THE NEXT MEGA-TRADE HAS BEGUN
Walter Bagehot, the legendary journalist and economist, set forth the following dictum more than a century ago:
“[T]o avert panic, central banks should lend early and freely (i.e. without limit), to solvent firms, against good collateral, and at high rates.”
I’m not going to Monday-morning quarterback the Fed’s decisions in an economic panic two years ago. But, what they are doing today is so clearly a mistake. They are still actively inflating a bubble in bonds, stocks, real estate, etc. that it will take a massive policy U-turn to stop it. The net result of this binge-purge is going to be a mess in the normal asset markets. Later I will make the argument that the best place to avoid the fallout of this policy failure is in blockchain assets.
Critically, the Fed missed the bit about “at high rates”. Their manipulation of Treasuries and mortgage bonds – which still seems to be driven on in some kind of trance disconnected from reality – has driven rates to historic lows.
There has never been a time in history with YoY inflation at 7.5% and Fed funds at ZERO. (And, the 7.5% would be 8.6% excluding “owner’s equivalent rent”, which is notoriously slow to update.) That policy mix is clearly wrong. There’s a ton of handwringing over whether to raise rates five weeks from now. They should have raised rates five months ago – or today. When I started as a bond trader, the Fed acted in real time. There was none of this “forward guidance” Kabuki theater.
Real rates – the interest rate one gets after inflation—are at negative 5.52%, a 50-year low. No economically-rational investor would buy something guaranteed to lose that much money every year.
The Fed’s manipulation of the U.S. Treasury and mortgage bond market is so extreme that is it now $15 TRILLION overvalued (relative to the 50-year average real rate).
If you own any bonds and have yet to sell them to the Fed, you might want to do so quickly. When the Fed’s bond buying operation is finally shut down, bond prices are going to experience a Wile E. Coyote moment.
We forecast the bursting of the bubble in our December 7th Blockchain Letter. Since then, 10-year notes are down 5 points—and rates up 70 basis points. The next mega-trade has begun.
Market participants are still not grasping the scale of this move. 10-year interest rates are going to triple — from 1.34% (when we predicted the burst) to something like 4-5%.
 Walter Bagehot (1897), Lombard Street: A Description of the Money Market (New York: Charles Scribner’s Sons).
IMPACT ON CRYPTO :: HIGHLIGHTS FROM RECENT CONFERENCE CALLS
This is one of those times in trading where a trader (me) totally called a massive trade – the bursting of the bond bubble, the Fed’s massive pivot—but missed/didn’t forecast what is now thought to be an obvious side effect—crypto getting killed.
So, either I was wrong about it not being a big deal for blockchain assets or the markets are wrong.
Some recent thoughts from our call with investors on February 1st:
Dan Morehead: “My first thought is about the markets, which obviously had a massive move since we last spoke. It’s one of those instances in trading where you have a situation where a manager correctly predicts some huge disruption or change in the markets—like we did predicting in November and December that the bubble in U.S. bonds would pop and the Fed would have to raise rates a lot more than the markets had anticipated – but sometimes you have a concurrent move in something else that everyone at the time says is driven by the first move that was predicted. And in this case, we did not predict such a savage downturn in crypto.
“That puts the trader in the position of wondering whether they were wrong and that those things are connected, or that the market’s wrong and over time that will shake out.
“In this case, I have a very strong conviction that the markets are really getting this wrong, and that the rise in interest rates (which I think was pretty obvious that it was going to happen and will keep happening) is not really that bad for crypto. And relative to the other asset classes, is actually really great for blockchain prices.”
Joey Krug: “Our macro view here is that crypto definitely got hit by a lot of the news surrounding the interest rate hikes that the Fed is planning. But at this point, we think it’s mostly been priced in. As of today, the market’s pricing in about five rate hikes—and I think a lot of that is being overplayed in crypto. Ethereum went down to a low of about $2,200 or so, and if you look at the 10-year treasury, it peaked at about 1.9% and it’s kind of leveled off since then. Today it’s trending at about 1.8%. Now that things have gone through this really aggressive move, where late last year the 10 year was 1.35% and then went up to 1.9% quickly, I think that was sort of a wake-up call to the market.
“But if you look at crypto specifically, when the traditional macro markets go down, crypto tends to be correlated with them for a period of roughly 70 days, so a bit over two months, and then it begins to break its correlation. And so we think over the next number of weeks, crypto is basically going to decouple from traditional markets and begin to trade on its own again.
“There are a couple of reasons for that. One is that crypto is still a relatively small market and so things like the federal funds rate being at 1.25% versus 0% doesn’t make a huge, huge difference for something that’s growing four to five times year over year, especially if you look at stuff like DeFi, where it’s already trading at fairly cheap multiples. There are a lot of DeFi assets that trade from P/E multiples anywhere from 10 to 40. They’re not crazy high-valued; tech stocks are trading at multiples of 400 to 500x.
“Our view is it’s going to decouple over the next number of weeks and crypto will sort of trade independently again. It’s my personal view that $2,200 ETH was likely the bottom.”
