“There are decades where nothing happens; and there are weeks where decades happen.”
VLADIMIR ILYICH LENIN
TWO CENTURIES OF DEBT IN ONE MONTH
We quoted that line last month — and, it just happened. The United States printed more money in June than in the first two centuries after its founding. Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.
For the sticklers out there with the knee-jerk counter-argument:
“Hey, you need to use constant dollars — take into account inflation!”
The answer is:
That’s EXACTLY why one should get out of paper money and into bitcoin. It isn’t being inflated away. One bitcoin is a constant fraction of the total 21 million that will ever exist. There is no need for inflation-adjusted numbers — because there is no inflation/hyper-inflation.
As an aside, you don’t do inflation-adjusted gold. An ounce of gold is an almost constant share of all the above-ground gold on Earth. There’s no coincidence gold recently hit an all-time high. Or, said another way, paper money hit a low vs. non-quantitatively-easible money like gold and bitcoin.
With that first trillion we defeated British imperialists, bought Alaska and the Louisiana Purchase (13 states’ worth of territory), defeated fascism, ended the Great Depression, built the Interstate Highway System, went to the Moon, and some other stuff.
Not all deficits are created equal. In August we’ll share some thoughts on the efficacy of current spending. In the meantime, we wanted to reinforce our view from April:
Stay long crypto until schools/daycare open. Until then the economy won’t function and money will be continuously printed.
VALUE IN DECENTRALIZED FINANCE EXPLODING
We’ve talked about the vision of an open financial system, commonly referred to as decentralized finance (DeFi). This subsector of the blockchain industry has emerged as one of the dominant use cases beyond store-of-value and speculation (on future use cases).
What’s really exciting is the amount of value that’s been flooding into DeFi protocols over these past few months. Over $3.5 billion in value is locked in DeFi protocols at the moment. People are beginning to experiment with non-centralized finance, particularly with borrowing and lending crypto-assets to generate yield.
This is an inflection point for open finance. Below is a chart of total value locked in DeFi exploding upward.
Data Source: DeFi Pulse
What Is Decentralized Finance?
Similar to how the internet was the underpinning of a new information infrastructure, blockchain tech and cryptocurrency are the underpinnings of a new financial infrastructure. The internet not only revolutionized access to content but it also democratized the creation of that content. We believe that blockchain tech and cryptocurrency will do the same but with financial markets — and this is what is referred to as decentralized finance.
The vision is that anyone, anywhere in the world, as long as they have a smartphone or a computer, can freely create or participate in new financial markets at very low cost. Initially this might sound like a wacky idea, but imagine if someone told you at the early stages of the internet (say 1995) that encyclopedias would go away — in fact, there would be online versions that were edited by thousands of people around the world and that they would actually be more accurate than Encyclopedia Britannica. That would have been viewed as a pretty crazy notion. But a similar type of revolution is beginning to happen now with finance.
You could think of Bitcoin as the first DeFi project (we don’t technically classify it as such in our portfolio, but hear us out). Bitcoin is digital gold — it’s money you can send globally. You can do transactions at no limit and at relatively low fees. That’s what Bitcoin provides. But outside of moving value around, it doesn’t let you do anything else in finance. Sending money is really important, but the financial system is a lot more complex than just that. There are thousands of different types of financial agreements that people enter into on a daily basis. So, if you take the efficiencies of Bitcoin (low cost, frictionless transactions, borderless, etc.) and apply it to other aspects of finance like lending/borrowing, exchange infrastructure, margin, etc. — that’s a very exciting concept. We’re just in the early innings of this now.
Where Growth Is Happening
When Ethereum launched back in 2015, the first two DeFi projects built on top of it were Augur and MakerDAO. Augur was the first decentralized predictions platform on Ethereum and MakerDAO was one of the first iterations of a decentralized stable unit-of-account, a stablecoin. Since then, the DeFi infrastructure has expanded to dozens of protocols offering tools that serve the basic components of any functioning financial system.
