The Simple Case for Investing in Blockchain :: Blockchain Letter, August 2019
Dear Community,
CRYPTO :: A NON-CORRELATED, ASYMMETRIC ASSET CLASS
In the Capital Asset Pricing Model, investors are looking for assets with high returns but with low correlation to the rest of their portfolio. Cryptocurrencies are the most extreme of both.
When I started on Wall Street in the 1980s, most assets were relatively uncorrelated. Bond investors just owned bonds. Equities investors knew nothing of currencies. People who traded oil, just traded oil and so on. As modern portfolio theory took over, everyone wanted to have a diversified portfolio. Ironically, they all ended up buying the exact same portfolio.
Assets that used to be completely uncorrelated, like commodities, started to become correlated because people created investment products like the Goldman Sachs Commodity Index, which made it easy for institutions to get exposure to formerly uncorrelated assets. Now, basically everybody owns the same thing. Real assets like timber are now correlated with the S&P. That’s wild.
Even former Fed Chairman Bernanke used the term “risk-on, risk-off”. When everyone owns the same thing, they all sell the same stuff in crises.
The meta-asset class “Alternatives” itself is no longer alternative — everybody owns the same mega-funds.
The one asset class not correlated to the others is blockchain (for the obvious reason that very few institutions own it).
If you can find an asset that has a 215% nine-year-compound annual growth rate and basically zero correlation with anything else, you should own some. That’s the simplest way to describe why blockchain should be in a portfolio.
Timeframe: Three-year weekly return correlations, Q2 2016 — Q2 2019
Source: Binance Research Report, Bloomberg
PANTERA BLOCKCHAIN SUMMIT
Our investment team has organized a day focused on the most important topics in the blockchain industry: scaling, Web 3.0 infrastructure, mainstream adoption, and new financial markets. Nick Szabo, who pioneered the concept and coined the term “smart contract”, will be sharing his perspectives on the current smart contract landscape and cryptocurrencies. CEOs speaking include Xapo, BitGo, Circle, Brave, ErisX, 0x, bloXroute, Celer Network, Origin Protocol, StarkWare, and Wyre. You can find the full list of speakers here.
The Summit is open to and free for all Pantera Limited Partners. If you are currently a Limited Partner and have not registered, the registration website is at https://pantera.ljfevents-rsvp.com/. You will need the unique code sent in your invitation. If you are not yet a partner, but are interested in attending, please contact our Investor Relations team at ir@panteracapital.com.
New Speaker Addition
We are honored to announce that former CFTC Chairman Christopher Giancarlo will be opening Pantera’s 2019 Summit. Mr. Giancarlo stepped down on July 15th. He is affectionately known as the “Crypto Dad” for his active engagement with the crypto community. Mr. Giancarlo will take the stage on the evening of October 21st to share his perspective on the future of the blockchain industry.
An Evening of Poker, Drinks, and Crypto Art
The summit traditionally concludes with a poker tournament and an evening of art, craft cocktails, and conversation.
- Poker Tournament: Winner-takes-all — 1,000,000 satoshi buy-in (0.01 BTC). Participation in the tournament itself is limited.
- Cocktails: Whiskey experts will lead a tasting, including a blind tasting “Does age really matter?”, while skilled mixologists will create craft cocktails.
- Crypto Art: A silent auction featuring art by leading crypto artists — including cryptograffiti and Josie Bellini — will be happening at the same time. 10% of proceeds will be donated to support Coin Center’s research and advocacy efforts on public policy issues regarding cryptocurrencies and blockchain technology.
Details about the evening’s activities are available at our registration website here.
Portfolio Company Investor Presentations
Fifteen portfolio companies will lead small-group sessions in parallel to the main presentation stage. These Investor Presentations are an opportunity for our Limited Partners to connect directly with the executive teams at our portfolio companies including Bakkt, Brave, BitGo, StarkWare, Alchemy, and Staked. These sessions are already over-subscribed. Preference will be given to those Limited Partners who are co-invested in each company. Additional seating for these sessions will be assigned to those who have registered on or before September 16th.
BITCOIN RETAKING MARKET SHARE
Bitcoin’s share of the total market cap has risen to 69% throughout this latest run up — the highest since going down below that level in March of 2017 — falling as low as 33%. Prior to that point no non-bitcoin token had been more than 18%.
PROJECTS LAUNCHING SOON
We are expecting a few long-awaited projects to launch later this year or early next. We have been supporting them since their earliest stages of development and are excited to see working products ship. Not only will this bring more liquidity to our ICO funds, but also bring additional robustness to blockchain infrastructure.
Before discussing the projects, it’s important to reflect on the development life cycles of these technologies. We’ll use one of the first decentralized applications built on top of the ethereum blockchain as an example, Augur.