Dan Morehead: “I totally agree with Joey that the correlation between the S&P and crypto is a short-lived thing. In the past six downdrafts of the S&P since bitcoin was trading in 2010, correlations spiked over a couple of months (71 days). I think that will happen again here and then they’ll decouple.
“Once people do have a little bit of time to think this through, they’re going to realize that if you look at all the different asset classes, blockchain is the best relative asset class in a rising rate environment. Most asset classes do have a direct algebraic impact from rising rates. Bonds, obviously, when rates go up, prices go down. I think bonds are going to get killed. Most other things like equities have cash flows that need to be discounted, which implies lower prices if yields are higher. That’s also true of real estate and most other types of assets.
“Whereas blockchain isn’t a cashflow-oriented thing. It’s like gold. It can behave in a very different way from interest-rate-oriented products. I think when all’s said and done, investors will be given a choice: they have to invest in something, and if rates are rising, blockchain is going to be the most relatively attractive.”
“We want to take a quick review of where we’re at in the market. This graphic [image below], which we’ve used many times over the decade, is very important. It shows where bitcoin, as a proxy for our industry, is in relation to its 11-year log trend. It’s now trading 60% below trend.”
Bitcoin has only spent 12.7% of its history as far under trend.
“That doesn’t guarantee it won’t go down next week. It doesn’t guarantee that it won’t go down a lot more next month, or whenever, but it just means the odds are really high that the markets are at an extreme and will bounce back relatively quickly. In the nine years we’ve been managing money in the blockchain space, I got to admit, there were times I was totally sweating it when the markets were down – this is not one of those times. I think the markets will be right back. I think it’s like weeks or a couple of months until we’re rallying very strongly. We are quite bullish on the market, and we think prices are at a relatively inexpensive place.
“We have a bit of an update from our investor letter. This, the graphic of the bond bubble, the gold line on the top is the market cap of the U.S. Treasury and mortgage bond market.
“You can see that about a year ago, the Fed completely pushed that up, really crazy. I think the Fed’s actions are a complete policy mistake and they are basically about to stop. The Fed is going to have to stop doing what they’re doing, and then there’s going to be this big air gap in bonds. So, if you have yet to sell your bonds to the Federal Reserve, you should do it. By next month, the last buyer (and only buyer) of bonds will be gone. And that will drive a lot of people to come into alternative asset classes like crypto.”
I think all the “it’s just a supply shock” dismissive notions that Fed Chair Powell and others have repeatedly said are very wrong. It’s not about a few container ships waiting outside Long Beach Harbor. The supply shock is labor. Three million Americans left the labor force. There are 11 million job openings and only 4 million unemployed people. The massive imbalance is in the supply of labor. Stimulus checks, homeschooling, early retirements. That’s why wage inflation is now so high. It will stay high for a long time.
CPI was changed in 1982 to “owners’ equivalent rent” (OER) – which is now 4.1% YoY. The real inflation people experience is much higher—S&P/Case Schiller reports 16.8% YoY. OER is 24.2% of CPI. If YoY OER were reported at 16.8%, YoY CPI would be 10.5%, 3.0 percentage points higher than the 7.5% in the headlines. Eventually the OER component of CPI will catch up with reality. This will make it very difficult for reported YoY CPI to fall very much over the next year or two. Fed funds are going to 4-5%.
I think our markets will decouple soon. Investors are going to think: bonds are going to get crushed as the Fed goes from the only buyer on Earth to seller. Rising rates will make equities and real estate less attractive. So, where does one invest when both stocks and bonds are falling? (Normally they are negatively correlated.) Blockchain is a very legit place to invest in that world.
UNINTENDED TAX SELLING INTO TAX DAY
Some of crypto selling pressure has been unintended tax positions. Imagine a trader actively buying and selling BTC, ETH, XRP, etc. Great year. Made a ton of money. Kept it all in the markets.
Come spring, their accountant tells them that every sale at a profit created a taxable gain with taxes due by April 15th. There were $1.4 trillion of cryptocurrency capital gains created last year. That could have caused a decent chunk of the recent sales.
Tax Day can be important to crypto prices. After the three previous big run-ups – 2013, 2017, and 2020 – and this one, 2021 – bitcoin peaked 35 days before Tax Day and then declined to a local trough as investors sold off assets to cover taxes accrued in 2020. That makes some sense. A lot of crypto traders are new to investing. You can imagine a person buying as much bitcoin as they can. Sometime later they decide to swap it for ether. And then their tax preparer tells them they owe 34% of the gains in taxes. Since they’re “all-in” on crypto, the only way to raise cash to pay their tax bill is to sell some crypto. Prices fall leading up to Tax Day.
Tax Day is April 18th this year. (It was in May last year.)
We’ve updated some bitcoin charts first shown in our June 2021 letter. They confirm our sense that the markets did not get overvalued and are, in fact, very cheap right now.
The year-on-year return never went literally off-the-chart like in past peaks. It’s down -11% year-on-year — during a period when the Fed printed $5 trillion in that period—seems cheap.
Bitcoin’s four-year-on-year return is at the lowest end of its historical range. Again, doesn’t look overvalued.
