DEFI WORKED GREAT

 

“Cryptocurrencies keep nosediving . . . The chaos has spread to DeFi:  Celsius, a crypto lender with assets of around $20 billion, was recently forced to freeze deposit withdrawals.  Last week, crypto exchange FTX said it was bailing out one of Celsius’ troubled rivals, BlockFi, with a $250 million loan, not long after rescuing crypto broker Voyager Digital.

 

— Jon Sindreu, Wall Street Journal, June 30, 2022

 

The whole article is a screed gleefully ruing the alleged failure of DeFi. 

 

 

There’s a huge misconception that DeFi – Decentralized Finance – failed.  It didn’t – it worked great!

 

Unfortunately the author – and all the skeptics who are promoting this narrative – have it totally backward.  DeFi’s flawless performance over the past months will be seen as a pivotal moment.  DeFi is a very important movement.

 

It’s CENTRALIZED finance that failed. 

 

All five of the companies that the reporter listed on are CENTRALIZED.  They are just old-fashioned venture-backed start-up companies.  They are not DeFi or on the blockchain at all.  Just some start-up banking entities that got overleveraged.  Very old school failure actually.  Nothing new or novel about them.

 

DECENTRALIZED finance protocols – like Aave, Compound, Uniswap, MakerDAO – all functioned flawlessly 24×7.  This crisis proves the opposite of the common narrative.  It proves DeFi works great.  Way better than centralized finance firms like Celsius, BlockFi, Lehman Brothers, et al.

 

First, I really try to avoid having to read journalists who reference tulips.  I can’t recall ever reading anything intelligent in an article with that four-hundred-year-old trope.  However, my desire to support blockchain is so strong that I dutifully muscled through the whole thing. 

 

Let’s break down the common misunderstandings contained in the article:

 

#1. “Remember how the banking system self-destructs every few decades?  Now imagine if banks only lent money to finance other banks, and you may get a notion of the house of cards that is ‘decentralized finance,’ or DeFi.”

 

You don’t need to remember.  It did again.  Celsius, BlockFi, Voyager Digital are all banking entities.  They are not decentralized in any way. 

 

Those start-ups are just banks that took in short-term deposits and lent long to each other and others.  They were 20-to-1 leveraged business models run by mortal humans.

 

DeFi, on the other hand, is not an empty house of cards.  Its foundations are rock solid and totally transparent.  DeFi removes human subjectivity in financing decisions.  Parties agreeing to conduct transactions openly and transparently on the blockchain, as opposed to backroom deals by opaque, human, potentially-conflicted financial actors, is the vision we should be striving for, rather than clinging on to inefficient centralized financial systems.

 

The author holds a misguided view of yield in blockchain.  He ignores that DeFi is the financial backbone for the entire blockchain ecosystem that is used to power all manner of transactions – retail, institutional, and even the type of green loans that he claims does not exist on the blockchain.  Staking yield to ensure blockchain security and incentivization of liquidity to prevent slippage are merely some of the ways yield is generated in crypto today.

 

#2. “To the glee of its critics, DeFi has ended up committing all the same sins as Wall Street, essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers.”

 

Oh, so sins in banking supposedly stopped in 2008?  Hmmmm…I’m not sure the record supports that.  Banks have paid an astounding $321 billion in fines since their supposed redemption at the hands of us taxpayers in 2009.

 

I remember one anti-bitcoin nut wrote an article “Bitcoin Is Evil”.  I don’t get that.  It’s a piece of open source code anybody can use.  It certainly has not ever done evil to anyone.  Banks, on the other hand, have been convicted of $321 billion worth of evil deeds.  (And, that’s only the ones they were caught at.)

 

To put that number in context:  the United Nations food-assistance branch, the World Food Programme, estimates “$6.6 billion would help stave off starvation for 42 million people across 43 countries.”

 

Banks spent fifty times the amount that would solve world hunger on fines.  Maybe the article should have been “Banks Are Evil”.

 

As further perspective, the banks’ fines are equivalent to the combined GDP of 84 nations.  If banks had not sinned they could have given all 363 million citizens of those 84 nations an entire year’s wages.

 

DeFi has never “sinned”.  The rules of engagement are coded into the smart contract.  You do not need to trust a counterparty who may be incentivized to twist the truth, nor rely on trust to engage in financial transactions.  The code just executes what both parties agreed to.

 

#3. “Crypto lenders’ exclusive focus on other crypto projects suggests their problems run much deeper than a Lehman-style liquidity crisis.”

 

Nah…Celsius, BlockFi, Voyager were just like Lehman Brothers.

 

#4.  “Digital currencies like bitcoin are too inconvenient to live up to their promise of ending the concentration of money in a relatively small number of banks, asset managers and governments.”

 

Why does a reporter – and here I love borrowing a classic Marc Andreessen line – “who can’t chin 12,000 followers” get to pronounce 300 million people wrong?  300 million people see the promise of blockchain.  Not my problem if a reactionary who completely misunderstands the basics can’t see it.

 

I’m a true sportsman though.  I made a serious effort to help this young whippersnapper through his misunderstanding.