What’s really taking off right now is cryptocurrency borrowing and lending which is providing the opportunity to generate yield on cryptocurrency holdings. If you’re going to sit on your cryptocurrency, why not generate additional yield on those holdings by putting them to work? Decentralized lending platforms like Compound have created openly-accessible smart contracts to facilitate crypto lending and borrowing. You can get a collateralized loan on cryptocurrency you have, and borrow, say, dollars against it. Or, you could do the reverse and borrow cryptocurrency and sell it to effectively go short. It’s sort of a money market in a sense where you borrow against your collateral.
The opportunity to generate anywhere from 1–30+% annual interest on crypto-assets has attracted many users to provide liquidity to lending pools to take advantage of those rates. On the borrow side, projects like Compound have created incentive mechanisms to reward borrowers with new tokens (in this case COMP) for taking out loans. Lenders are also rewarded COMP for providing liquidity to lending pools. All of this has spurred a deep interest in “yield farming” or “liquidity mining”, the process of generating yield across various lending protocols in the DeFi space. With all the different lending platforms available, people have been taking advantage of very complex strategies leveraging platforms like Uniswap, Curve, and Balancer for exchanging all these tokens back and forth. And so there’s also been a ton of growth in decentralized exchange volumes and liquidity.
This has spurred demand for services like InstaDApp that automate the allocation process across lending protocols where the highest yield opportunities arise.
In conclusion, the increase in demand for digital asset lending/borrowing is very promising. But there’s still a ways to go from both an adoption and technical standpoint.
Where Improvement Is Needed
As mentioned, we are still in the early innings of this; there are areas that need improvement before we can tap into the full utility of these technologies. We believe that there are three important catalysts that will drive further adoption of decentralized finance protocols:
We’ve covered these in the past, but we’ll quickly reiterate why these are important.
Major blockchains like Bitcoin and Ethereum can only facilitate 10 transactions per second, basically a non-starter for real-world adoption. This needs to be solved or else transactions will be costly and slow. There are many projects working on scalability solutions today and they’re beginning to launch. Polkadot recently went live, which is both an interoperability and scalability solution. Projects like Matic Network, bloXroute, and StarkWare are also providing additional throughput to Ethereum. Scalability has been a major limiting factor till this day, but we think that by the end of this year it’ll be feasible for projects to scale to several hundred transactions per second if they integrate solutions like these.
Another important catalyst is making the process of obtaining crypto easier and quicker for the masses through better fiat onramps. If you can’t offload fiat into crypto easily, people won’t adopt it. There are solutions for this like Wyre and a slew of competitors have launched products that enable users in less than 30 seconds to onboard dollars into their crypto wallets as Ether, Bitcoin, or Dai, without leaving the wallet or app that the user is using. It’s a really slick user experience and greatly helps solve the onramp problem.
Lastly, nascent infrastructure is a “soft barrier” that makes it difficult to do things in the space as a developer. For instance, it is still difficult to interact with an Ethereum node, fetch data from it, and to display that data in an application quickly. Services like Alchemy are helping to alleviate the infrastructural barriers present today.
The progress we have seen in these barriers, and our expectations going forward, have us very optimistic about the coming years.
FUND STRATEGY PERFORMANCE YEAR-TO-DATE
To portray the growth in DeFi, we share the year-to-date returns of our two hedge fund strategies. Pantera Digital Asset Fund has exposure to assets integral to the growing DeFi ecosystem, which is outpacing bitcoin’s store-of-value play so far this year.
We posted in our June letter a percentage breakdown of asset weightings across different use cases, depicting a strong position in DeFi-related protocols relative to the market.
In addition, Pantera ICO Fund portfolio tokens are beginning to list on various exchanges, marking more of the Fund’s assets to market. A few positions in the ICO Fund also overlap with the DeFi space, including blockchain infrastructural projects that aim to enhance overall functionality and usability of the DeFi ecosystem. Pantera ICO Fund was an early investor in Ampleforth, a DeFi project that has been taking off recently. (There’s a designated section on Ampleforth further below).
If you are interested in investing in Pantera Digital Asset Fund, please visit this page to access our online subscription form. Alternatively, you can reach out to our Investor Relations team at firstname.lastname@example.org.