Pantera Co-CIO Joey Krug first thought of Augur back in mid-to-late 2014. It was only until August 2015 did Augur conduct its ICO, which concluded a few months later in October. After a year, the team released a beta version and then published a revised white paper in January of 2018. Four years after the ideation phase, Augur went live in July of 2018. Below is a visualization of this timeline plotted over ethereum’s price chart.
These applications and technologies aren’t developed overnight. Months-to-years of development and beta testing take place before projects can be deployed. An unfortunate byproduct of raising capital through an ICO or public token offering is an accelerated expectation of when final products are shipped. The reality is that investing in these projects is like early-stage venture but with a real-time price feed. These technologies will take a while to build and they will be iterated upon many times before they work. So we encourage investors to keep that in mind as the foundations of the future crypto landscape are being built today.
The Projects
There are four projects soon to launch in the scalability, interoperability, and decentralized marketplace sectors. Polkadot is a platform that has been in development since 2016 by the Web3 Foundation. The technology is aiming to bridge disparate blockchains through a system of relay chains and parachains. The way the network is designed will also allow for higher throughput as a common set of validators will be able to spread transactions across multiple parallel blockchains within the network. As the market is signaling a multi-blockchain ecosystem, it will be important for cross-chain communication protocols to connect them.
BloXroute is another project solving blockchain scalability but with a different approach. The project is described as a “layer 0” solution as it focusses on the underlying network layer — the biggest bottleneck in scaling. For context, when you send a transaction on ethereum or bitcoin, you have to broadcast that transaction to a group of computers who then relays it to another group of computers. It’s like a game of telephone except it takes a really long time because each person has to call ten of their friends who then call another ten. After ten hops, all of a sudden it’s taken a long time to complete one phone call. The idea with bloXroute is, instead of having to call ten sequences of people to route your phone call, why not just do one direct call. So they’re building what’s called a CDN (Content Distribution Network) for underlying blockchains that will hopefully solve the networking component of scalability.
Origin is a protocol for creating decentralized marketplaces on ethereum. The idea is to connect buyers and sellers directly, effectively removing the rent-seeking entities that charge 20–30% for each transaction on their platforms. The total addressable market within the sharing economy model is massive and so are the fees extracted by the middlemen in control: Uber, Lyft, Airbnb, etc. In theory, removing these entities out of the equation would effectively allow for significant cost reductions for both the buying and selling sides.
Lastly, Filecoin is a decentralized marketplace for file storage. The amount of storage capacity sitting idle around the world is greatly underutilized. Through Filecoin, individuals can monetize their unused hardware by participating in the network as a Filecoin miner and fulfilling storage requests by clients. Competition within the network’s storage providers would also reduce costs for users — especially compared to what is offered by the oligopolists that dominate the cloud storage market today. Filecoin has been in the works since around 2015, so we’re very excited to see this project deployed.
ICO vs. IEO
Initial coin offerings (ICOs) served as the primary method for token offerings in 2017 and 2018. At a high level, a project would issue tokens on a public blockchain like ethereum and sell them to accredited investors. This allowed projects to raise capital via crowd-founding from any qualified person with an ethereum wallet. KYC would be conducted by the project or a third party partner. Projects would then negotiate deals with exchanges to be listed on their trading platform.
In search for more streamlined and optimized approaches to token offerings, a new method called initial-exchange-offerings or IEOs has taken off. Below is a high level comparison between the two different methods.
We’re starting to see a shift towards IEOs as they offer a more direct path to liquidity and remove the burden on projects to perform proper KYC on their investors. Exchanges have both the resources and platform in place to conduct token offerings at a much more efficient level with reduced liquidity risk for investors. Customers on exchanges have already been KYC’d and tokens can be distributed easily through their existing infrastructure. Below are two pie charts depicting the transition of share of total funding from ICOs to IEOs in 2018 and 2019. So far in 2019, IEOs account for 82% of funding compared to just 2% in 2018.
How Does This Affect Our ICO Funds?
In terms of our investment strategy, we still enter into deals at the earliest stages, that being at the pre-auction or private sale stages. So it is unlikely that we will invest in an IEO itself when it goes live on an exchange platform. IEOs are not likely to affect our ICO funds’ strategies.
The position we’ve established for ourselves allows us to see projects well before the rest of the market. In many instances, we are the first call for new blockchain projects. A combination of our value add on both a technical and marketing level allows us to negotiate steep discounts to public offering prices — usually far in advance of the public sale. The rise in popularity of IEOs does not affect our strategy in any material way, rather it opens the door to new strategies that will ultimately enhance the liquidity of our ICO funds’ portfolios.
UPCOMING TRAVEL
Our Capital Formation partners and sometimes investment team members will be traveling to a bunch of cities over the next months to discuss the blockchain disruption with our partners and potential investors.