 

 

To quote from Cool Hand Luke (starring Paul Newman, 1967), “Some men, you just can’t reach.”

 

DEFI IS SUPERIOR

 

The most elegant proof of the superiority of DeFi over centralized finance/banking is in head-to-head competition.  Centralized finance companies like Celsius and BlockFi did business with counterparties who then invested funds in DeFi protocols.  What happened is profound.

 

The centralized finance companies were forced by smart contracts to pay back the DeFi protocols. 

 

In fact, you could say that DeFi, due to its discipline for over-collateralization, protects you from CeFi.  Celsius was forced to prioritize paying down its $400+ million DeFi loans on Maker, Aave, and Compound to prevent its collateral from being liquidated.  There is no ability to “re-structure”/renege on smart contracts.  In DeFi “a deal is a deal” – you can’t back out. 

 

All centralized finance companies are forced by smart contracts to pay back the DeFi protocols.  On the flip side, centralized finance companies can lie to and then ghost their own clients. 

 

For example, even as of this week Voyager explicitly advertised that their client’s deposits were FDIC guaranteed – when the FDIC obviously only guarantees member banks that fail.  They certainly don’t bail out the business losses of a bank’s customer, like Voyager.

 

“In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000).

 

—  Voyager Website, 2019

 

“Your USD is held by our banking partner, Metropolitan Commercial Bank, which is FDIC insured, so the cash you hold with Voyager is protected.”

 

—  Still on Voyager Website, July 11, 2022

 

The failed centralized finance companies have gone silent to their customers.  Unfortunately, their customers are unlikely to recover their money.

 

DeFi never does.  Customers can monitor the protocols on the blockchain and are certain that the code will execute their transitions.  Centralized finance clients have only vague website spin to believe in. 

 

WHY DEFI IS SO IMPORTANT :: By Chia Jeng Yang, Investment Associate

 

Of the large leading crypto lenders founded in 2017 – Aave, Compound, BlockFi, and Celsius – the DeFi protocols have fared the best. BlockFi was essentially bailed out by FTX with a deal that provided a $400mm line of credit and the option to buy the company at a 93% discount to their high watermark observed in the private markets. Celsius at one point handled $24bn assets under management which is about as much as Point72, one of the most famous hedge funds, founded by Steven Cohen in 2014, off of his 30 years of investment experience. Celsius is now facing potential bankruptcy.

 

So how did DeFi work better than CeFi in this current crash?

 

Let’s go back to why blockchain is useful once again.

 

Blockchain provides full transparency.  Smart contracts provide automated rules for how specific financial instruments and protocols should act, executed and governed by code, rather than relationships.

 

Blockchain’s visibility and transparency comes with accountability.  DeFi applications can’t escape with the funds, nor deploy them in strategies your retail investors did not agree to, nor favor one investor over another, nor be under-collateralized without others knowing of it.  With the blockchain, the whole world gets to track your actions 24/7 and see every step that you take. 

 

 

From an SEC statement on BlockFi.  DeFi lending protocols governed by smart contracts would not have allowed this to have happened, since the rules of the loans would have been stated clearly in the smart contract.

 

This transparency transcends specific DeFi applications but encompasses industry-level transparency for the entire crypto community conducting transactions on the blockchain.  Information on how various assets and wallets are performing are completely visible to all.  For example, we can use on-chain data to see that wallets that have taken out leverage to purchase Ethereum face significant liquidation pressures at $600 and $500 /ETH.  For any actor operating in the market, on-chain market visibility is available to all, not just those in the know.  This increases everyone’s ability to understand what is going on in the markets.

 

Contrast that with the role of trust for CeFi.  We are reliant on market rumors to get a sense of which crypto lender one has deposited their assets with, is safe.  There is no visibility into their balance sheet, nor the actions they have taken with your funds, because there is absolutely no transparency with CeFi. 

 

DeFi also relies almost exclusively on over-collateralization in lending protocols providing transparently healthy risk management practices.   This is similar to how banks issue mortgages against homes.   The strength of DeFi’s current platforms is over-collateralization with the minimum collateralization ratio for most DeFi platforms being 110-150%, representing a 60-90% loan-to-value ratio.  In practice, we saw strong DeFi protocols (MakerDAO, Compound, Aave) with much higher collateralization ratios of 200-300%, representing a 30-50% loan-to-value ratio.  DeFi’s anonymity means that only those with strong risk management practices will survive for long, and no leeway was given to relationship-based or gut-feel-based underwriting/under-collateralized lending.  CeFi did not have such on-chain discipline, conducting under-collateralized lending to entities that they felt were good borrowers (until they were not), or for a range of reasons that may not be financially sound.  In contrast, if not explicitly allowed by the transparent smart contract, DeFi protocols cannot undertake such backroom deals.

 

DeFi players could also be relied upon to conduct their business in the same way before the crash, during the crash, and now in their aftermath, with no pauses in withdrawals or requirements for emergency funding.  During the LUNA crash, for example, DEXs continued functioning as normal while some CEXs were forced to halt withdrawals to the clear detriment of their users, who suffered losses as a result.