BLOCKCHAIN PAYMENTS GROWTH, UPDATE
Earlier this year, we reported on the positive role that blockchain companies are fulfilling during this difficult time. The blockchain payments sector has more than doubled during the crisis as more individuals and businesses seek out blockchain-powered payment rails for their speed, accessibility, and low cost.
We attribute this latest surge to recent developments in Decentralized Finance (DeFi) protocols, where new yield-generating products for stablecoins and other digital assets have led to a flurry of new demand and activity.
The index below shows real-time growth in blockchain-based payments and cross-border remittances. We aggregated and normalized our portfolio companies in these sectors. The chart below depicts the average growth in blockchain payments through the crisis, using November as the benchmark.
The constituent companies in the index are:
BitAccess: global provider of bitcoin ATM solutions
Bitso: Mexico-based cryptocurrency exchange and remittance provider
Circle/USDC: business banking and payments infrastructure, powered by USDC (USD Coin), a stablecoin backed by US dollars and founded by Circle and Coinbase
Coinme: integrated network of cryptocurrency kiosks, digital wallets and private client services — powering more than 3,500 bitcoin kiosks globally in partnership with Coinstar
Veem: global B2B payments platform — “real-time wires at half the price”
Wyre: payments and compliance infrastructure enabling fiat on-/off-ramps
USDC Surpasses $1.1 Billion In Total Market Cap
Since the start of this year, USDC market cap has grown +100% as people elect to use the fully-backed token pegged to the US dollar built on Ethereum. We wrote in our April investor letter, “Would you rather have your savings in the Lehman Brothers of 2020 — or a token you control, which is fully backed by US Treasuries?” Since the start of the pandemic, over $500 million have voted with their feet.
SEVENTH ANNIVERSARY OF PANTERA BITCOIN FUND
The crypto fund industry in the United States began seven years ago this month. Pantera Bitcoin Fund’s lifetime return is 15,140% net of fees and expenses, outperforming bitcoin over the same period.
Pantera Bitcoin Fund provides institutions and high-net-worth individuals quick, secure access to large quantities of bitcoin — without the burdens of buying and safekeeping them. The Fund features daily liquidity and very low fees (0.75% management fee and no performance fee).
Despite offering daily liquidity, most of our investors view it like a long-term venture investment. The average holding period thus far has been 841 days.
Pantera Bitcoin Fund offers many advantages over other products in the space — including brokerage accounts like Coinbase or Bitstamp. We believe that Pantera Bitcoin Fund is the only Bitcoin investment vehicle offering daily liquidity, no premium to NAV, low fees, audited financials, and management by an SEC-registered investment advisor.
The minimum investment is $100,000. You can click the button below for more information about investing in Pantera Bitcoin Fund. In addition, you can email our Investor Relations team at email@example.com with any questions.
9-YEAR LOG REGRESSION TREND + HALVING PROJECTION
In our April letter, we published a potential framework for analyzing the impact of bitcoin halvings on price based on the stock-to-flow ratio across each halving. This analysis would suggest that bitcoin could rise to $115,000 by August of next year if it follows a similar ratio to previous halvings. This is maybe not totally a coincidence that it would also put the price back on the 9-year log regression of the bitcoin price.
Today’s price of $11,137 is close to the pace forecast two months ago. The stock-to-flow estimate for today would be $13,424.
ADDRESSING INSTITUTIONAL INVESTOR CONCERNS
Fidelity Digital Assets published their Institutional Digital Asset Survey Report last month with responses from 800 investors. The survey covers the entire spectrum of institutional investors: endowments and foundations, crypto hedge and venture funds, traditional hedge funds, family offices, financial advisors, and high-net-worth individuals. The results highlighted the positive growth in investor perception of digital assets year-over-year. It’s a very useful tool to address the main obstacles to investment that were expressed in the survey.
The most common concerns:
Source: Fidelity Digital Assets, Institutional Digital Asset Survey Report
With 75% annualized volatility, bitcoin is undeniably guilty of having high volatility. It just is what it is. It used to be a lot higher — twenty years from now, it will be a lot lower. That’s the way new asset classes work.