We also have organized group lunches in some cities, should you want to meet other investors who share your interest in blockchain. If you are interested in attending one of our group lunches, please fill out the form on this page and we will be in touch regarding availability.
•Denver, September 3–4
o September 4, Group Lunch | 12pm
• New York City, September 4–6
• Scottsdale, September 5 | including a Group Lunch at 12pm
• Las Vegas, September 6
• Scottsdale, September 9
• Tel Aviv, September 15–16
• Shanghai, September 16–18
• Palo Alto, September 17, Group Lunch | 12pm
• Madison, WI, September 18
• Chicago, September 19
• Indiana, September 20
• North Carolina, September 23
• Montreal, September 23
• Toronto, September 24
• Detroit, September 25
• Atlanta, September 26
• New York City, September 26
• London, September 30
• Amsterdam, October 1–3
• Boston, October 2–4
• New Hampshire, October 3
• London, October 7–8
• Osaka, October 8–16
• Zurich, October 9–10
• Tokyo, October 14–18
• New Haven, October 18
If you are interested in a meeting, please contact Pantera’s Investor Relations team at +1–650–854–7000 or ir@panteracapital.com.
The future has arrived,
Dan Morehead
dan@panteracapital.com
PORTFOLIO COMPANIES AND PROTOCOL TOKENS
FUND DOCUMENTS
If you would like to receive additional information on Pantera’s funds, including the Private Placement Memorandum, Limited Partnership Agreement, or Subscription Documents, please fill out the form on this page to begin the subscription process.
BLOCKCHAIN FUNDS
CONFERENCE CALLS :: ICO, DIGITAL ASSET, AND VENTURE FUNDS
Pantera Blockchain Funds Conference Call
Tuesday, September 3, 2019 9:00am PDT / 18:00 CEST / 12:00am CST (Sep. 4th)
Please register (in advance) via this link:
http://info.panteracapital.com/general-information-conference-calls
Meeting ID: 465–630–279
Venture Fund III LP Performance Call
Tuesday, September 17, 2019 9:00am PDT / 18:00 CEST
Open only to LPs of the fund.
Venture Fund II LP Performance Call
Tuesday, September 24, 2019 9:00am PDT / 18:00 CEST
Open only to LPs of the fund.
Pantera Blockchain Funds Conference Call
Tuesday, October 1, 2019 9:00am PDT / 18:00 CEST / 12:00am CST (Oct. 2nd)
Please register (in advance) via this link:
http://info.panteracapital.com/general-information-conference-calls
Meeting ID: 703–606–266
PAST ICO, DIGITAL ASSET, AND VENTURE FUND CONFERENCE CALL RECORDINGS
Recordings of recent ICO, Digital Asset, and Venture Fund III conference calls are available on this page.
RECENT PRESS
- Dan Morehead on CNBC, ‘Crypto Trader Show’ :: Live In Los Angeles
- CNBC, ‘Crypto Hedge Fund Pantera On Track to Raise $175 Million’
- Dan Morehead on CNBC, Fast Money
- Joey Krug on the June 8 Episode of the “Unconfirmed: Insight and Analysis from the Top Minds in Crypto” podcast, episode entitled “How to Create Regular Cryptocurrency”
- Dan Morehead on CNBC, Fast Money
- Dan Morehead on Fox Business, Mornings with Maria
- Dan Morehead on Bloomberg Panel, Bitcoin: The Past, Present and Future
- Dan Morehead on Bloomberg, Pantera’s Morehead Says Bitcoin ‘Is a Screaming Buy’
- Dan Morehead on CNBC, Hedge Fund CEO Says Bitcoin’s Flashing a Rare Buy Signal
- Dan Morehead on CNBC, Early Innings for Cryptocurrency Craze: Pantera Capital CEO
- Dan Morehead on CNN, Bitcoin: Digital gold or Ponzi scheme?
- Dan Morehead on Fox Business, Morning with Maria
- New York Times, A Bitcoin Hedge Fund’s Return: 25,004% (That Wasn’t a Typo)
- Dan Morehead on Fox Business, Mornings with Maria
- Dan Morehead speaks at Money2020 Conference with Kik’s Ted Livingston
- Dan Morehead speaks at Sohn Conference CNBC
- TechCrunch, While Investment Firms Ponder ICOs, This Team is Barreling Ahead With a $100 Million ICO Fund
- TechCrunch, ICOs, How Do They Work? | Disrupt SF 2017
OPEN POSITIONS
Pantera is actively hiring for the following roles:
- Systems Engineer
- Marketing & Investor Relations Senior Associate
- Administrative Assistant
If you have a passion for blockchain and want to work in Menlo Park, San Francisco, or New York, please follow this link to apply.
