We began our deep dive on bitcoin halvings in our May investor letter — just after the 2020 halving date itself — like this:
“With the price roughly flat over the last two weeks, there’s a little bit of a ‘The Bitcoin Halving Happened and All I Got Was This T-shirt’ vibe in some of the comments. We have stressed that the halving is a big event — but it takes years to play out. The typical trough is 1.3 years before the Halving and, on average, the market peaks 1.2 years after. The whole process has taken 2.5 years.”
It’s happening — exactly as forecast.
Halvings have a HUGE impact — but — it takes a couple of YEARS to see the full impact.
Bitcoin is exactly on track with the forecast we made in our April letter. Our analysis was based on comparing the reduction in the supply/flow of bitcoin relative to the outstanding stock — at the time of each halving — and the subsequent impact on price. (The full analysis is below.)
In our April investor letter, 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:
It’s had some slow months, but it’s currently right on track. Will bitcoin reach $115,212 by August 1st?
“I’m not saying I’d bet our life savings that’s definitely going to happen, but I think it’s possible, and we’re right on pace to do that.”
DAN MOREHEAD, FOX BUSINESS, JANUARY 8, 2021
When people wonder if the halving is fully priced in, I’m reminded of a great line from Jesse Powell, CEO of Kraken, when I asked him on our halving conference call with investors May 2020:
Q: Is the halving priced in?
“I don’t think bitcoin is priced into bitcoin.”
JESSE POWELL, BITCOIN HALVING CONFERENCE CALL, MAY 12, 2020
Seems like the supply demand imbalance isn’t priced in. We’re still below the 10-year exponential compound return trend line. We’re below this Halving Stock-To-Flow Projection. Unlimited money printing. Morgan Stanley’s buying 10+% of MicroStrategy. It just doesn’t feel priced in.
BITCOIN HALVING :: BACKGROUND
The money supply function of the Bitcoin protocol is the polar opposite of Quantitative Easing. Six and a quarter bitcoins are issued every ten minutes. There’s no “Greenspan put” if a politically-powerful group gets a boo-boo in the stock or housing markets. It’s just 6.25 BTC every ten minutes.
Every four years that “block reward” is cut in half — until the year 2140 A.D., when the Zeno’s Paradox ceases at 21 million bitcoins.
Bitcoin’s supply and coin distribution ruleset is based purely on mathematics — predictable and transparent by design.
“Total circulation will be 21,000,000 coins. It’ll be distributed to network nodes when they make blocks, with the amount cut in half every four years. First four years: 10,500,000 coins. Next four years: 5,250,000 coins. Next four years: 2,625,000 coins. Next four years: 1,312,500 coins. Etc. …”
SATOSHI NAKAMOTO, THE CRYPTOGRAPHY MAILING LIST, JANUARY 8, 2009
BITCOIN HALVING :: PRICE IMPACT
Bitcoin’s price has surged during the halvings. This makes sense as we’ve outlined in recent letters: if you cut supply in half — particularly when there’s a huge demand surge — a shortage develops and the price must rise steeply to induce holders to sell existing stock.
Below is a graph showing Bitcoin’s price action leading up to and following the three halvings.
Bitcoin has historically bottomed 459 days prior to the halving. The price has then climbed leading into the halving date and then exploded to the upside afterwards. The post-halving rallies have averaged 446 days — from the halving to the peak of that bull cycle.
In this cycle, the market did in fact trough 514 days before the halving. IF history were to repeat itself, bitcoin would peak in August 2021.
BITCOIN HALVING :: STOCK-TO-FLOW PROJECTION
The framework we’ve used to analyze the impact of halvings is to study the change in the stock-to-flow ratio across each halving — and then scale for the subsequent halvings. The first halving reduced the supply by 15% of the total outstanding bitcoins. That’s a huge impact on supply and it had a huge impact on price.
Each subsequent halving’s impact on price will likely taper off in importance as the ratio of reduction in supply from previous halvings to the next decreases. Below is a chart depicting past halvings’ supply reductions as a percentage of the outstanding bitcoin at the time of the halving.