Here’s a perspective I’d like to share: Over our entire careers the mantra was drilled into us “volatility is bad — the paramount goal is to always avoid volatility”. In normal, linear assets, that’s probably true. Investors should have the perspective that bitcoin and other cryptocurrencies are essentially a call option on the future payment rail of the world. Now one might add: Or, a put option on global central banks really debasing their paper currencies. If you’re long an option, volatility is great.
You can lose, at most, one times your money. On the flip side, our first fund is up 130x. Disruptive technologies have such an option-like asymmetric return that we should think of volatility as a good thing on an asymmetric investment.
Despite high volatility, it’s important to point out that each subsequent annual price low has been higher than the previous year’s low — with the exception of just one year in the past ten. Bitcoin keeps surging up. Explosive ups, scary drawdowns — but net net, each low is higher than the previous.
Volatility exists because it’s still a young asset class — bitcoin is just a teenager. Volatility will dissipate over time.
In my professional opinion, concerns about price manipulation are much bigger than they rationally should be. For example, the Chairman of the SEC says market manipulation is one of his main concerns. To me it’s like the previous outdated stigma that bitcoin was used for illicit activity. I think the same applies for market manipulation. I’ve never seen any evidence that there is more manipulation in the bitcoin market than any other of its size.
Smaller exchanges outside the U.S. and Europe sometimes inflate their volumes to push themselves up the league tables to try to attract new customers. Fake volume obviously has no directional impact on the market. Most importantly it’s not present in the activity reported by the regulated exchanges like Coinbase, Binance, Bistamp, et al.
Every now and then, we’ll see a flash crash. There are highly levered exchanges that have stop loss limits. If you have an exchange offering 10:1 leverage with an asset that has 75% annualized volatility, you’ll have a flash crash every so often. It’s just math.
Even the 203-year old U.S. equity market has these. In 2010 the U.S. stock market flash crash erased over a trillion dollars in market capitalization in five minutes. 36 minutes later it was all over.
The punchline is that these flash crashes are often over within nanoseconds, definitely minutes, and not hours. If you’re an institution investing in anything other than high-frequency trading strategies, you can ignore these flash crashes. If you’re putting money to work for five to ten years, it just doesn’t matter.
Lack of Fundamentals
I had a fun debate with one of my “Tiger cub” friends who’s a tech investor. He said, “We don’t invest in bitcoin because there are no cash flows to discount.” I came back saying, “Well there’re no cash flows in EUR/USD either. It’s just a bilateral exchange rate. EUR/USD goes up or down based on the amount of people that want to use US dollars vs. euros and vice versa.”
There are trades that don’t follow the typical framework to gauge fair value as with traditional assets. Particularly with Bitcoin, there are so many use cases including ones that haven’t even been thought of — that’s what makes it so difficult to value but is also what makes it such an asymmetric trade. The market is still trying to figure out what those use cases are. If you think of Bitcoin as an alternative store-of-value to gold (a $9 trillion market), Bitcoin is just 2% of that. And if you compare it to money, it’s an infinitely small fraction of the total market cap of money. So with all these potential markets to disrupt, it really comes down to how many people choose to use it. It’s like an option. You invest a bit. And if it’s successful and gets 10 percent of gold’s market share, you will go up 5x.
A few years ago, there were half a million people using it for speculation, commerce, remittances, and more. Now there are probably 50 million people using bitcoin and cryptocurrencies. And in a few years, if a billion people are using it, it’s going to be worth a lot more. It’s just supply and demand.
THE NEW WORK-FROM-HOME ECONOMY
Stanford economist Nicholas Bloom shared some head-spinning stats on the current “working-from-home economy”:
“We see an incredible 42 percent of the U.S. labor force now working from home full-time. About another 33 percent are not working — a testament to the savage impact of the lockdown recession. And the remaining 26 percent — mostly essential service workers — are working on their business premises. So, by sheer numbers, the U.S. is a working-from-home economy. Almost twice as many employees are working from home as at work.
“More strikingly, if we consider the contribution to U.S. gross domestic product based on their earnings, this enlarged group of work-from-home employees now accounts for more than two-thirds of U.S. economic activity.”