Joey Krug, Paul Veradittakit, and I think we’ve seen the most of this panic.
HUMAN NATURE IS PRO-CYCLICAL :: GO AGAINST THE URGE
[This section is a reprint from June 2021 Letter, un-updated, for those who didn’t see it then.]
Humans have an innate herd instinct. It’s what kept our ancestors alive—when those with the wild lone-wolf/contrarian tendencies got “Darwined” out.
- It’s human nature that we want to buy when the market is surging up—when the FOMO devil is whispering in our ear.
- When the markets are crashing – and our spouse/friends/boss are all WTF, we want to flee…we want the pain to stop.
We all do it.
I’m probably not going to win the Nobel Prize in Physiology or Medicine for this, but I could imagine that the traits we imprinted on the plains of the Serengeti might not be optimal for trading early-stage protocol tokens.
Pantera Bitcoin Fund is the oldest cryptocurrency fund, so it has the most complete data on investor behavior over three cycles. Here’s an update to a histogram we originally published in 2014, after the 2013 peak. We updated it in 2018, after the 2017 peak. While it’s too early to call 2021 a peak, a quick update is useful.
Going with the momentum is just human nature.
The following graphic plots the percentage of time that the price of bitcoin was in each price bucket. We’ve added a new perspective this time: the buckets are a logarithmic progression. Each bucket is a 33% rally from the lower bucket. They are labeled in terms of the percentage of the trend price bitcoin was trading.
The gray bars are the percentage of time bitcoin spent trading in each price range. The price distribution is fairly normally distributed. Most of the time at or near trend. A little bit of time super-cheap and a little bit way above trend.
The gold bars show the percentage of inflows in each valuation bucket. The inflows are very skewed – massively pro-cyclical. Very little inflows when bitcoin is extremely weak. Very few investors wanted to buy when bitcoin was trading at or below 37 cents on the trend dollar.
On the flipside, there have been very large inflows when it’s trading well above its trend. The majority of the money has come in well into the rallies.
For example, the market spent only 10% of the time above 500% of fair value, but 39% of inflows came in at or above that level.
This is not all bad; as we’ve stressed, bitcoin generally goes way up. It has averaged more than tripling annually for ten years. Anyone that has held bitcoin for 3.25 years has made money. Bitcoin has only printed one calendar year with a lower low. So, most of those investors are up big-time.
Resist the urge to close down positions. If you have the emotional and financial resources, go the other way.
For new investors, it’s best to buy when the market is below trend. Now is one of those times.
Updated: The market has been this “cheap” or cheaper relative to trend only 13% of the past eleven years.
BLOCKCHAIN FUND :: NEW ADDITIONAL CLOSING
Because we believe this is an especially compelling time to invest, we are adding an additional closing for the Blockchain Fund—March 1st. Investors coming in then will hopefully still be able to lock in these attractive valuations.
BLOCKCHAIN FUND :: FINAL CLOSING
Many investors view blockchain as an asset class and would prefer to have their managers allocate among the various asset buckets. This caused us to create Pantera Blockchain Fund, a new “all-in-one” wrapper for the entire spectrum of blockchain assets. We believe this new fund is the most efficient way to get exposure to blockchain as an asset class.
The Blockchain Fund is like the super-set of our four existing sector funds.
The most important feature is that we can invest against the large swings in value between tokens and venture. Tokens reset very quickly whereas venture is slow-moving.
As in previous Pantera venture funds, a Co-Investment Class is offered. Limited Partners investing $15mm or more will have the option to collectively co-invest at least 10% of each venture and early-stage token deal. If you don’t reach this threshold, and co-investments are of interest to you, we offer excess co-investment opportunities to all LPs of the fund. In the last twelve months, LPs without co-investment rights were offered the chance to invest in eight deals, such as Arbitrum and Bitso. They were able to invest $25mm collectively.
For investors who prefer venture, the new fund offers a Venture-Only Class. This class will have exposure only to the equity deals we do – and will not invest directly in tokens. It is essentially “Pantera Venture Fund IV”.
The summary of terms can be found here. Click the button below to begin the investment process online.
Also, please join us for Pantera Blockchain Fund Final Closing Call on March 8th at 9:00am PST. You can register here.
BLOCKCHAIN FUND INVESTMENT HIGHLIGHTS
Pantera Blockchain Fund has invested in 41 early-stage token projects and venture equity deals, with a record pipeline behind it.
Pantera led the $12mm debut-funding round for Aurora – a bridge for the NEAR blockchain designed to provide Ethereum compatibility and scalability for NEAR smart contracts. In addition to a handful of DeFi investments, we invested in Arbitrum which is a leading layer-2 scaling solution powering some of the largest decentralized applications in the ecosystem. The team has also been sourcing deals in two of the hottest sectors – blockchain gaming/metaverse and NFTs. Pantera has led or co-led 24 deals, with more to be announced in the coming months.
BLOCKCHAIN FUND VENTURE PIPELINE
We have record deal flow right now as blockchain is attracting some of the brightest minds and entrepreneurs from Big Tech and Wall St. Our investment team is sourcing projects that are making blockchain more accessible and usable for mass adoption. We’ll be announcing many of those deals throughout the coming months.
