for a fee ranging from 5 to 9 percent. Today, a payment system using cryptocurrency can send the same sum in seconds, for pennies.”
WHY ETHEREUM IS UNDERVALUED WITH JOE LUBIN
Last month’s thematic call was a very special one, Why Ethereum Is Undervalued, with Ethereum co-founder Joe Lubin. Joe and I went to Princeton together — the ecosystems have evolved a great deal since then.
Despite Ethereum being close to its all-time high, we believe both it and DeFi assets built on top are undervalued relative to their long-term potential.
Below are some highlights from the conversation. You can watch the full episode at https://www.panteracapital.com/why-ethereum-is-undervalued.
Q. Can you tell us a little about why Ether has value and what its role in the Ethereum network is?
Joe Lubin: “The main reason that Bitcoin and Ether and other cryptocurrencies have had value early on, is that they represent a store of value or a means of payment. A very speculative context as these systems are still quite young; however, these massive value propositions are materializing now and certainly going to grow.
Ether is being used to power programs and to store data — but it’s also being used to stake. There are millions of Ether being locked up on Ethereum 1.0, and for the Ethereum 2.0 Beacon Chain. It’s being used in pretty enormous quantities around 2.0. It’s about five times larger in terms of dollar value of fees, compared to Bitcoin, on a daily basis. I think there’re approximately $27,000,000 in fees being generated each day. The top three applications on Ethereum equal all the fees that are generated on Bitcoin.
Finally, Ethereum 1559 is coming — a protocol that will enable a much more effective fee structure, that will have better scalability and availability. You’ll be able to pay a fee to make sure that your transaction gets into a block pretty quickly and that’s going to have a side effect of burning Ether. The narrative that Ether’s monetary base is uncapped is probably going to go away –it will give quasi stable equilibrium most likely or deflationary.”
Q. Of the consumer-use cases being built on Ethereum right now, what ones are you most excited about?
Joe Lubin: “I’m really excited about DeFi. DeFi is just an astonishing innovation. The web and internet protocols represent the democratization of access to information globally, the ability to publish information, the ability to engage in e-commerce, the ability to engage in social networks. That sort of power of democratization is being brought to the financial infrastructure. The financial infrastructure hasn’t really been changed that much by the internet until recently.
“Real deep infrastructure changes are now possible because we’re creating money on decentralized protocols — whether it’s stablecoins, bitcoin, central bank digital currencies. We’re creating these financial protocols that act together like Legos for lending, borrowing, insurance, equity issuance, bond issuance, automated portfolio management and so many more use cases. This financial infrastructure is being built by innovators, it’s being built by technologists and entrepreneurs and it’s enabling use cases like flash loans that are astonishing, use cases that were never really thought possible before.
“I’m confident that discussions with regulators in different countries is going to bring in tremendous value creation. We’re moving from an analog and friction-filled society to a natively digital society, and that’s going to enable us to squeeze all the frictions and delays out of our economies, and drive tremendous value. DeFi is going to enable the world to re-architect its systems again because it needs that financial encryption structure to sit on.
“Another incredibly exciting use case, that is possibly going to be bigger than DeFi commercially, is NFTs (non-fungible tokens). NFT’s are basically creating digital representations or just gain some ownership for lots of different things in the world, whether they’re natively digital, like digital art or music, or whether they represent physical objects.
“NFT’s are a part of DeFi. They will implicate DeFi in some use cases, but are also just going to be relevant to so many more people. There are going to be so many use cases in art and music — people like collecting things and organizing things as a species.”
Q. How do you think about the competitive landscape of Ethereum competitors — projects like Polkadot — how do you think they fit in?
Joe Lubin: “There have been so many Ethereum killers over the years and there really was no competition for a very long time, but now there’s some good projects that are emerging and gaining some solid traction. These projects are still very immature. They still have tiny ecosystems in comparison to Ethereum. They don’t have a great developer experience. They have minimal infrastructure. But I think they’re playing an important role. Ethereum is doing astonishingly well, but it is experiencing lots of growing pains. These are good pains to experience rather than the kind of pain that you might experience if you build something that you think is cool and nobody else thinks it’s cool. Growing pains, combined with real desire to utilize a system, bring lots of capital into the context and humans are really good at what they think is valuable. Ethereum has a lot of scalability projects underway, some of them coming online.”
