Pantera Blockchain Letter, November 2020
THE U.S. ELECTION
A divided U.S. government — Democratic White House, Republican Senate — would likely result in more pressure on the Federal Reserve to expand their balance sheet. This money printing will inflate the price of things whose quantity cannot be “eased” — like gold, bitcoin, real assets, and even equities.
It feels like bitcoin is going to melt up here.
In last month’s investor letter we discussed that after 30 months of operation, Square’s Cash App is estimated to be buying around 40% of all newly-issued bitcoin.
PayPal just launched their new service that enables customers to buy, sell, and hold cryptocurrency directly from their PayPal accounts. It’s already having a huge impact.
The bitcoin community is proud to have grown to 100 million users over twelve years. PayPal has 300 million active users. As we’ve argued — and will argue more fully in our December investor letter — this rally is much more sustainable than 2017. One of the main differences is the ease of investing in bitcoin now — via PayPal, Cash App, Robinhood, etc.
Previously the friction to buy bitcoin was pretty onerous: take a selfie with your passport, wait days to a week to get activated, daily limits.
Three hundred million people just got instant access to Bitcoin, Ethereum, and other cryptocurrencies.
BOOM! The results are already apparent.
PayPal’s crypto infrastructure provider is Paxos. Prior to PayPal’s integration of crypto, itBit, the Paxos-run exchange, was doing a fairly constant amount of trading volume — the white line in the chart below.
When PayPal went live, volume started exploding. The increase in itBit volume implies that within four weeks of going live, PayPal is already buying almost 70% of the new supply of bitcoins.
PayPal and Cash App are already buying more than 100% of all newly-issued bitcoins.
The dashed horizontal line in the graphic represents the total supply of newly-issued bitcoins plus the original itBit volume. If their growth persists, PayPal alone would be buying more than all of the newly-issued bitcoin within weeks.
Where would Cash App get their coins? That’s where the finite-supply, inelasticity part comes in: At a higher price.
That is THE story in Bitcoin right now.
When other, larger financial institutions follow their lead, the supply scarcity will become even more imbalanced. The only way supply and demand equilibrates is at a higher price.
The influx of capital to decentralized finance protocols and major projects like Polkadot and Filecoin freeing to trade have generated substantial alpha for our fund strategies.
Pantera Bitcoin Fund provides institutions and high-net-worth individuals quick, secure access to large quantities of bitcoin — without the burdens of buying and safekeeping them. The Fund features daily liquidity and very low fees.
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BITCOIN PRICE DEVIATION FROM TEN-YEAR TREND
When I was a trader in the 80’s Wall St., there was a saying, “The worse the fill, the better the trade.” The thought being, the harder it is to actually buy/get filled on your market order, the better it will be in the long run.
Not sure that’s a 100% certain axiom; however, it’s come to mind often lately as people ask if today is a good time to buy cryptocurrencies. The market is up a bunch recently. However, it’s still below the highs and is trading well below its ten-year logarithmic trend. At $18,000, the price of bitcoin is 52% below its long-term regression. The trend would put bitcoin at $37,000 today. Bitcoin is trading at the 22nd percentile of expensiveness relative to trend. Not obvious that it’s overvalued.
More on fundamental value in the What Bitcoin Did interview excerpts below.
Another quick sanity check: The price of bitcoin has been rising without one of the indicia of hype: Google searches for the word “bitcoin”.
In the bubbles of 2013 and 2017, Google searches was a leading indicator of the market — both in the price surges up — and then in their peaking and rolling over. Google searches for “bitcoin” haven’t really moved much. Doesn’t feel over-hyped.
STAN DRUCKENMILLER AND BILL MILLER BUY BITCOIN
If you want to talk about “smart money”, none smarter…
Stan Druckenmiller and Bill Miller both appeared on CNBC to discuss their bullish views on Bitcoin. They are legendary investors. Their words move markets — and make it easier for institutional investors to make the case for blockchain assets to their investment committees.
“Bitcoin could be an asset class that has a lot of attraction as a store of value to millennials and West Coast money — and as you know, they’ve got a lot of it. It’s been around for 13 years and with each passing day, it picks up more of its stabilization as a brand. I own many times more gold than I own bitcoin. But frankly if the gold bet works, the bitcoin bet will probably work better because it’s thinner and more illiquid and has a lot more beta to it.”
— Stan Druckenmiller, CNBC, November 9, 2020
Bill Miller was one of the earliest high-profile investors to advocate for Bitcoin. His current views:
“[Bitcoin has] been very volatile, but I think right now it’s staying power gets better every day . . . .
“I think every major bank, every major investment bank, every major high net worth firm is going to eventually have some exposure to bitcoin or what’s like it, which is gold or some kind of commodities . . . .
“The bitcoin story is very easy, it’s supply and demand, Bitcoin’s supply is growing at around 2.5% a year, and the demand is growing faster than that and there’s going to be a fixed number of them.”