 

 

There will be lessons learned from the crash of 2022.  The strength of DeFi will be recognized and we think that better tooling for institutions to engage with DeFi will emerge and grow in strength in the next bull cycle.

 

 

 

9TH ANNIVERSARY :: PANTERA BITCOIN FUND

 

Nine years ago this month Pantera launched the first cryptocurrency fund in the United States.

 

That fund is up 26,096%.

 

I wanted to share the original logic I wrote to investors in 2013 – as it is equally compelling to me today:

 

 

 

WHICH BITCOIN FUND YOU CHOOSE MATTERS

 

I know it sounds counter-intuitive, but it really matters which bitcoin fund you pick.

 

Since November 2017, Pantera Bitcoin Fund returned 64% while Grayscale Bitcoin Trust (GBTC) has been flat.

 

 

You can click the button below for more information about investing.

 

 

 

CRYPTOCURRENCY DECLINES BY SECTOR

 

Last month, we featured a chart showing how most cryptocurrencies have fallen against bitcoin since the market peak in November – the exception being a few exchange tokens.  Below is a table which shows the declines by sector.

 

 

 

 

LONGEST PERIOD OF FLAT PERFORMANCE

 

Bitcoin is hovering just at its December 2017 high four and half years later.  This is the longest period that bitcoin has been flat.

 

 

 

 

DE-COUPLING

 

Unfortunately, crypto has been trading as a long-duration tech stock so far this year.  

 

 

Many asset classes are directly linked to interest rates. 

 

However, there are some assets which have no direct connection to rates, such as gold and other commodities. 

 

It’s likely that digital gold can decouple and trade with things like gold.  In the first rising interest rate environment in 42 years, there will be a rush to invest in things that don’t have to go down as the Fed unwinds its mistakes.  Blockchain and other commodities are likely the only place to hide in a world with massively rising rates.

 

It’s beginning to happen.  Bitcoin’s correlation to the S&P 500 is coming off considerably.

 

 

I think we can decouple from the other risk assets and we will see a world, a year or two from now, where a lot of other risk assets are lower than they are today and crypto, much higher.

 

 

PANTERA SELECT FUND

 

When we began investing, Seed and Series A rounds were the only deals that existed.  No company was old enough yet to raise a Series B.  However, the industry has grown up.  27% of the deals now are past Series A. 

 

 

 

Many of our portfolio companies are now valued in the tens of billions.  We’ve spent almost a decade helping companies like Ripple, Circle, Alchemy, StarkWare, Coinbase, Amber, and FTX.  For example, we’re the only venture firm to have invested in every round Alchemy has done. 

 

We are excited to be able to continue to meaningfully back the best companies.  We’re launching a new fund which will be entirely growth-stage investments.  Pantera Select Fund seeks to capitalize on the industry’s transition to more growth-stage opportunities.

 

Over the last 18 months, growth-stage deals had some of the richest valuations in our space, and these are the first deals to meaningfully come down in valuation.  This is why we are excited to be launching the Select Fund and investing in growth-stage companies over the next few quarters.

 

The structure of this opportunity is a concentrated fund:  Pantera Select Fund.  We are targeting $200mm. 

 

 

Please find the deck here.  The recording of our Select Fund Launch Call can be accessed here.

 

If you are interested in exploring this opportunity further, please reach out to our Capital Formation team at invest@panteracapital.com.

 

 

Pantera will donate 1% of revenue from Pantera Select Fund to 1% For The Planet.

 

 

 

PERFORMANCE-ENHANCED?

 

We’ve been chronicling the similarities between today and the 70’s.  Here’s a wild new one! 

 

Over the past month President Biden has frequently stated that the U.S. economy is growing faster than China’s – for the first time since our beloved 70’s.

 

“The GDP numbers for my first year show that we are finally building an American economy for the 21st Century, with the fastest economic growth in nearly four decades, along with the greatest year of job growth in American history.  And, for the first time in 20 years, our economy grew faster than China’s.”

 

— President Biden, Statement on First Year GDP Growth, January 27, 2022

 

“America is in a stronger economic position today than just about any other country in the world.  Independent experts have projected that the U.S. economy could grow faster than China’s economy this year.  That hasn’t happened since 1976, nearly one-half century ago.”

 

— President Biden, Remarks on the May Jobs Report, Rehoboth Beach Convention Center, Delaware, June 3, 2022

 

Not sure we should be proud that Congress and the Fed have overheated our economy so severely that it is growing faster than an incredibly dynamic emerging market country. 

 

That’s borrowed growth.  No chance it’s sustainable.

 

It’s like a sugar high.  Unfortunately, the sugar withdrawal crash is almost inevitable.

 

In our August letter we’ll dive into the stats that show the U.S. is likely already in recession.  Q1 2022 had -1.6% GDP growth.  Real-time indicators of Q2 are negative.

 

 

ATLANTA FED’S GDPNOW

 

The first release of Q2 GDP won’t come out until July 28.  Fortunately the Federal Reserve Bank of Atlanta has a model that estimates economic output in real-time. 