FURTHER READING
Some good material to start with on the development of blockchain technology and cryptocurrencies as speculative instruments:
- Bitcoin: A Peer-to-Peer Electronic Cash System — white paper by Satoshi Nakamoto
- 12 Graphs that Show Just How Early the Cryptocurrency Market Is by Chris McCann
- Blockchain Investments and the New Problem Asset for Conventional VCsby Jake Brukhman
- Cryptoeconomics 101 by Nick Tomaino, and his Tokens, Tokens and More Tokens
- Fat Protocols by Joel Monegro
- What Does $300 Ether Mean? by Vinay Gupta
- Token Economy by Stefano Bernardi and Yannick Roux
- Traditional Asset Tokenization
- The Rise of the Token Sale by Max Mersch
- Making Sense of Cryptoeconomics by Max Mersch
- Why Amazon’s Margin Is Filecoin’s Opportunity Forbes, Aug 28, 2017
- Joey Krug RealVision Interview Excerpts: ICOs, Future of Digital Currency, Ethereum Flash Crash RealVision, Aug 10, 2017
- Pantera Capital to Raise $100 Million in Investment for ICO Hedge FundCoindesk, Jun 28, 2017
- While Investment Firms Ponder ICOs, This Team is Barreling Ahead with a $100 million ICO Fund TechCrunch, Jun 28, 2017
- Balaji CNBC Interview CNBC
- US Fed Hints at Blockchain Integration Coindesk
- Coindesk State of Blockchain Q2 Report Coindesk
- The Isle of Man Welcomes ICOs Coindesk
- Ethereum Metropolis Release Testnet To Launch Coindesk
- Closure Steps for Chinese Exchanges Coindesk
- China Shmyna, Bitcoin Trading is Way More Distributed Now AnywayCoindesk
- Lawmakers Seek Tax Exemption on BTC Transactions Under $600Coindesk
- ICO “Rounds” Are Coming TechCrunch
- Crypto Regulation? Not Anytime Soon, Says White House OfficialCoindesk
- Why Decentralization Matters by Chris Dixon. Outstanding perspective on how we went the open Internet 1.0 to a closed Internet 2.0 — and the promises of a new Internet ecosystem powered by Blockchain.
- Beyond the Bitcoin Bubble The longest read on this list from NY Times Magazine. A great ten-thousand foot view. A must-read.
- Fat Protocols Written over two years ago, an image in this article is one of the most frequently referenced in the industry
- A Letter to Jamie Dimon Famous retort to Mr. Dimon’s flippant remark about bitcoin being a fraud. Concise, even-tempered, a brilliant article.
- Interview with David Sacks Former Pay Pal COO Sacks lists ten use-cases where he anticipates blockchain can disruptive in the not-too-distant future.
- Mapping the Blockchain Project Ecosystem Attempt to categorize the protocol tokens based on use –helpful for newbies.
- Two of the best books are Digital Gold by Nathaniel Popper for a fun high-level history and an in-depth technically-minded look Mastering Bitcoin and Mastering Ethereum by Andreas Antonopoulos.
- And some additional information on the ICO model specifically:
- Recommended Primer: Token Mania
- Kin Whitepaper
- Kin Webpage
- AVC Venture Capital on Kin
- Tech Crunch Article on Kin
- Reuters Article on Kin
- Video on Kin by AVC
- USV on Protocol Value
- Tokenomics — A Business Guide to Token Usage, Utility, and Value by William Mougayar
- Earn’s CEO on Token Economies
- Basic Attention Token Whitepaper
- Basic Attention Token Webpage
- Nick Szabo and Naval Ravikant on Tokens
Additional information on blockchain regulation:
- SEC’s Office of Investor Education and Advocacy Investor Bulletin on ICOs
- SEC Issued Statement on ICOs and the DAO
- China Banned ICOs
- FINMA Issues Stricter ICO / AML Regulatory Compliance Requirements
- SEC Puts Task-Force on ICOs
- SEC Shuts Down Protostarr
- South Korea Bans ICOs
PANTERA PUBLICATIONS
You can subscribe our publications, including the ones listed below, by visiting Pantera’s website or by e-mailing ir@panteracapital.com.
Blockchain Letter
A monthly letter with our thoughts on significant market and ecosystem-related developments. Also, includes our thoughts on blockchain venture capital and news on our portfolio companies for accredited investors.
Blockchain Investor Letter
Public Letter plus exclusive information for accredited investors.
White Papers
Periodic, original blockchain research and academic papers.
- “A Crypto Thesis” by Pantera Co-CIO Joey Krug [2019.01.08]. Joey’s insights on crypto and blockchain innovations what is still needed for user and institutional adoption. Informative and detailed primer for anyone considering investing in the space.
Follow us on Twitter and Medium for the latest blockchain news and insights. @PanteraCapital, @Dan_Pantera, @JoeyKrug, and @Veradittakit.