— Bill Miller, CNBC, November 6, 2020
My own global macro background is what got me into crypto in the first place (Mike Novogratz gives that story in the interview linked below). It’s not surprising that so many other global macro investors like Mike, Paul Tudor Jones, and Alan Howard were also drawn to Bitcoin.
The asymmetry of this trade — working on the largest markets in the world — make this opportunity orders of magnitude larger than the trades we’ve typically chased around the world. I believe it’s the most asymmetric trade I’ve ever seen.
Let’s update a theme from the second Pantera Blockchain Summit, March 2014:
“At the dinner a few hours before the late-night poker game, Morehead had joked about the fact that, at the time, all the bitcoins in the world were worth about the same amount as the company Urban Outfitters, the purveyor of ripped jeans and dorm room decorations — around $5 billion. ‘That’s pretty wild, right?’ Morehead said.
“I think when they dig up our society, all Planet of Apes-style, in a couple of centuries, Bitcoin is probably going to have had a greater impact on the world than Urban Outfitters.”
— Nathaniel Popper, 2015, Digital Gold
When I sat down to write this, Bitcoin’s market cap was the same as L’Oréal. Maybelline might be really really good, but I still think there’s an asymmetry here.
“At L’Oréal, our mission is to democratize…the best of accessible and quality beauty in skincare, makeup, hair care and hair color.”
Awesome. Bitcoin’s mission is surprisingly similar (-sounding): to democratize financial access.
I think the financial one will end up bigger.
FOR BILLIONS OF PEOPLE, BITCOIN ALREADY AT ALL-TIME HIGH
In the upcoming conversation with Mike Novogratz and Peter McCormack, I made this cheeky comment:
“We have to do all these podcasts to tell Americans or Brits how Bitcoin works and why it’s important. People in Argentina, you don’t need to do a big podcast. They totally get it.”
For billions of people, the price of bitcoin is already at an all-time high.
“WHAT BITCOIN DID” PODCAST WITH DAN MOREHEAD AND MIKE NOVOGRATZ
Peter McCormack recently had my friend Mike Novogratz and me on his popular podcast, What Bitcoin Did. The discussion focused on the current global macro environment and the institutionalization of Bitcoin. Below are some highlights from the conversation. You can watch the full episode at https://www.whatbitcoindid.com/podcast/the-institutional-case-for-bitcoin.
Q. What’s the background? How do you guys know each other?
Mike: “…the best part of the story is when we started looking at Bitcoin, I called Dan because we were thinking we wanted to get in at Fortress, but we didn’t have the expertise or the time. Dan was family officing at that time, and I called and said, ‘Dan, look at Bitcoin, what are you thinking?’ Two weeks later, he called me back. He said, ‘Dude, it’s going to change the whole world. This is the coolest thing I’ve ever seen.’ He was just so ecstatic about it. And I had looked at it as a speculative thing, and the God-honest answer is we started buying it. It was in the sixties, 65 bucks or something, and I would have probably put in about one fourth as much as I did, but I said, ‘How much are you going to put in it?’
“Dan put in a big wedge of capital, and at that point, Pete Briger and I, who were the other two amigos of the threesome, Fortress had done well, we were certainly wealthier, and we were like, ‘Damn, if he’s putting that in, we have to at least put one dollar more than him.’ And so, in lots of things in investing, if you get in at good levels early and you put a lot in, it makes the whole game a lot easier. We bought like 90,000 coins between the three of us.
“We weren’t piking around, but if you had done a lot less, if we’d all done a third of that, you would’ve made a third as much money probably because it’s harder… you feel like you miss things. You never really miss things, but you feel like you do. So I owe Dan a lot for my Bitcoin fortune.”
Q. Is there anything more exciting than Bitcoin right now as an investment?
Dan: “This thing is eclipsing everything out there. For the next 20 years, I think Blockchain will be more interesting than any other investment. For a while, Mike used to keep calling me and say, ‘Hey man, what do you think about the Brazilian real?’ or something. I’m like, ‘I can’t think about anything else. It’s a hundred percent Bitcoin.’”
Q. I also feel like I’m less worried about the regulatory side these days. I don’t think we’re in that phase anymore of, will it be banned? Will they regulate it out?”
Dan: “I think Bitcoin’s reached its escape velocity. There was a time when regulators or even maybe an oligopoly of banks could have shut it down. It’s now way bigger than that. I think one of the big announcements was when China announced their version of it. It’s game on now. Somebody is going to build a blockchain-based payment system. China is going to build one, Bitcoin has one, there’s going to be some others. You can’t put the toothpaste back in the tube. It’s out.”
