There’s an old saying on Wall St. “Don’t fight the Fed.”
I’m inclined to go with that. Our core post-pandemic macro theme has been:
The unlimited printing of money will push up the price of things whose quantity cannot be eased.
Jay Powell, the Chair of the Federal Reserve, recently announced a major policy shift aimed at supporting the labor market and broader economy — by explicitly creating inflation.
“In conducting monetary policy, we will remain highly focused on fostering as strong a labor market as possible for the benefit of all Americans. And, we will steadfastly seek to achieve a two percent inflation rate over time.”
It’s a brave new world — when central bankers are promising to increase inflation. I’m old enough to remember when they used to fight inflation.
Over the decades, not all central banks have been successful in fighting inflation. It’s complicated — takes commitment. However, every central bank that has tried to create it has succeeded. Venezuela is the current title holder, followed by Zimbabwe. What these countries have shown is that when you increase the quantity of paper money, it takes more pieces of paper to buy things of real value.
The Fed promised to keep printing money until they have more than doubled inflation.
Chair Powell went on to say:
“Following periods when inflation has been running persistently below two percent, appropriate monetary policy will likely aim to achieve inflation moderately above two percent for some time.”
Wow — that’s wild. Promising to keep pushing inflation well above the two percent target until they’ve paid back all the previous time that inflation was below the target.
The U.S. Consumer Price Index is currently up 1.0% over July 2019. With unprecedented global slack, inflation is likely to be below the Fed’s target for years.
Forecasts for inflation are at or well below two percent in every country for the entire forecast period in this graphic:
That means the Fed will continue printing money until inflation has run well above two percent for many years.
Fed Chair Powell’s full speech can be found here. The FOMC simultaneously released an updated Statement on Longer-Run Goals and Monetary Policy Strategy which is here.
PAPER MONEY IMPACT ON S&P 500
With so much additional paper money sloshing around, it will take more pieces of paper to buy the same amount of things.
Pundits puzzle at the cause of rising stock prices — even setting all-time record prices. The world is clearly much worse off than it was at the start of the year. In fact, earnings are estimated to be down almost 30%. (S&P “as reported” Earnings Per Share was $157.12 in 2019. Standard and Poor’s current forecast: “The bottom line for 2020 EPS is a -27.8% decline over 2019, with the 2020 P/E at 29.9x (based on the 6/30/20 closing price).”)
Prices — as quoted in fiat money — are not rising because stock fundamentals have improved. They are rising because a huge wave of money is being printed. It’s floating all boats.
PAPER MONEY IMPACT ON CRYPTOCURRENCY
Assets such as gold which have not been impaired by the pandemic are rising even faster. Gold is at a 5,000-year high. Or, said another way, paper money is at an all-time low.
However, the best performing assets are ones which have both fixed-supply and improved usage/fundamentals — like cryptocurrency. Cryptocurrency has out-performed most/all other asset classes this year.
MAJOR BITCOIN PRICE CYCLES
We strongly believe we are in the early stages of a large bull market fueled by both a powerful global macro tide and growing fundamentals in the underlying technology.
In my scant eight years in bitcoin I’ve lived through three major price cycles already. This graphic makes it less scary by graphing it logarithmically.
Even with that, it’s still a massive hype cycle roller coaster. My intuition from trading waves for 35 years is we’re in for another one.
Bitcoin has gone through five full market cycles since price history really began in 2010. The median bull market lasted 194 days. The median bear market lasted 251 days and experienced a drawdown of 83%.
UPDATE ON CRYPTO MARKET AND PANTERA STRATEGIES, BY JOEY KRUG
We want to provide an update on the cryptocurrency markets and Pantera liquid strategies this year. Year to date, Pantera Bitcoin Fund is up +61% with Pantera Digital Asset Fund and Pantera ICO Funds out-performing substantially.
This is due to a few factors. One is that the market overall is up this year and small to mid-cap cryptocurrencies tend to out-perform in upswings. From a thematic standpoint, we’ve been positioning the funds towards decentralized finance (DeFi) in preparation for it to be the main driver of value in adoption for the space, in addition to bitcoin’s digital gold thesis. We started accumulating these types of assets some years back, and it’s exciting to see the DeFi space finally gaining momentum.
The amount of value locked up in these DeFi protocols is now around $10bn and increasing rapidly — two years ago it was only a couple hundred million. The market is quickly changing. In addition to there being fundamental usage for things like peer-to-peer lending and trading, there’re also cash flows underlying many of the popular projects in this cycle. Projects are going to market with live products that actually work (with cash flows or potential for cash flows) and with generally much higher quality teams than in 2017. There’s finally a resurgence in the ICO market as well, but this time valuations aren’t nearly as frothy (even projects that aren’t liquid yet are often going out to market with valuations at 20–30x implied P/E multiples, which is wild given that they have growth rates in the hundreds of percent a year).