WHY WEB3 MATTERS THEMATIC CALL HIGHLIGHTS
Following the debate stirred up by Elon Musk and Jack Dorsey’s comments on the merits of Web3 applications late last year, we decided to host a thematic call on Why Web3 Matters, featuring Nader Al-Naji of the DeSo Foundation and Roneil Rumburg of Audius. Below are some highlights from the discussion:
Q: How would you define “Web3”?
Nader Al-Naji: “I personally think of Web3 as building something on a blockchain. If you’re using a blockchain, to me that’s Web3. And you might ask, ‘what’s the point? Why is a category of blockchain based apps so interesting or different?’ I think the biggest reason why Web3 is interesting is that when developers build on a blockchain, all the assets and content are actually shared across all of the developers, which allows them to build off of each other and innovate in a way that they couldn’t before in Web2. And that concept is called composability.
“For a concrete example, with the DeSo blockchain, apps that are built on it are actually all sharing the same pool of content. And that means interesting things happen. Like when you make a post in one app, it actually shows up in all the other apps. If you’ve built a following in one app, and then you want to move to a different app, all your followers are actually accessible there on that new app as well. That concept of sharing data across all apps, as I mentioned, is called composability, and I think it’s the key that distinguishes Web2 from Web3 apps.”
Q: Recently on Twitter, Jack Dorsey and Elon Musk publicly questioned the reality and vision of Web3. When tweeting about it, Elon stated: “[it] seems more marketing buzzword than reality right now”. Is he right?
Nader Al-Naji: “I think the people who write off Web3 probably don’t understand the power of composability – the power of the assets and the content being shared and truly owned by their users. I think that when you have composability, there’s an inevitability of the platforms that fully support it (the layer-1s and things like that) because a single killer app that’s built on them results in all these users and data being shared, and then more apps building, and creating a virtuous cycle. We saw it with Ethereum and I think when that happens, it’ll just be impossible to ignore
Q: Jack Dorsey has been critical of Web3 ownership by stating: “You don’t own ‘Web3′” and that “it’s ultimately a centralized entity with a different label.” Do you agree?
Roneil Rumburg: “I both agree and disagree. I think where I agree is that most networks today in crypto are pretty nascent. Typically that means that the distribution of token ownership among the broader community is not super dispersed. But when you think about how this compares to existing Web2 products, these companies actively having ownership available to users so young in their life cycle is a novel thing. But more so than that, these products are actually designed in such a way that they continuously distribute ownership in themselves to the very users that are making them valuable.
“The Web2 life cycle for a typical company is: sell equity to investors, spend that money on marketing and customer acquisition to bring in users, who you can farm data from and sell to advertisers. And the way that growth flywheel keeps moving is basically around a separation between owners of capital and the people who are actually creating the valuable asset on the network, which is data.
“You can remove a few layers there. And I think that’s what these networks are doing by incentivizing users to create the valuable resource, which is data, through distributing ownership to them to bootstrap a network effect in the early days – that’s a very powerful incentive mechanism. Five to ten years down the road, if you project out the expected inflation rates and distribution schedules of most of these networks, they do not at all look centrally owned or centrally controlled….
“So I think this [Jack’s] criticism is valid today, but it misses the intention. I don’t think anyone was saying that these things have ideal distributions of ownership. But I certainly think these products, assuming they’re two, three, four, five years old, have distributions of ownership that are far more heavily skewed to their users than products like Twitter, which were owned by six or seven investors at that stage, and then maybe a handful of early employees.”
METAVERSE AND PLAY-TO-EARN BY PAUL VERADITTAKIT
Play-to-earn: Play-to-earn, a type of blockchain-based gaming where players earn money based on their in-game activities, has certainly been one of the most significant industry themes of the year. Axie Infinity, at its peak, generated over $15M in revenue per day, illustrating the power of play-to-earn gaming experiences. Many other games, from Star Atlas to Genopets, have since been announced, emphasizing that this trend of vibrant in-game economies is here to stay.
To maximize performance—and earnings—in many of these play-to-earn games, players sometimes are required to make an initial asset investment to commence their play-to-earn journey. As an example, in the Axie Infinity model users must own a team of three “Axies” to begin battling, which can cost hundreds of dollars. This problem motivated the creation of gaming guilds. Guilds lend out in-game assets—such as those Axies—to their network of “scholars,” allowing them to play the game and taking a proportion of their earnings in return. Many of the largest guilds, such as Yield Guild Games or Merit Circle, have thousands of scholars and are both valued in the billions.
Metaverse: “NFT” may have been Collins Dictionary’s word of the year, but another concept from the technology sector made its way into the mainstream consciousness in 2021: the “metaverse.”
Everyone’s talking about it. Partially driven by macro factors such as COVID’s digitization of our lives—and likely tipped over the edge by Facebook’s recent rebrand to Meta—the topic is top-of-mind, from op-eds in the New York Times to casual dinner table conversations.