Q. I was chatting to a guy yesterday who runs a fund, and he said to me, “We’re just about to pull the trigger on Bitcoin. We should be making our purchase by January.” And I was like, “Huh? You’re about to pull the trigger. And then from that point, it’s a two-month turnaround to actually make the purchase.” So in my head, I was thinking, “Well you might miss some action between now and then.” But then I was thinking, “Well, that’d be a great question for you guys.” Why would it take two months to get to that point?
Dan: “I know that you and I are drinking the Kool-Aid and that seems like an eternity, but this is going to be a multi-decade trade. Someone who gets in January next year is going to look like a visionary 10 years from now.
“It’s commonly said that it took the internet twenty years to happen. Because it took twenty years to get from the browser to Google and Facebook. But it took 20 years to get to the browser. TCP/IP was from the seventies. We’re just still in the really, really early innings of this thing. As Mike said, a hundred million people have it. We think that’s awesome, but there’ll be 6 billion people with it in 20 years. Getting from here to there is going to be a great trade. When we originally got into the trade, we felt like we missed a huge chunk of it. Because it had been running from 2011 to 2013. People who get it now, it’s been running for a while. But when we look back ten years from now, you probably won’t see these prices on the chart. It’s such an asymmetric hockey-stick type trade.
“The thing I love about the negative [people] who say bitcoin has no intrinsic value: if you look at a Jackson Pollock, it’s 40 bucks, right? There’s some house paint and some canvas. But, but it’s a scarce thing that has a 70-year track record of appreciating and being a good store of value. Bitcoin only has a 12-year track record — so it’s not as good as a Jackson Pollock. But 20 years from now, it will be.”
Q. What do you make of MicroStrategy’s $450 million bitcoin purchase?
Dan: “I think it’s great. It’s always hard to be the first to do something. It’s not that hard to be the 12th person to do something. Once each of these companies [invests in bitcoin], it lowers the frictional barrier for others. Having all your balance sheet as a company, a private individual, or an endowment sitting in cash that’s being depreciated, in bonds that are negative yielding, and equities in the middle of an economic crisis — it doesn’t sound great. You should have 1% or 2% in Bitcoin. . . .
“This is the most asymmetric trade I’ve ever seen. Mike and I have been trading dollar/yen forever. It’s been within 20 points of 100 our **entire** careers! We sometimes buy it, make some money sometimes, whatever. But it actually never really goes anywhere. So why not put a little bit of your assets in something that really could go up 50x? Dollar yen is not going up 50x. Bitcoin could. So it’s rational for MicroStrategy and these companies to put a bit of their balance sheet there and get the returns. Maybe they can get a higher multiple on their equity valuation.”
Mike: “I keep thinking right now the narrative that is powerful and it is working. JP Morgan just wrote Bitcoin is digital gold. It’s a finished product in lots of ways, right? Where Ethereum and a lot of the other new projects aren’t finished. They’re still being worked on. They’re venture bets on the future. Bitcoin doesn’t have to change. It’ll be the same in five years. So it’s adoption. We’re really betting on adoption, and bitcoin is roughly 2% of gold. We’re $300 billion roughly of Bitcoin and gold is what? $13 trillion or $12 trillion. So 2%, two and a half percent.
“10% doesn’t seem so far-fetched. That’s not [saying], ‘Oh, Bitcoin’s going to be 80% of gold in the next three years.’ It could get to 10% of gold in the next two to three years pretty easily. That’s Bitcoin at $65,000 or $70,000. So people love to make $500,000 or a million, and we certainly can get there in time. You don’t get there overnight because the law of large numbers, you’re moving lots of money around and it shifts. It’s accelerating. But when I put a target now of like 50 to 65 to $70,000, it’s not pie in the sky. It’s we’re going to eat into some of gold, and I think gold is going to go higher.
Dan: “…talking about gold, we’ve got to remember that gold went beyond 10% of seashells. It replaced seashells, more than 100% of the value of seashells as currency, and Bitcoin could be 50 times the value of gold in the long run. There’s no reason it can only be a fraction of gold — because gold might be yesterday’s seashells.
“Gold’s has been awesome for 5,000 years, so it’s not going to happen overnight. But I can totally see a world, three decades from now, when we look back and all central banks have Bitcoin on their balance sheet and not all central banks have gold.”
N.B. Our December letter will feature a piece on gold and the new digital gold, Bitcoin.
Q. What do you think is going to happen over the next 18 months? What do you think people should look out for?
Dan: “If we had this call three years ago, you had your crystal ball — and you told Mike, me, and your audience that:
- the OCC was going to approve federally-chartered banks having Bitcoin
- China was going to have a digital currency
- 2.4 billion Facebook people would have a digital currency
- 350 million PayPal, Robinhood, Cash App people were going to be able to buy it with one click
- and the price is going to be 25% below the highs
- …we would have had a heart attack.