 

The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay.  Our GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis

 

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.2 percent...

 

— Federal Reserve Bank of Atlanta, July 8, 2022

 

 

 

IT’S GONNA TAKE AN ELEPHANT GUN

 

The ironic thing is that Congress and the Fed have created such a bonfire of buying demand it’s going to take an elephant gun to stop inflation.  The Fed’s been ruminating on “the taper” for nine months and look at how strong the inflation-generating sectors still are.  Housing is off-the-charts. 

 

 

This is one of my favorite signs there’s too much paper money chasing too few things.  The percentage of new-car borrowers willing – and this is the key point, able – to pay $1,000 a month has tripled since before the post-pandemic policy changes.

 

 

Unfortunately a few basis points here and there will not stop inflation.  Fed funds will ultimately go to something like 4-5%. 

 

 

FED RESPONSE TO A RECEESSION

 

Market participants have been trying to get their head around all this.  There’s now a view that since we’re close to or in a recession, we’re close to the end of tightening. 

 

Unfortunately it doesn’t work that way.  The Fed’s mandate is not “Keep tightening until you cause a recession.”  The Fed has a dual mandate – full employment and stable prices.  It’s way off on both.  The labor market is way too hot.  For the first time in history there are two job openings for each person looking for a job.  11.3 million job openings and only 5.9 million unemployed people willing to work.

 

I wish it were, but a recession is not a Get Out Of Jail Free card.  The Fed will have to keep tightening until the housing and labor markets come off their intensely hot highs.

 

“This is not a time for tremendously nuanced readings of inflation.  We need to see inflation coming down in a convincing way.  Until we do, we’ll keep going.”

 

— Fed Chair Powell, Wall Street Journal, May 17, 2022

 

 

CNBC :: HIGHLIGHTS

 

Q:  “Your monthly letter was very interesting – I didn’t know that the Fed did not buy any bonds whatsoever for 95 years, until now, and then they went all in.  Walk us through why Fed policy is now a Ponzi Scheme.”

 

Dan:  “The Fed used to just control the overnight rate and even that has been way behind where they should be.  The policy rate used to, on average, be about a percent and a quarter above inflation.  It’s now 700 basis points below inflation.  They’ve just gotten the overnight rate back to where it was right before the pandemic.

 

“When the pandemic started, inflation in the US was 2.3% and it’s now 8.3% in official terms.  Then there’s a problem with the way they report housing, the true inflation rate is in double digits now. So that’s a policy mistake, but completely separate is their manipulation of the mortgage market.

 

“The Fed used to not invest in bonds; they didn’t manipulate the long curve. They let free market actors like pension plans, mutual funds, and insurance companies do all the lending in the economy.  But in 2020, they decided to get involved in the mortgage market.  They ultimately bought $6 trillion of government and mortgage bonds.

 

“To put that into perspective, the record year for issuance of mortgages to all Americans was a quarter of that size.  So in two years they did 200% of all mortgage lending in the US.  There are some big ramifications that, unfortunately, we’re just seeing now.”

 

Q:  “What’s the most credible move the Fed can make to begin to build back?”

 

Dan:  “There’re two things.  They have to deal with the overnight rate.  For a long time, they said inflation was transitory or some supply chain issues.  To build credibility, they have to make it clear that it’s not a couple of container ships stuck off Long Beach Harbor.  It’s a supply of labor issue.  We have twice as many job openings in America as we have people looking for a job.  Unemployment claims in the US hit an all-time record low.  Only one out of 1,000 people filed for new unemployment claims, which are the odds of getting hit by a coconut.  So they need to establish credibility on the short term side, but really they have to stop manipulating long rates.  They have to let the free market do that.  Right now, Case-Shiller Housing Index is still running above 20% nationwide – that’s not just hot markets, that’s everywhere.

 

“The Fed is loaning money in the short term at 1.5% and even long term rates are very cheap.  We’ve never had that much of a spread between the appreciation of housing at 20% and mortgages at 5% or 6%.  That’s literally double the previous wide in that spread.  We had it around 5% in the ’70s.  We had about 7% just before the global financial crisis.  Obviously, both of those ended up disasters.

 

“The Feds really created a huge housing bubble and they have to get out of the housing market before that’s going to correct.”

 

Q:  As part of QT, we know the Fed will be selling mortgage backs – how do you think that market will absorb that?  What will then happen to housing prices?”

 

Dan:  “They really haven’t sold any mortgages.  They’re just saying that they won’t replace all of those that mature.  Unfortunately, I think they have to start unwinding their book and letting the free market establish the correct rate.  Housing has been a huge windfall for homeowners and, in particular, speculators.

 

One of the biggest issues with this policy mistake is it’s not like everyone in America owns a home and it’s all great for everybody.  35% of Americans don’t own a home – they’re trying to buy a home.  And even those that own a home might be wanting to expand into a larger home for their family.  20% of all homes in the US last year were sold to speculators, institutional speculators with money they borrowed from the Fed.  So it’s really not advantaging most Americans.