Digital Asset Fund Position Updates:
A couple examples of notable investments we’ve made recently include YFI and LUNA. YFI is up at a significant multiple since we invested and is essentially an on chain hedge fund with single asset strategies. Developers can write their own strategies, deploy them, and then charge a fee, part of which goes to YFI token holders. The platform has grown extremely quickly to now near $1bn under management across all the different aspects of the Yearn ecosystem. LUNA is another position we’ve added and it is the token associated with Terra, which is the leading stablecoin and crypto payments company in Korea. They’re doing about $4bn annualized payment volume and growing very rapidly.
ICO Funds Position Updates:
In the ICO Funds, a few of our flagship investments from 2017 and 2018 are now live and trading (or about to go live). Polkadot is one of those positions and currently sits as the fifth largest cryptocurrency by market cap. The project has made a ton of progress cementing itself as one of the leading Ethereum alternatives (alongside NEAR). Flexa has been a huge contributor to fund performance and has just signed a bunch of merchant partnerships and is now focusing on distribution on the user side. Gemini just announced their intent to list Flexa (AMP) soon as well. Filecoin will be tradable in a few weeks and futures are trading well above our cost basis.
We’ve made four recent investments in new ICOs, two of which are non-public. We discuss the two public deals, Injective and Acala, further below.
DECENTRALIZED EXCHANGE “DEX” VOLUME GROWTH, BY PAUL VERADITTAKIT
Since 2013, Pantera has been one of the most active investors in cryptocurrency exchanges, whether global or local. Pantera was also one of the earliest investors in decentralized exchanges such as 0x, Kyber, and OmiseGO. Decentralized exchanges provide differentiation from centralized exchanges in that there is no KYC (know-your-customer) requirement, they are non-custodial, and run on smart contracts. They are typically more nimble in listing assets. The latter is very important as we discuss why decentralized exchanges are gaining so much traction right now.
As discussed many times, we believe we are in the early stages of a bull market. The 2016–2017 bull market erupted when there was a democratization of fundraising and liquidity of tokens on centralized exchanges like Bittrex, Binance, Huobi, and OKCoin. These centralized exchanges have been gatekeepers since and have been slower to list tokens due to regulatory compliance, economics, etc. With new decentralized exchanges like Uniswap, Curve, and Balancer, anyone can list any token on these exchanges and open up the possibility for liquidity. Those that provide liquidity to these pools earn trading fees. In addition, these new decentralized exchanges use automated market making which makes it possible to list and exchange digital assets without the help of an order-book. A formulaic approach is used to determine the price of an asset and it helps spur liquidity for the long-tail of tokens.
Volumes on decentralized exchanges have been soaring the past couple of months. In August, there was over $11 billion in DEX trading volume. One large factor in driving up volume is liquidity mining, which is incentivizing users to contribute liquidity to pools. One of our portfolio companies, Ampleforth, got listed on Uniswap, and after launching, their geyser program (rewards for providing liquidity in a Uniswap pool) became and is still a top liquidity pool in Uniswap, currently $13mm. While the protocol wasn’t the first to deploy liquidity incentives on Uniswap, one unique mechanism is to reward with a 1x multiplier in the beginning to 3x after 8 weeks. With decentralized exchanges providing a channel for projects to list their tokens and to then use the ecosystem reserves to incentivize liquidity, it increases liquidity, trading, and potential yield of a myriad of new tokens. This helps to bring more awareness, users, and money into the ecosystem.
Pantera recently invested into Injective Protocol and they will be launching in the next few months. We are currently evaluating more DeFi infrastructure and decentralized exchange projects.
THE MONEY MOVEMENT :: “THE BITCOIN THESIS”
Dan was recently a guest on the series The Money Movement hosted by Circle’s CEO Jeremy Allaire. The discussion focused on the evolution of the bitcoin thesis, bitcoin in the current global macro environment, and how broader adoption may play out over the coming years.
Pantera recently hosted Erik Voorhees, CEO of ShapeShift, and Blockfolio CEO Ed Moncada for a discussion of crypto markets, what is taking off within the industry, and where value may accrue in the next bull cycle.
We want to share a couple of interesting perspectives. You can watch the video here.
Q: What do you think is driving the markets right now?
Ed: “I’m seeing a lot of interest and a lot of excitement in the DeFi space. And we’ve seen this kind of evolution. It’s like originally it was cryptocurrencies and then different variations of cryptocurrencies. And then it was moving into layer one protocol, smart contract platforms.”
Erik: “I don’t think anything necessarily is driving it other than just gradual adoption. I think that this technology is slowly taking over the global financial system. This is something that plays out over 10 to 30 years and we’re 10 years into it. And as that occurs, because these are scarce assets, the price of them is going to rise.”
Q: What is an interesting theme you’ve seen over the past few months in the crypto space?
Erik: “Stablecoins has to be the theme that I would highlight. They are essentially cryptocurrencies that are stable to something like Fiat. So most of these are stable to a dollar, so they’re worth roughly a dollar, give or take a penny every day. Some of these are algorithmically stable like this one called Dai, which is something I never thought would’ve worked, but has been working for a few years now.”
Q: What’s your outlook on the crypto markets in the next upcoming years? Is it going to be digital gold? Is it going to be DeFi? Where is most value going to accrue?