It’s a topic that’s been covered at length elsewhere; I’ve even touched on it in several of my recent pieces. But, at the risk of sounding like a broken record, I think the subject is still worth a deeper dive.
What even is the metaverse?
Defining “the metaverse” is an impossible task from the start.
For one, it’s so early that it’s hard to predict what the metaverse will morph into and eventually mean to us, similar to how predicting Snapchat immediately after the release of the iPhone would have been miraculous.
To add to the mess, there are so many semantic battles. Some people think “metaverses” (plural) is more appropriate since there will be multiple different virtual experiences that will be accessed by various interfaces. Some don’t like to use the term at all because of much of a buzzword it has become—the “metaverse” has come to encompass almost anything in the virtual world. Maybe “metaverse” itself will eventually be retired for another term, who knows!
For now, it’s useful to at least try to arrive at a precise definition for the concept. The best one I’ve been able to find comes from Matthew Ball, an investor whose write-ups on the metaverse are must-reads. While he acknowledges that a perfect description is impossible, he defines the metaverse as:
“A massively scaled and interoperable network of real-time rendered 3D virtual worlds which can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, entitlements, objects, communications, and payments.”
There’s a lot to unpack there, but some of the elements that stick out are: it’s 3D, open to near-infinite numbers of people, and has some element of continuity, similar to real life.
For some, this may bring up images of Second Life, a popular massively multiplayer online role-playing game (MMORPG) from the early 2000s. While this analogy has some merit, it’s a visualization of what a single type of metaverse could look like. In reality, the design space for metaverse-builders will be wide and, ultimately, will be driven by us, the users.
Who, then, is building the metaverse? So far, they’ve fallen into two camps: non-crypto and crypto metaverses. And, until recently, they’ve been building more or less in parallel to one another.
Non-crypto: Big Tech’s metaverse
Due to the metaverse’s longstanding association with virtual reality, what we would consider “the metaverse” has been in development for several years by a number of VR companies. VRChat and AltspaceVR, for example, have been two of the most prominent platforms for working and socializing in virtual reality. Particularly with COVID, the virtual events use case found early traction.
This year, two Big Tech companies—Facebook (now Meta) and Microsoft—made big bets on the future of the metaverse, incorporating it directly into their immediate roadmap.
Facebook, of course, rebranded to Meta late last year, unveiling their own Horizon Workrooms product for VR-based teamwork. They seem to have bigger ambitions though, not only from a financial standpoint (~$10B per year for miscellaneous metaverse-related R&D) but also in scope. Zuckerberg, at least from what he’s saying publicly, seems to “get” why interoperability and openness matter and, since he views this as a new era of the company, claims to be building in that direction.
We’ll see what Meta ends up doing. At the end of the day, they remain deeply embedded in the profit-maximizing, zero-sum competition cycle of Web2 technology companies, so I don’t expect them to build the metaverse that we hope for, necessarily. But I also wouldn’t jump to conclusions too quickly.
Crypto: a community-owned metaverse
In our industry, the approach has been different. The core principles of decentralization, trustlessness, pseudonymity, and community ownership have been ingrained from the start.
Some of the earliest virtual worlds to be created with blockchain technology include The Sandbox, Decentraland, and Cryptovoxels. While they each have different elements and in-world economics, the power of blockchain and NFTs allows for true digital land ownership, which opens up entirely new types of activities from leasing your plot to custom-building a home for someone else.
A lot of early activity has been from buyers hoping to reserve their plot of land in the metaverse for posterity, but a number of interesting uses have begun to pop up. On Decentraland, for example, there are events almost every day that users can hop into and experience. Dominos, Atari, and other big-name brands have also purchased plots of land to advertise their goods, host events, and build awareness in the virtual world.
Where we go from here
We’re still a long way from the metaverse going “mainstream.” Frankly, we’re not even close.
It will start with the enterprise (e.g., Microsoft, Meta) and gaming (e.g., Decentraland) and will slowly branch out from there. I personally think that the open, decentralized, and community-owned metaverse will beat the closed, rent-extracting, and surveilled systems, for many of the same reasons why I think Web3 will disrupt Web2. But this future is by no means predestined; it needs to be built!
In so many ways, we’re still in the picks and shovels phase of this industry. The metaverse needs its own currency—we’ve more or less already got that covered. But the metaverse also needs its own sovereign infrastructure stack that doesn’t go down when AWS does. Or ways for groups of people to easily collaborate with one another, from decentralized messaging to project management tools. Or standards for NFTs as they cross between “metaverses” and different rendering environments. In short, there’s a lot that needs to be built for this new future.
INTERNET VS. BLOCKCHAIN ANALOGUE
Brave published this cool graphic showing the number of people using crypto is closely following the internet in the 1990s – eight years for each to hit 100 million users.
This captures the essence of Pantera’s thesis:
“Cryptocurrency and blockchain technologies are the underpinnings of a new financial infrastructure, similar to how the internet was the underpinning of a new information infrastructure.”
— Joey Krug, Co-CIO, Pantera Capital
The massively important difference is the order of magnitude more value being created by the digitization of finance compared to the digitization of information a generation ago. The average value of a crypto user today is $8,000 versus $875 in the 90s.