Custody has been a primary concern holding some institutional investors back from entering the space. This may finally be put to rest once and for all. We’d argue this had already been alleviated by institutional custody services like Bakkt, BitGo, Fidelity, Anchorage, etc., but the latest development should be the nail in the coffin.
The Office of the Comptroller of the Currency (OCC) is now letting all nationally chartered banks in the U.S. provide custody services for digital assets. This is what they said:
“For the reasons discussed below, we conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.”
This is a major advancement for our industry, full-stop. It’s a critical stamp of approval that will further legitimize digital assets in the eyes of both institutional and retail investors.
On July 15th, various high-profile Twitter accounts were compromised, including those of Elon Musk, Bill Gates, Barack Obama, Joe Biden, and Kanye West. The scammer posted tweets from each individual’s account promising to return double the amount of bitcoin sent to the scammer’s bitcoin address.
It’s important to note that this is not a “Bitcoin scam”, as many headlines wrote. Had the hacker requested USD, and provided account and ABA routing numbers, it probably wouldn’t have been called a “fiat scam”.
While perhaps not the best publicity for Bitcoin, it does prove that Bitcoin **is** the native money for the internet. A frictionless, censorship resistant, and difficult-to-trace trace method of transferring value is a profoundly powerful tool, irrespective of how a small minority of “bad actors” choose to use it.
One of the three largest cryptocurrencies has out-performed all the major paper currencies in eight out of the last 10 years.
ETH led in the first half of 2020. Currencies with quantities that cannot be eased by fiat have either held or grown in value relative to paper money most years.
With money-printing kicking into an entirely new gear and cryptocurrencies remaining scarce, it’s highly likely that a paper currency won’t top this chart in the next few years.
AMPLEFORTH’S RAPID GROWTH
The AMPL is a digital asset, like Bitcoin, but with a novel supply policy that translates price-volatility into supply-volatility. The protocol’s smart contract design allows the increase and decrease of supply to be automatically executed without any need for a transfer between peers, and without the need for a bank.
Since June, AMPL has grown from a $10mm market cap to a $338mm market cap with more than $22 million in 24hr trading volume. On average, the price of AMPL has oscillated between $1.70-$2.80, which has been the equivalent of a 6–17% supply expansion each day for token holders over the past two weeks.
This policy was originally designed to be the simplest direct solution to the supply inelasticity problem that limits assets like gold and bitcoin. Supply changes expand directly to wallets and contract directly from wallets, with no bank or marketplace in between. The project’s founders later discovered that the AMPL solution could have the tremendous additional benefit of introducing a new asset movement pattern unlike any existing cryptocurrency or traditional asset. This became their primary topic of inquiry and has since been demonstrated under live market conditions.
The AMPL token’s non-dilutive supply changes introduce a fundamentally different set of incentives for traders because changes in demand are expressed by the number of AMPL held in addition to price. As a result, profit-maximizing actors are compelled to devise new trading strategies. This new behavior generates a step-function-like movement pattern that is distinct from Bitcoin and traditional assets.
The unique incentives, movement pattern, and monetary qualities of AMPL, make it ideally suited for the following near, medium, and long term use cases.
Near-Term — A Diversifying Asset
Mid-Term — A Decentralized Collateral Asset
Long-Term — An Alternative to Bitcoin
You can read more about the project on their website.
THEMATIC CALL: CRYPTO MARKET PERFORMANCE
As an asset class, cryptocurrency has out-performed nearly all other assets year-to-date. As a proxy for the industry, Bitcoin is trading roughly +52% since the start of the year. But there are other sectors of the industry that are performing even better than Bitcoin that we’d like to discuss on our call set for August 4th at 10:00am PDT / 1:00pm EDT.
We’ve invited Shapeshift CEO Erik Voorhees and Blockfolio CEO Ed Moncada to share their views on the digital asset ecosystem, the exciting applications beyond Bitcoin’s store-of-value/payments thesis, a forward outlook on the crypto market, and where they see value accruing over time.
If you are interested in attending, please register below.
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.