“There’s a line in trading, “The worse the fill, the better the trade.” It’s when you’re buying the absolute highs, it hurts so much to do that, but normally that’s when the market’s going to keep going up. Here you’re buying it at a 25% discount and all the fundamentals are there and there is money printing like I literally couldn’t imagine. If you told me three years ago the U.S. was going to print a trillion dollars in one month, I would have said 1,000 to one against. It just happened. With all that, I just think it’s going to melt up.”
DECONSTRUCTING DEFI CONFERENCE CALL HIGHLIGHTS
Pantera hosted a conference call early this month on decentralized finance. We invited Joe Lau, co-founder and CTO of Alchemy, and Ruitao Sui, co-founder and CEO of Acala, to join us for the discussion. Below are some highlights from the call. You can access the recording here.
Q. Some people say DeFi is like the ICO bubble 2.0 — why is DeFi not a fad?
Ruitao: “I think it’s very different. Fundamentally you can see the actual usage and use cases of DeFi applications, or of DeFi protocols. I’ve been telling a lot of my non-crypto friends that I have been saving on Compound and that there’s now a decentralized commercial bank happening on blockchain. You can save your stablecoin, or your money, and earn a lot of rewards directly from the interest paid by the borrowers . . . .
“But I do believe that in the short-term there is some [speculation] because with any speculative technology, especially a promising technology, the assumption of speculation is unavoidable. We can see a lot of yield-farming stuff that’s happened, and went crazy in a month or two and then went away. We can see a lot of APY numbers that were going crazy, skyrocketed and were unsustainable. We think this period of speculation is unsustainable. It will see a lot of hype and things like APUI, going to go away. But after they go away you will see the true value.
“The most important metric that you can look at for DeFi applications is how many users they actually serve, what sort of value that it actually creates, what sort of transaction volume they actually help to facilitate. And those are the most important metrics we have to look at in looking at any particular use case for a particular application.”
Joe: “At the end of the day, what DeFi is doing is rebuilding the entire financial infrastructure. And keep in mind, DeFi has been around for, depending on how you slice it, a few months…a couple of years. Ethereum, as a platform, has been around for maybe four or five years or so, at its earliest. Financial infrastructure has had centuries to evolve. We’ve had centuries to build out banks, currencies, how we do lending and borrowing, things like that. That’s not going to be invented overnight, right? And that’s not going to be moved over to different technology overnight. So I think what we’re seeing, in my opinion, is that it’s [DeFi] probably here to stay . . . .
“When you think about the promise of what DeFi is, it’s taking things that we know we need, which is financial infrastructure, and it’s doing it in a way that’s better . . . .
“I think the thing to remember is that the progression of technology is not always just a straight line up and to the right. You look at something like the internet. In ’95 we were just getting started. People were like, is this a fad or not? We’re starting to put news on the internet. Is that going to stay? Why would I do this instead of a newspaper? There are a lot of questions like that, right? And then in 2000 people are like, ‘oh, the internet is done, this bubble popped, it was just a fad, it’s gone’. But you look at where we are now in 2020, and the internet has impacted our lives way more than we thought, even at the height of the bubble in 2000. And that’s just how technology works — as it progresses, people see more and more use cases. I think we’re going to see similar dynamics with DeFi.”
Q. What are some hurdles needed to overcome to bring DeFi to the mainstream?
Joe: “I think there are some challenges around the pace of development. There are a lot of people really excited about building on blockchain, but it’s still really hard today. If we can speed up how quickly developers can build applications, it spins the flywheel of adoption, because what happens is you have developers which build applications, applications bring in users, users make it more enticing for developers who build more applications, and so on and so forth. The faster that wheel spins, the faster we get technological progress, and the more quickly this industry starts to take off.”
Ruitao: “I think [with] the current DeFi sector on Ethereum, there’s a bottleneck in the network and there’s a lot of fees associated with trading on DeFi. So, it doesn’t make sense to trade on DeFi unless you have a certain amount of capital. At its core, this is a performance issue [scalability] that we’re talking about. I think performance is going to be resolved as the technology matures.
“We’re still very, very early in the game. There’re a lot of counter-intuitive designs in DeFi, mainly due to limitations of the current ledger. For example, if you are transferring DAI, you are paying ETH as the gas fee for the transaction. For a non-crypto user, that’s a very counter-intuitive concept. Why would you have to pay a foreign currency in order to transact in this particular currency? . . . .
“I think lowering the whale-heavy nature of DeFi currently and boosting the user experience are two areas that we need to focus to see a lot of adaptation in DeFi.”
If you are interested in digging deeper on any of these themes or our funds, please contact Pantera’s Capital Formation team at +1.650.854.7000 or email@example.com.
Take care everybody,
“Put the alternative back in Alternatives”
BLOCKCHAIN HEDGE FUNDS
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.
- Introduction to Blockchain Investing
- Thematic Call :: Then And Now — 2017 Rally vs. Today
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