Companies like Brave integrate the benefits of digital assets with everyday tools like the browser. Their user growth has skyrocketed over the past half decade.
Metaverse, Gaming, and NFTs
The metaverse, blockchain gaming, and NFTs were some of the biggest themes of 2021. Facebook’s rebrand to “Meta” and the recent high-profile gaming company acquisitions by Microsoft and Sony are major indications that the metaverse is coming. In addition, the market for NFTs has grown to $40 billion with an incredible amount of value waiting to be tapped into as use cases beyond digital art are unlocked.
We hosted a Thematic Call to discuss the booming NFT market and the emerging metaverse and gaming economies with founders and CEOs of MakersPlace, Perion, and Faraway.
Check out the recording here.
The Future of DeFi
Our next thematic call will be on decentralized finance (DeFi) and will take place on March 15th at 9:00am PST.
DeFi was the dominant theme in crypto in 2020 and the ecosystem of applications has been growing since. Over $200 billion in value is locked in DeFi protocols and decentralized exchanges now process over $100 billion in monthly volume. We are excited to discuss the current state of the industry, the hurdles to overcome, and how the future of finance is decentralized.
You may register by clicking the button below.
BOND BUBBLE POPPING
“Morehead said he’s no longer interested in betting on the traditional assets that defined his early career and that he hasn’t invested in anything other than crypto since 2013.
“ ‘Crypto is so much more compelling than any other trade out there.’ ”
— Tom Maloney, Bloomberg, Ex-Goldman Bond Trader Builds a $5.6 Billion Crypto Behemoth, January 21, 2022
Since March 2013 I haven’t invested in anything other than blockchain. The bond bubble is the first trade since then to present such a compelling asymmetry. Bond yields are likely to triple.
That interview was done in December. I have since entered what I think is an incredibly compelling trade: shorting 10-year notes and mortgage-backed securities and buying interest only mortgage strips. I/Os increase in value as rates rise.
The next mega-trade has begun.
FED POLICY FAILURE
The Fed’s policy inertia is shocking. The data has been overwhelming since way before we started writing about it in November. Everything’s at half-century extreme overheating – and the **Fed** is still, today, trying to drive bond yields down and has set Fed Funds rates at zero?!?!?
If you would have put this graphic to economists a few years ago and asked what the appropriate Fed Funds rate would be, literally nobody on Earth would have selected ZERO.
WHAT MOVIE IS THE FED WATCHING?
St. Louis Fed President James Bullard, in an interview on Monday with The Wall Street Journal, said he didn’t think a larger rate increase was warranted. “We don’t want to be disruptive or surprising markets,” Mr. Bullard said. He said he would change his view “if the data went against us here.”
What they will ultimately have to do to unwind their manipulation is going to be surprising and massively disruptive. When they’re waiting for data to go against them and I look at the table above I literally cannot imagine what else they could be waiting for.
His colleague, Cleveland Fed President Loretta Mester, said Wednesday that she didn’t at that point see “any compelling case to start” with the larger half-percentage-point increase.
(The appropriate rate is something like 5.00%….not 0.5%.)
REAL FED FUND RATES
Inflation is 7.42% higher than the fed funds rate (el zippo). For most of my career the Fed kept rates ABOVE inflation to put downward pressure on inflation. The average has been +0.99%. For whatever reason they are still pouring gasoline on a bonfire. We are at all-time lows.
Total public debt outstanding was $30.01 trillion as of January 31, according to Treasury Department data released Tuesday. That was a nearly $7 trillion increase from late January 2020, just before the pandemic hit the U.S. economy.
That makes the math easy. There are a little over 300 million Americans. $30 trillion is a hundred grand per man, woman, and child in the country. The average family’s share of the national debt is $243,902.
I think it will be seen as a massive policy failure to be printing that debt to lower mortgage rates—and thus push up home prices—to the point homes are unaffordable to so many citizens. And, the Fed is **still** buying mortgages today with printed money.
There’s going to be so many PhD theses written on whether that money printing was a wise investment in our future.
The U.S. employment-cost index—a quarterly measure of wages and benefits paid by employers—showed that costs continued to rise at the highest rate in two decades. The fourth-quarter gain, compared with a year ago, was 4%, the Labor Department said Friday.
The labor force participation rate is still near a 50-year low. The lowest percentage of Americans in two generations are either working or looking for work.
The unemployment rate is very low because so many people don’t want to work—not because there are so many jobs being filled. It’s wild—we lost 2.4 million jobs and the unemployment rate went down.
In October, there were about 3.6 million more job openings than unemployed workers, the Labor Department said. That has prompted employers to look for ways to compete for new workers.
INFLATION :: CAUSE AND EFFECT
“If car prices are too high right now, there are two solutions: You increase the supply of cars by making more of them, or you reduce demand for cars by making Americans poorer. There’s a lot of people in the second camp. . . I reject it.”
— President Biden, January 7, 2022
President Biden is, of course, correct. If you run that logic backwards, it explains why there’s so much inflation. The government printed $9 trillion and handed that free money to everybody. A fraction of those people really needed it—and in fact could have used much more help. The majority didn’t need the free money. The savings rate proves that.