 

“They have to get out of the borrow market, reduce their holdings, and let the free market find the right rate.  Housing is up 38% since they started this policy, which is insane.  That’s never happened in our country before.  It probably can’t keep going up, and at some point, unfortunately, I think housing has to come back off and it does seem likely a recession is coming.”

 

 

Q:  “If we do head down this path and you say recession is likely, how are you positioning your portfolio?”

 

Dan:  “One of our essential views is that although interest rates obviously have to impact bonds mathematically, they almost certainly will impact stocks, real estate, etc. but there are some asset classes, like cryptocurrencies, that should be uncorrelated/disconnected from the interest rate markets.

 

“Although it hasn’t happened yet, I can easily see a world in say a year when stocks are down, bonds are down, real estate is down, but crypto is rallying and trading on its own.  Very much like gold or soft commodities like corn, soybeans.  That’s the world that I think we’ll see.”

 

Q:  “So in 6 to 12 months or so, all the asset classes are down except for crypto?”

 

Dan:  “Could be, including commodities and any kind of fixed quantity assets that don’t have a direct connection to interest rates.  These could keep rallying. 

 

The fundamentals in crypto are still very positive.  Obviously, we had a huge bull market and now a huge bear market, but I’ve been through five of those so far in the 10 years we’ve been investing in crypto.  This is not unprecedented.  We’ve seen it a lot.”

 

Check out the full interview here.

 

 

PANTERA BLOCKCHAIN SUMMIT

 

We wanted to share the remaining highlights from Pantera Blockchain Summit 2022.  All video recordings of the Summit can be viewed on our website here.

 

A Roadmap for the Future

An overview of the roadmap for Pantera and how we plan to expand our capabilities to best serve founders and entrepreneurs as they develop technologies underpinning the future of finance.


“There is a concern that DeFi could present a challenge to the traditional financial system – to which I would reply:  ‘so what?’.  That’s the nature of technology and creative disruption.  We have no obligation to protect the legacy institutions or incumbent institutions if they are failing to serve communities like mine.  We should welcome dynamism and creative disruption.”

 

Congressman Ritchie Torres

 

Conversation with Congressman Ritchie Torres

 

Congressman Ritchie Torres discusses his perspectives on cryptocurrency and blockchain technology and their potential to decentralize the internet and finance.  In addition, Congressman Torres explains how certain use cases can fundamentally reshape the lives of the most vulnerable communities.


“I’m really interested in seeing what happens in the emerging and frontier markets with the users there.  Obviously, there’s a lot of friction to traditional banking in those types of markets.  DeFi is the great equalizer – you’re not region-locked by any means.”

 

Rob Masiello, Arcade

 

DeFi:  A New Financial System

 

A discussion about the use cases and benefits of decentralize finance with entrepreneurs who are building key infrastructure pieces of tomorrow’s financial system.


“One of the earliest insights that we’ve worked with when we came up with our thesis is this phenomenon that human beings have had this tendency to care a lot about digital representations of assets or themselves, sometimes more than their physical counterpart.”

 

Albert Chen, Genopets

 

Bridge to the Metaverse:  From Gaming to Fashion

 

A conversation with the leading minds and developers behind blockchain gaming, metaverse, and NFT projects.  The group discusses the future of the metaverse, what it will look like, and how to onboard users to digital experiences.


“If you start to help them [institutions] understand that this is where all the talent is migrating, this is where folks at top universities are spending their time, it becomes pretty obvious that there’s something really powerful and special going on in crypto.  And professional investors get that.”

 

Matt Halstead, Teacher Retirement System of Texas

 

Institutional Allocator Perspectives

 

A conversation with institutional allocators about their journeys from identifying the opportunity in cryptocurrency, getting their respective investment committees onboard, and how they are approaching investing in the space.


“The SEC has said in recent rule makings that it has intended those rules to be technology neutral and Chair Gensler has said in one of his recent speeches that as a policy matter, he is technology neutral.”

 

Dan Berkovitz, SEC

 

Regulatory Perspectives on Crypto

 

SEC General Counsel Dan Berkovitz and CFTC General Counsel Rob Schwartz discuss their perspectives on cryptocurrencies, DeFi, and specifically stablecoins with respect to U.S. securities law.

 

 

REAL VISION :: “My Life in Four Trades”

 

“Wisdom comes alone through suffering.”

 

— Aeschylus, 524-455 BC

 

Real Vision did a fun podcast called “My Life in Four Trades”.  The theme is to takes viewers into the life of each guest by discussing their two best – and their two worst – trades.  It was fun thinking about all the trades over the years.  They’ve been some great trades, but, man there have been some painful ones too.  The trick is to try to get wisdom from the pain.

 

Below are some of the highlights of my conversation with Maggie Lake.

 

Bad Trade #1 :: Japanese JGB Super-Longs (1994)

 

Q:  Set the scene for us. . .

 

Dan:  It was 1992, Bankers Trust asked if I wanted to move to Japan and manage interest rate risk and equity derivatives in Tokyo.  I’d never even thought about Japan in my life – I was newly married, no kids – so I’m like, ‘Hey, this could be fun.’