The second halving decreased supply only one-third as much as the first. Very interesting, it had exactly one-third the price impact.
Extrapolating this relationship to the 2020 halving:
The reduction in supply is only 40% as great as in 2016. If this relationship holds, that would imply about 40% as much price impulse — bitcoin would peak at $115,212 /BTC in August 2021.
I realize that price may sound ludicrous. But, $5,000 sounded equally ludicrous as our first written price forecast when we launched Pantera Bitcoin Fund at $65/BTC.
Mark Twain is often attributed with the saying, “History doesn’t repeat, but it often rhymes.” Just sayin’ — there’s more than a 50–50 chance the price of bitcoin goes up — and goes up big.
As we enter 2021, we expect the themes that drove positive performance for Pantera’s funds in 2020 to continue:
Unprecedented money printing
Extremely accommodative/negative interest rates
Continued institutional interest
Decentralized finance (DeFi) growth
Cryptocurrency markets should continue to benefit from these actions.
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PANTERA BITCOIN FUND ADVANTAGES
Pantera Bitcoin Fund offers many advantages to other products in the space — including brokerage accounts like Coinbase or Bitstamp. We believe that Pantera Bitcoin Fund is the only Bitcoin investment vehicle offering daily liquidity, no premium to NAV, low fees, audited financials, and that is managed by an SEC-registered investment advisor.
THEN & NOW :: 2017 RALLY VS. THIS RALLY
Lately I get asked this a lot: Is this rally different?
Ken Rogoff wrote a fantastic book, Why This Time is Different: Eight Centuries of Financial Folly. Having read the book with humility and thought about some of my own experiences feeling “But, this time is TOOOOTALY different” , I will take the plunge and share some of the differences I see — this rally vs. 2017. (Hopefully these will read well in a couple of years.)
With hindsight, 2017 is now officially a bubble.
The first massive difference is 2017’s rally was all about hype. In mid-2017 the world fell in love with newly-issued tokens — ICOs. They had existed since 2013. My Co-CIO Joey Krug did the first token on Ethereum in 2015 — Augur. There were incredibly important projects. However, they were very rare — only a few meaningful projects a year. A variety of factors came together and the second half of 2017 was ICO mania. By the end of the year, we were getting fifty whitepapers a week. Obviously it’s impossible to come up with 50 genius ideas each week, every week. Most of these projects were not useful. The market didn’t know that yet. A huge amount of money went into them. When bitcoin peaked in December 2017 it represented only 39% of the market cap of the industry. These “Other” tokens were almost as valuable — 25%. Today bitcoin has almost doubled its share to 72% while the “Other” category has fallen by 15 percentage points, to only 10%. A small corollary to that move is Ethereum gained share as well — from 12% to 14%.
There has been a massive shift from highly speculative, mainly non-functioning tokens having roughly half of the total market cap in 2017 — to today when the market cap is mainly in the two proven, functioning chains: Bitcoin and Ethereum. Those two chains have 86% of the value. The other 5,000 chains have 14%.
MOVING ON UP
At the first Pantera Blockchain Summit in 2013, I compared the total market cap of bitcoin to a similarly-valued public company — Urban Outfitters.
In our investor letter late last year we updated that comparison — L’Oréal.
Bitcoin has recently surpassed Facebook in market cap. Starting to get interesting.
WHY ETHEREUM IS UNDERVALUED — BY JOEY KRUG
Ethereum is the leading asset in the cryptocurrency space for developers who want to write smart contracts and decentralized finance (DeFi) applications. It’s the base money collateral for this new financial system. On Ethereum, DeFi has grown from $1bn in Jan 2020 to $16bn in Jan 2021, has more fees paid than Bitcoin, trades at an implied P/E multiple of 79, is down 14% from its all-time high, and we believe is undervalued on a relative basis to Bitcoin. Especially when we see Bitcoin’s share of the overall market above 70%, which tends to be the higher end of its range in recent years.