(Unfortunately, money printing is an extremely inefficient way to fight an invisible virus. Too much of the money printing went to those who already have plenty.)
Too much money is chasing too few goods.
The personal saving rate — a measure of how much people have left over after spending and taxes—hit a record 33.8% in April 2020, according to the Bureau of Economic Analysis. The rate averaged just under 8% for the two years before the pandemic began.
[WSJ, Americans’ Finances Got Stronger in the Pandemic—Confounding Early Fears, January 9, 2022]
The second problem with this logic is it’s hard to increase the supply of goods when policies are inducing people to no longer work. The U.S. labor participation rate is near a 45-year low. It’s hard to produce more goods when policies have taken millions of workers out of being willing to work.
Fed Chairman Jerome Powell said in recent Congressional testimony that a smaller U.S. labor force “can be an issue going forward for inflation, probably more so than these supply-chain issues”.
I believe that is the biggest cause of inflation.
BLOOMBERG INTERVIEW HIGHLIGHTS
“Plenty of people wish they had bought crypto early, when it was still little more than a curiosity.
“Former Goldman Sachs Group Inc. bond trader Dan Morehead was among the few who did, launching his first crypto fund when a Bitcoin cost less than a bag of groceries.
“ ‘I was captivated,’ Morehead, 56, said in an interview, calling it ‘the first Global Macro trade that is truly global across all borders.’
“As a result, the Pantera Bitcoin Fund has returned more than 65,000% since 2013, and his Pantera Capital Management, once a traditional hedge fund that wagered on macroeconomic trends, oversaw “$5.6 billion of crypto assets at year-end. That’s on top of the $6 billion the firm has returned to investors.
“There’s always a chance it’ll crash and burn. Bitcoin has tumbled 17% to start the year and traded for $38,600 as U.S. markets opened Friday in New York, well below its November peak of roughly $68,000—a drop fueled by expectations of rising global interest rates and aggressive moves by central banks to tame soaring inflation.
“This is where Morehead’s worlds collide.
“Morehead stood out during crypto’s adolescence because he immersed himself in it after a storied career in finance. He started trading bonds at Goldman in the 1980’s, and later worked for hedge fund legend Julian Robertson before launching Menlo Park, California-based Pantera in 2003.
“Rising inflation—and how central banks respond to it—will be a big theme of 2022, said Morehead, who previously had wagered on the long-term decline in inflation and yields.
“That trade ‘basically made my career,’ he said, ‘and I think it’s come all the way to the end of that story.’
“Morehead expects a reversal of that dynamic to drag on cryptocurrency prices, but it hasn’t dampened his enthusiasm for the underlying technology.
“ ‘Bitcoin and blockchain are upending the financial world,’ said Fortress Investment Group co-chief executive officer Pete Briger, who worked with Morehead at Goldman. ‘Dan is at the epicenter of all that.’
“Morehead could have gotten into cryptocurrencies even earlier, in 2011, when his brother introduced him to Bitcoin. He read about it some, thought it was a cool idea and then pretty much forgot about it.
“Then, two years later, Briger summoned him to Fortress’s San Francisco offices to discuss Bitcoin, along with early crypto evangelist Mike Novogratz. Briger, 58, a distressed-debt specialist who describes himself as a ‘garbage collector’ of the financial system, saw Bitcoin as having the potential to disrupt traditional banking.
“’Blockchain is a game-changer in financial services,’ Briger said. ‘It pressures the banking and payments industry to rethink their reliance on legacy barriers to protect competitive advantages.’
“After the meeting, Morehead pledged to do additional research, and a month later he told Briger that crypto was the most exciting thing he’d seen in his career. He set up shop in Fortress’s office and got to work on starting up a cryptocurrency investment fund.
“In addition to the gains for the Pantera Bitcoin Fund, a venture fund that also debuted in 2013 has generated an internal rate of return of 51%, and Pantera’s Liquid Token Fund surged 385% in 2021 alone.
“It was a big change for Morehead, too. He had started Pantera as a traditional macro hedge fund—his specialty during four years as chief macro strategist and chief financial officer at Robertson’s legendary hedge fund, Tiger Management.
“In his Dec. 23 interview with Bloomberg, Morehead predicted that expectations for more aggressive Federal Reserve tightening would continue to drag on cryptocurrency prices.
“ ‘Blockchain is now being driven by all the excessive money-printing going on in the world,’ said Morehead.
“In a letter to investors last month, Morehead called the U.S. government and mortgage bond market ‘the biggest Ponzi scheme in history.’
“As for whether the technology has fulfilled Briger’s vision for disrupting the banking system, he said the process has begun, but that there’s still a long way to go.
“ ‘It’s like email in the early 1990s, when it was very clunky,’ Briger said. ‘No one could envision at that point what instant communication would mean for commerce and the world.’ “
— Tom Maloney, Bloomberg, Ex-Goldman Bond Trader Builds a $5.6 Billion Crypto Behemoth, January 21, 2022
PANTERA BLOCKCHAIN SUMMIT 2022
Pantera began bringing together leaders to foster the development of the blockchain ecosystem in 2013. Today, the Pantera team is honored to bring together our family of portfolio companies, partners, and investors for a day of learning, inspiration, and connection. The Summit will be hosted in San Francisco between April 4-5, 2022.