 

They had just come through their huge bust of the Nikkei – the Nikkei had dropped 80%.  At the time, Japan was what China is now a growing super-strong economy.

 

“The Nikkei fell 80% because they had priced everything to such ludicrous levels.  There’s a story at the time that the amount of land of the Imperial Palace in Tokyo would be worth all of the state of California.  Everything had got to such crazy valuations that there was going to be just a huge impact from the market imploding.

 

I got there and they said they were going to have a Japanese recession, which meant sub 3% growth. . . overnight rates were 6%, and I was like this is got to be one of the best trades of all time, rates have to start coming down.  And so I did a bunch of trades in Japanese rates for a while.

 

“About a year or two later (1994), I found these things called super-longs.  The normal JGB is a 10-year bond – but somehow over the years they’d issued some 20-year bonds that just kind of literally got forgotten, it was so weird.

 

My partners and I started buying them up because they were ludicrously cheap to these tenure bonds.  They were maybe four or five years old.  So within four or five years they would become 10 years.  And then would reset to this new much lower rate regime.

 

“We really convinced ourselves how smart we were and we piled in and ultimately ended up owning probably too big a fraction of all of those.

 

Q:  Did it seem risky to you or you’re like, This is so obvious, this is a layup?

 

Dan:  The moral of this story is, it didn’t seem risky because I didn’t really have a full picture of what was going on.  I probably didn’t think through all the ways things could’ve changed over time.  I had strong conviction that I would be right.

 

“We were in a secular bull market, which is a really important point for the markets as a whole.  There was no working-age person who’s traded in a rising rate environment – rates were rallying six years into the rally.  In fact, when I got to Wall Street, they’d been rallying for 42 years.

 

“The super-longs got crushed – down six standard deviations or so.  I thought we had the only remit to trade long-term Japanese interest rates.  The position me and my two partners had on was borderline stupid too big, but seemed possible.

 

However, it turned out 57 people in the firm were limit long, super-longs.  We had too much of it.”

 

Bad Trade #2  :: S&P Dividend Swaps (2007-2009)

 

Q:  This is not long after the great financial crisis.  What’s the environment like now?

 

DanIn 07/08 I came to the conclusion that the dividend part of the S&P 500 would perform very well.  The main reason for this was because they were changing taxes to exempt dividends.  Companies had incredible amounts of cash balances and I thought dividends would outperform.

 

Originally, I did a trade where I was long the dividends 10 years out and then short the S&P 500 Index itself because I was trying to risk mitigate.

 

“Ultimately, as the S&P came down and down, I decided that, oh, maybe the S&P has already come down too much into that global financial crisis and so I then went for the Texas hedge.  I went just long instead of having the swap on there.

 

“The lesson from those trades, ultimately those trades worked – if I had been able to hold that trade for the next couple years I would’ve made a ton of money, same thing with a dividend swap.  So it was a great example of, when you have an idea, you really just have to balance all the other issues like liquidity, your ability to hold a position for a long time.

 

Good Trade #3 :: Tesla (2013)

 

Q:  We know everyone’s talking about Tesla now, but this is 2013 – set the scene for us around this trade.

 

Dan:   “I had a dinner with a guy named Marc Tarpenning, who’s one of the founders of Tesla.  He is a lovely guy and spent part of the dinner telling me how he is building an electric car and battery company.  I’m like, So sweet, I’m so glad you’re trying to do that.  But at the same time I’m like, That’ll never work.

 

“The funny thing is I was rocking a Gen Two Prius as my daily driver for seven years then.  When he said he was going to build an electric car, I was like, Hey, I hope that happens for the world, but I really didn’t think it would happen.

 

They had just gone public, trading at about a billion market cap.  I kind of kept in touch with Marc and was excited about his project.  But again, wasn’t really thinking about it.

 

Then they announced the Model S, and I was like, Oh my god, it’s gorgeous.  The specs are off the chart, how it performs – so I ordered one of the first ones and I’m not even sure if I bought the stock until after I got the car.  But as soon as I got the car, I was like, This thing is just going to totally destroy everybody.

 

Q:  When did you buy the stock?

 

Dan:  When it was at about $1 billion market cap, in late 2012 or early 2013.  We put a large position on because I thought it was going to change the world.  It’s still so disruptive and it’s so powerful.”

 

 

Good Trade #4 :: Bitcoin (2013)

 

Q:  You get out of that trade, you go into Bitcoin in 2013. . .

 

Dan:  I actually got introduced to Bitcoin in 2011 by my brotherhe introduced me to Bitcoin at a time when they were giving them away for free.  It’s hard to remember that, but the chief scientist at Bitcoin, Gavin Andresen, had a thing called The Bitcoin Faucet.  All you had to do is log in and you get free Bitcoins.  I read about Bitcoin and hoped it would happen (as I kind of have a libertarian streak), but I didn’t actually do anything about it until 2013.

 

Q:  So what drew you into that trade?