When Ethereum launched in 2015, it was easy to write off as an inflationary cryptocurrency with an economic model inferior to Bitcoin’s, but this missed the forest for the trees. Ethereum’s launch was a watershed moment in finance and enabled for the first time financial contracts without requiring a trusted third party to engage in a financial transaction. Bitcoin did this for digital gold/wealth storage, but Ethereum is doing it for finance. This new parallel system in the long run will be more globally-accessible, cheaper, and enable rapid experimentation on the level that the internet saw with information consumption, but this time for financial markets. With Ethereum, anyone can participate in or even create a new financial market in a few clicks. You can take out a loan at 3am on a Saturday night if you want, and pay it back the following Sunday. Instead of needing an exchange or OTC desk, you can swap from one asset to another using sites like 1inch and Matcha , and often get a better price. And you can send someone digital dollars 24x7x365 in 30 to 60 seconds, and they actually receive it in that timeframe too.
Like most revolutionary new technologies, it’s often hard to use, seems complicated, and many of the use cases feel like toy use cases. Is the future of finance really going to have things like Sushi (a Japanese-themed decentralized exchange) as core components of it? Maybe, maybe not, but does it really sound that much crazier than the term NASDAQ (National Association of Securities Dealers Automated Quotations)? Not really. Ethereum will be useful initially to practically no one beyond its investors (2015–16), then to people within crypto as a fun toy (2017–18), and now we’re in the era of Ethereum actually being very useful and having found product market fit for people within crypto (2019–21). Over the course of this year, I believe this growth will continue and Ethereum will provide even more value for crypto users as a platform for decentralized exchanges (DEX’s), lending protocols, synthetic asset trading protocols, etc.
This product-market fit is very real, exchanges on Ethereum have grown over 100x in the last year, and the same is true for lending. Ethereum itself now has more daily transaction fees than Bitcoin. Ethereum as an asset gives exposure to all of these developments, since Ethereum will receive transaction fees when staked after Ethereum finishes the migration to Ethereum 2.0. On top of that, Ethereum is used as collateral in many of these DeFi applications (Ethereum collateral is the mechanism by which Dai, a stablecoin pegged to the USD, is issued, as an example).
Ethereum is also used to pay transaction fees by users (and at some point there’s a plan to burn some transaction fees too). Long run, Ethereum could potentially even be a deflationary asset that earns fee revenue, is used as collateral, and is used to pay fees. Each of these properties alone make it a fascinating asset from an investment standpoint, but combined they make it unlike anything else in the market. The implied P/E multiple based on current transaction fees is about 79, and for something where underlying usage is growing 25x (total value in DeFi) — 100x (DEX’s) year over year, that feels incredibly low compared to assets in the equities markets.
Ethereum is currently down 37% from its all-time high and we believe undervalued on a relative basis to Bitcoin (not that they should be compared that much, as digital gold and DeFi are two different things), but still we’re overweight Ethereum. Bitcoin dominance has been hitting above 70% recently, which tends to be at the higher end of its range in recent years, and as the bull market continues, we think people will take some of their Bitcoin gains and roll them into Ethereum. In addition, once CME ETH futures launch, it legitimizes Ethereum as something institutional investors can own, and it’s actually a fairly easy bucket for them to allocate to (it fits in their tech disruption buckets). And as more and more holders stake their ETH in Ethereum 2.0, that locks up Ethereum, which means less sell pressure on the price. These two things, combined with the fundamentals and historically low valuation relative to Bitcoin, should provide a lot of positive pressure on Ethereum’s price in 2021, and for that reason we’re very bullish on Ethereum.
We will host a conference call on February 16th at 9:00am PST to discuss why Ethereum is undervalued. Please feel free to register here .
There are over 200 paper currencies on Earth. We’ve limited the cryptocurrencies to just the top five.
Even with that, a cryptocurrency has been the best-performing currency nine of the past eleven years.
In the era of unlimited money printing, paper money is no bueno.
With hope for 2021,
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.
Why Ethereum is Undervalued :: February 16, 2021 9:00am PST
The Case for Blockchain Investment :: March 16, 2021 9:00am PDT
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