Pantera Blockchain Summit 2022 is curated by the Pantera investment team and focused on the most important and exciting topics in the blockchain industry. Our goal is to uncover valuable insights, foster great conversations, and empower the entire Pantera network to move our industry forward.
We are excited to host keynote speakers including CEOs, Founders, and others from Alchemy, Amber Group, Wyre, BCB Group, Bitso, Flexa, Braintrust, Acala & many more!
We are thrilled with the strong demand to attend the Summit so far and will try to accommodate as many attendees as we are able given the capacity rules of the venue.
If you are interested in attending, you can submit an application here and a member of our Capital Formation team will contact you regarding availability.
“Put the alternative back in Alts”
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.
Pantera Blockchain Fund Final Closing Call
A detailed dive into our new “all-in-one” blockchain fund.
Tuesday, March 8, 2022 9:00am PST / 18:00 CET / 1:00am China Standard Time
Please register (in advance) via this link:
Thematic Call :: The Future of DeFi
A discussion of the current state of DeFi and where the industry is heading.
Tuesday, March 15, 2022 9:00am PDT / 17:00 CET / 12:00am China Standard Time
Please register (in advance) via this link:
Pantera Blockchain Fund Final Closing Call
A detailed dive into our new “all-in-one” blockchain fund.
Tuesday, April 19, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time
Please register (in advance) via this link:
Investing in Blockchain Conference Call
A discussion of the blockchain opportunity set and how Pantera’s four funds are structured to capture value in this rapidly evolving ecosystem.
Tuesday, April 26, 2022 9:00am PDT / 18:00 CEST / 12:00am China Standard Time
Please register (in advance) via this link:
Recordings of past conference calls are available on this page.
PORTFOLIO COMPANY UPDATES
BCB Group raises a $60 million Series A round to Expand Regional Offerings
BCB Group is a leading banking and financial services provider for the digital asset economy. Over the last five years, BCB Group has processed over $100 billion in payments and serves some of the industry’s largest companies including Bitstamp, Circle, Galaxy, Gemini, Huobi, and Kraken. The team plans to use the funds to expand their regional offerings to the US and Singapore and acquire stakes in critical infrastructure partners. Pantera participated in the round led by Foundation Capital with participation from BACKED VC, PayU, Digital Currency Group, Nexo, Wintermute, Tokentus Investment, and more. Pantera previously participated in their $4.5 million strategic funding round co-led by North Island Ventures and Blockchain.com Ventures in March 2021.
Investing into Guilds and the Play-To-Earn Ecosystem
Perion is a top gaming guild led by the previous World Number 1 player in Axie Infinity with a focus on metaverse economies, a competitive scholarship model, and a venture arm that invests in early-stage blockchain-based games. Pantera participated in their $8.6 million Series A led by Alameda and Framework, with other participation from Jump and The Spartan Group. Ancient8 is the largest Vietnam-based gaming guild that partners with play-to-earn games to educate local communities about the opportunities in blockchain gaming. Pantera co-led their $4 million seed round with Dragonfly Capital and Hashed.
NEAR Foundation Raises $150 million to Accelerate Adoption of Web3
NEAR is a Layer 1 blockchain that is designed to be fast, secure, and scalable. Since mainnet launch in Q4 2020, the NEAR network has processed over 70 million transactions with over 2.3 million accounts and became the first sharding-enabled blockchain in Q4 2021. Pantera participated in the $150 million private token sale led by Three Arrows Capital with other participation from Mechanism Capital, Dragonfly Capital, a16z, Jump, Alameda, Zee Prime, Folius, Amber Group, Circle Ventures and more. Pantera previously participated in NEAR’s $12.1 million round in July 2019 and subsequent $21.6 million round in May 2020.
Livepeer Raises $20 million Series B-1 to Improve Video Streaming Offerings
Livepeer is a decentralized video streaming network built on the Ethereum blockchain. In October 2021, Livepeer acquired MistServer, expanding features to make the platform even more powerful for developers. Livepeer’s network includes over 70,000 GPUs and has streamed tens of millions of minutes. Their $20 million Series B-1 included new investors Alan Howard and Tiger Global. Pantera previously participated in Livepeer’s funding round in 2019.
Rift Finance Raises $18 million Round to Supercharge DAO Growth
Rift Finance is a decentralized protocol that assists DAOs in achieving sustainable token liquidity without having to give up ownership. Their beta product reached $50 million Total Value Locked (TVL) from large DAOs including Fantom, Terra, and Injective. Led by Harvard computer science alumni Austin King and Tyler Tarsi, Rift plans to launch its infrastructure across multiple Layer 1 blockchain networks. Pantera led the $18 million round with participation from Two Sigma Ventures, Coinbase Ventures, The Spartan Group, Defiance Capital, Hashed, Jump Capital, and more.