 

Dan:  I’m always looking at trades where you have very asymmetric risk rewardRussian privatization, Argentina farmland, Middle East equities.  There’s ways you could lose some money, but if you make money it’s way more upside than downside.  That’s the conclusion I came to on Bitcoin in 2013.  I still think that it’s going to change the world – it might not do it overnight – and I know it’s in a savage bear market right now, but when you look at it over any multi-year time period, it always goes up.  I think in 10 years it’s going to have completely changed the world.  The trade just fit.  It really did actually fit the mold of these things like Tesla Motors, which could have gone down $1 billion in market cap, but it could go up $300 billion in market cap.  It fit the mold of one of those things where obviously there’s some risk but huge amount of potential upside.

 

Q:  You came from the traditional macro world.  There are a lot of people who are anti-crypto, think it’s a Ponzi.  Is it difficult to go against the grain of that sort of community that you were part of?

 

Dan:  There are such strong passions – but if we’re all being honest with ourselves the biggest Ponzi scheme in the history of the world is the Fed’s manipulation of the mortgage and bond market.  The Fed drove the value of mortgages to $15 trillion above their 50 year historical average rate.  Unfortunately, we are all suffering from the fallout of that bubble.  While there might have been a little bit of excess in Bitcoin here and there, the thing that’s driving the world is this massive policy failure at the Fed.  Unfortunately, I don’t think they understand how big the problem is yet.   

 

I think crypto can ultimately be insulated from that.  Obviously, it hasn’t been in the first four or five months of this, but in my mind, there’s a world a year or two from now where rates are above 5%, both Fed funds.  In 10 years, stocks might be down a ton.  Anything else that’s definitely connected to interest rates real estate might be down.  The Fed created a massive bubble in housing, the Case-Shiller Index is up 37% since they started printing money.  They have to make that go negative to stop all this inflation.

 

“I can see a world where all that stuff still struggles, but crypto is doing really well.  I’m not saying it has to happen immediately, but my main construct is even with all the crazy destruction happening because of the Fed’s policies, you could see a world where things like gold, soft commodities, or digital gold (Bitcoin) could trade on their own merits.

 

“I think you’re going to see big institutions when they’re looking to allocate capital say, ‘Hey, I don’t want to invest in bonds, I don’t think I can put more in stocks.  Hey, what about blockchain?’.  So blockchain will ultimately see a lot of inflows.

 

Check out the full interview here.

 

 

PRINCETON REUNIONS TALK HIGHLIGHTS

 

Q:  “Can you speak to the recent crypto volatility?”

 

Dan:  “Cryptocurrency is something that I think is incredibly important and it’s going to change the lives of billions of people, but anything that disruptive has detractors.  It goes in hype cycles – has these really big ups, these really big downs. . .

 

“The Fed has created an enormous bubble in bonds that’s created an enormous amount of inflation.  Blockchain could be the asset that’s safe from all of the repercussions of what’s coming as this bond bubble is popped.  With the Fed printing $9 trillion over the last couple of years, it’s essentially crunched the value of paper money.

 

“Even in the United States, where people are used to a pretty stable currency, are now flocking to cryptocurrencies because they will typically be more stable.  They do have a lot of ups and downs, but over the last 11 years, they have gone up 2.5x on average, annually, over that period of time.  The emerging world totally gets cryptocurrency.  I even think the developed world, after the Fed printing ,will start getting into it.”

 

Q:  “What will be the catalyst for Bitcoin to de-couple with risk assets?”

 

Dan:  “Bitcoin’s been around for 13 years.  There have been six big S&P downdrafts during that time.  Its correlation has spiked up in the past only for 71 days.  It’s been doing it for four months now.  Admittedly, it’s doing it longer than it has in the past – but I think those are just temporary.  In a world where inflation is rising and interest rates are rising, that has to make bonds go down mathematically.  That’s just a certainty.  But I think it makes stocks go down too.  The Fed has to keep raising rates until the bubble in housing they created gets stopped.  Other asset classes will suffer over the next couple of years, whereas blockchain doesn’t have to.  It’s not really connected to interest rates.  I can see a world that they do decouple and blockchain does well, even when other asset classes struggle.”

 

— Dan Morehead ’87 & Carolyn Wilkins (Former Senior Deputy Governor of the Bank of Canada), “The Future of Digital Currency and Blockchain”, Princeton University – Griswold Center for Economic Policy Studies, May 20, 2022

 

Check out the full recording here.

 

 

WASH SALE RULE

 

One last kinda macabre note to end on:

 

There is one small silver lining to bear markets in crypto.  In equities and other securities there is a rule which prohibits “wash sales”.  A wash sale occurs when you sell securities at a loss and within 30 days buy them back.  The Internal Revenue Service rules prohibit you from deducting losses related to wash sales.

 

For example, you’re not allowed to sell IBM shares to lock in a tax loss and immediately buy them back at basically the same price.  You have to wait 30 days and take the risk they rally.

 

Currently, the wash sale rule only applies to stock and securities.  It does not appear that this rule extends to cryptocurrencies.

 

If you hold crypto positions which have mark-to-market losses, you can sell and immediately buy them back to take a tax loss – at the high ordinary income rate. 