Q. Ethereum as an asset class for institutions and potentially even corporations. I think we’re starting to see that narrative this year with Bitcoin, where institutions are coming into our funds looking to get exposure to even Bitcoin specifically. And then of course, MicroStrategy and Tesla are seeing Bitcoin as a way to store value from their treasury. Do you sort of see the same for Ethereum and what does that look like in terms of the timeline?
Joe Lubin: “Things are really heating up on the enterprise front. We have entities like PayPal making use of digital assets, cryptocurrencies. Michael Saylor has done an amazing job of researching how one might line their treasury with Bitcoin, laying out all of the thinking, strategies, and procedures to enable organizations to do that. All of that is applicable to Ethereum and we’ve been talking about it internally — how we might present a much more compelling case for organizations to hold some Ether.
“It has all the benefits of holding Bitcoin on your balance sheet but is also much more functional than Bitcoin. Yes, it’s still the Wild West, and yes, these systems are still sharp around the edges, but the potential is just so awesome that many will come very soon. I expect lots of enterprises will be using Ethereum and DeFi over the next 12 months.”
Q. What sort of hurdles do you see, that Ethereum needs to achieve, and even more specifically, maybe even touching upon some of the regulatory hurdles for Ethereum going forward too?
Joe Lubin: “Usability, scalability, and regulatory certainty. Corporations don’t do well in environments of uncertainty and especially regulatory uncertainty. The issues on the security side, I think, have been significantly addressed. Some might argue with that, but, I’m reasonably comfortable with the approach as we understand it at ConsenSys — we can issue tokens that we believe are utility tokens, with a clear expression on what they can do and what they can’t do. It should be about utilization rather than speculation. Utility tokens aren’t seen as securities. The Office of the Comptroller of the Currency did our industry a couple of solids recently in writing a letter indicating that financial institutions like banks can custody digital assets, like cryptocurrencies. More recently, they indicated that the same institutions can use the DeFi rails. They can use Bitcoin rails, Ethereum rails, run nodes, and transact on things like stablecoins — a pretty good opening.
“Gary Gensler, the new head of the SEC, is very well acquainted with the technology and so I don’t anticipate difficult regulatory hurdles going forward. Though decentralized finance is going to be really interesting.
“I think it will be incumbent on the developers of decentralized finance protocols to understand the law well with their legal counsel and to build protocols that enable them to operate without incumbent laws.
“Scalability is being addressed — we’re going to see lots of applications making use of layer 2 technology. Usability is also getting addressed — our wallet system, MetaMask, has 1.6 million monthly active users. We’re focusing on usability for the consumer and it’s starting to make a real impact.”
Take care everybody,
BLOCKCHAIN HEDGE FUNDS
CONFERENCE CALLS
Our investment team hosts monthly conference calls to help educate the community on blockchain. The team discusses important developments that are happening within the industry, and will often invite founders and CEOs of leading blockchain companies to participate in panel discussions. Below is a list of upcoming calls for which you can register for via this link.
- Thematic Call: The Case for Blockchain Investment :: April 20, 2021 9:00am PDT
- Thematic Call: The Case for Blockchain Investment :: May 18, 2021 9:00am PDT
This letter is an informational document and does not constitute an investment recommendation, investment advice, an offer to sell or a solicitation to purchase any securities in Pantera Bitcoin Fund Ltd (the “Fund”) or any entity organized, controlled, or managed by Pantera Bitcoin Management LLC (“Pantera”) or any of its affiliates and therefore may not be relied upon in connection with any offer or sale of securities. Any offer or solicitation may only be made pursuant to a confidential private offering memorandum (or similar document) which will only be provided to qualified offerees and should be carefully reviewed carefully by any such offerees prior to investing.
This letter aims to summarize certain developments, articles, and/or media mentions with respect to bitcoin and other cryptocurrencies that Pantera believes may be of interest. The views expressed in this letter are the subjective views of Pantera personnel, based on information which is believed to be reliable and has been obtained from sources believed to be reliable, but no representation or warranty is made, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness, or completeness of the information and opinions. The information contained in this letter is current as of the date indicated at the front of the letter. Pantera does not undertake to update the information contained herein.
This document is not intended to provide, and should not be relied on for, accounting, legal, or tax advice, or investment recommendations. Pantera and its principals have made investments in some of the instruments discussed in this communication and may in the future make additional investments, including taking both long and short positions, in connection with such instruments without further notice.
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It is strongly suggested that any prospective investor obtain independent advice in relation to any investment, financial, legal, tax, accounting, or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate, or other market or economic measure.
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