Ed: “I think DeFi is going to get bigger and bigger and bigger. Actually, one of the things I’m pretty bullish on, and that I think we’re starting to get close with, is tokenizing equity. I think people like Tokensoft are sort of making a lot of advancements there.”
Erik: “DeFi is going to be a massive thing, bitcoin as money is a massive thing. I think the most prudent way to be exposed to this whole phenomenon is simply to own some bitcoin and some of ethereum.”
AMPLEFORTH EXPLAINED BY FOUNDER, EVAN KUO
“Ampleforth is an adaptive base-money, and what that means is that it’s a pure monetary asset. Like Bitcoin, it’s completely uncollateralized so it’s a cryptocurrency, but unlike Bitcoin, it has an automatic supply policy that responds to price exchange rate. This means, when demand is greater than supply, the protocol automatically increases the number of AMPLs that are held in user wallets, and when demand is less than supply, the protocol automatically decreases the number of AMPLs held in all the balances. The enabling technology behind this is just a series of smart contracts that allows us to increase or decrease the quantity of tokens in user wallets, without any transfer between peers, and without a bank in between.
“And this is just part of the magic of smart contract platforms, that we can modify the number of tokens that people have proportionally and automatically, by adjusting this global scalar variable. Imagine you’re adjusting a coefficient of expansion, and it’s automatically reflected across all wallets at once.
“And the other important thing to note about these supply adjustments is, they’re universally applied and proportional. That makes the protocol completely non-dilutive. If you were to own 1% of the AMPL network at, say, a $10 million market cap, you would also own 1% of the AMPL network at a $100 million market cap. You would just probably have something like 10 times the number of AMPLs.
“Because these supply adjustments happen automatically, once every day, you have to look at the quantity of tokens that are changing, in addition to the price. And looking at this more inductively, we came to a conclusion that, the AMPL token would have a different movement pattern, and therefore had the potential to decouple from assets like ETH and BTC and other cryptocurrencies, which are really highly correlated in today’s market.
“And this led us to believe that, if it were the case that AMPL could be uncorrelated, it could add value in at least two different domains. One, it could reduce risk and increase return in baskets, so right now it’s difficult for us to construct baskets of cryptocurrencies that actually diversify risk, but if AMPL were to decouple, then we would enable that feature. And for that reason, it could also be a useful building block in broader decentralized finance applications, just as precious metals were building blocks in the historical financial ecosystem.
“And I think what’s really exciting to me is that there’s this crazy community that has rallied around AMPL. It’s a combination of so many things, the novelty of the supply policy, but also the predictability of it. The fact that it happens at the same time, every single day, resulted in this crazy cultural phenomena of meme generation on Telegram. And it’s just been really exciting for us . . . .”
PANTERA LEADS $2.6M SEED ROUND IN INJECTIVE
Injective is a decentralized exchange protocol that unlocks the full potential of open finance (DeFi) by supporting margin trading, derivatives, and futures. You can think of it like a decentralized, non-custodial version of BitMEX. Injective is built on top of Cosmos and we believe it is a strong contender for expanding decentralized finance beyond the Ethereum platform.
The team is preparing for a mainnet launch and new token in the latter half of 2020.
You can read more about the project on their website here.
PANTERA LEADS $7M SAFT IN ACALA
Acala is a decentralized stablecoin platform powering cross-blockchain open finance (DeFi) applications. The Acala Network is built on Polkadot, a scalability and blockchain interoperability platform that recently went live.
Acala’s main use case will be creating a decentralized stablecoin, aUSD, and there will also be a governance token called ACA. Acala will share similar mechanics to creating a stablecoin like MakerDAO — users deposit assets and borrow newly minted stablecoins against that collateral.
You can read more about the project on their website here.
OUTBREAK: AMERICANS ARE AFRAID OF TOUCHING CASH
I’m old enough to remember a time when some people thought bitcoin was dirty. Now it’s paper and metal money nobody wants to touch!
According to a new survey, 54% of Americans are concerned about touching coins or bills due to COVID, while 60% plan to use so-called touchless payments in the future.
There’s a hysterical shortage of coins happening. Since nobody wants to touch paper and metal money, businesses who need it can’t find it:
“…the U.S. Mint has been operating at full production capacity, minting almost 1.6 billion coins in June and is on track to mint 1.65 billion coins per month for the remainder of the year.”
The United States literally cannot mint money any faster.
THEMATIC CALL: BREAKING INSTITUTIONAL BARRIERS TO ADOPTION
We invite you to join us on our upcoming conference call, Breaking Institutional Barriers to Adoption, on September 15th at 9:00am PDT / 12:00pm EDT.
ErisX CEO Tom Chippas and John Conneely, Head of Custody Business Development at Bakkt, will discuss the common concerns and challenges that institutional investors face when assessing the case for digital assets.
You may register via this link:
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 firstname.lastname@example.org.
BONUS STOCK MARKET GRAPHICS
Wild how concentrated the U.S. stock market is. They should rename it the S&P 5.