 

This would also lower your tax basis.  If the market rallies back – and you hold the new position for over a year – you will get long-term capital gains tax treatment on the gains.

 

[As with all free tax advice some guy gives you, please check this with your tax advisor if it’s a meaningful number to you.]

 

 

WEB3 CAN’T COME TOO SOON

 

“Google said it would begin automatically deleting visits to abortion clinics from its users’ location history, a move that comes amid growing calls for tech companies to ramp up privacy controls after last week’s Supreme Court decision to eliminate the constitutional right to an abortion.”

 

— Wall Street Journal, July 2, 2022

 

Hmmmmm…doesn’t anybody care that they still track 99.99% of people’s lives?  I can’t wait for Web3 to get us out from under the control of the data monopolists.

 

 

Good luck out there,

 

@Dan_Pantera

 

“Put the alternative back in Alts”


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 via this link.

 

Thematic Call :: DeFi Worked Great

A discussion of how and why DeFi protocols worked better than centralized crypto finance firms during the deleveraging cycle w/  Rebecca Rettig from Aave (General Counsel) and Rick Pardoe from Liquity (Co-Founder and Lead Engineer)

Tuesday, July 19, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time

Please register in advance via this link:

https://panteracapital.com/future-conference-calls/

 

Pantera Liquid Token Fund Investor Call

Tuesday, July 26, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time

Open only to Limited Partners of the fund.

 

Pantera Early-Stage Token Fund Ltd Investor Call

Tuesday, August 2, 2022 7:00am PDT / 16:00 CEST / 10:00am China Standard Time

Open only to Limited Partners of the fund.

 

Pantera Early-Stage Token Fund Investor Call

Tuesday, August 2, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time

Open only to Limited Partners of the fund.

 

Pantera Venture Fund II Investor Call

Tuesday, August 9, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time

Open only to Limited Partners of the fund.

 

Investing in Blockchain Conference Call

Tuesday, August 16, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time

Please register in advance via this link:

https://panteracapital.com/future-conference-calls/

 

Pantera Select Fund Launch Call

A detailed dive into our new growth-stage fund.

Tuesday, August 23, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time

Please register in advance via this link:

https://panteracapital.com/future-conference-calls/

 

Recordings of past conference calls are available on this page.


PORTFOLIO COMPANY UPDATES

 

Orderly Network Raises $20 Million Series A to Improve Trading on NEAR

Orderly is a permissionless, decentralized exchange protocol and ecosystem built on NEAR Protocol.  Their platform offers lower fees and minimal slippage on spot and futures markets and allows decentralized applications such as Woo Dex to build on the network.  Orderly plans to use the raise to expand their team, develop new products, and establish new partnerships.  Pantera participated in the $20 million Series A round alongside Alameda Research, Dragonfly, Sequoia, and more.

 

Pintu Raises $113 Million Series B to Expand Offerings in Indonesia

Pintu is a leading cryptocurrency platform in Indonesia that is designed for first-time crypto users.  The platform supports over 50 cryptocurrencies and has grown users to 4 million, up 7x since May 2021.  Pintu will scale their current offerings like Pintu Academy, support new tokens, and grow their team.  Pantera participated in the $113 million Series B round alongside Intudo Ventures, Lightspeed, and Northstar Group.  Pantera previously participated in Pintu’s $6 million Series A round in May 2021 and their $35 million Series A+ round in August 2021.

 

Ancient8 Raises $6 Million Private Round to Build GameFi Infrastructure

Ancient8 is the largest Vietnam-based gaming guild and partners with play-to-earn games to educate local communities about the opportunities in blockchain gaming.  They are developing products such as GameFi Identity to better connect the gaming community with blockchain games.  Pantera participated in their $6 million private round led by Makers Fund and C² Ventures.  Pantera previously co-led their $4 million seed round in January 2022.


FURTHER READING

 

Some good material to start with on the development of blockchain technology and cryptocurrencies as speculative instruments:

  •  

And some additional information on DeFi, Web3, NFTs, blockchain infrastructure, and more:

 

Additional information on blockchain regulation:


PANTERA OPEN POSITIONS  

 

Pantera is actively hiring for the following roles:

 

  • Chief Compliance Officer

  • Cloud Engineer

  • Head of Portfolio Talent

  • IT Desktop Support Technician

  • Content Writing Associate

  • Associate, Accounting

  • Execution Trader

  • Associate, Capital Formation / Office of the CEO

  • Platform Engineer

  • Associate, Investor Relations

  • Co-Head, Capital Formation

  • Investment Associate/Analyst

  • Trading & Middle Office Python Developer

  • Director, Capital Formation

  • Associate, Capital Formation

  • Executive Assistant/Office Manager

  • Platform Associate/Analyst

  • Executive/Personal Assistant to the CEO

  • Security + Cryptoeconomics Auditor

  • Associate, Finance & Operations

  • Tax Manager

  • Senior Associate, Accounting

  •  

If you have a passion for blockchain and want to work in New York City, San Francisco, Menlo Park, San Juan, or London, please follow this link to apply.  Some positions can be done remotely.