BLOCKCHAIN LETTER - 05/03/2022 - Dan Morehead - PANTERA CAPITAL
Blockchain is the first truly global Global Macro trade.
I was laughing about Global Macro trading with my buddy Mike Novogratz. We’ve been trading USD/JPY for thirty-five years. We lived down the street from each other in Tokyo . . . we’ve studied it . . . agonized over it . . . bought, sold . . . sweated the drawdowns . . . but it hasn’t actually gone anywhere.
It’s literally exactly where it was the day we started in 1987 – 128.39. That’s insane.
In fact, it’s spent almost the entire time we’ve been sweating it in a range plus or minus twenty yen of 120. What was it all for?!?!
On the other hand, blockchain is going to change the world. Like the whole world; everybody with a smartphone will be using blockchain in a decade. That’s 3.5 billion people. We may never see the price of $38,342 /BTC again. Today might be the last time in history one can buy bitcoin that cheaply.
That’s why so many re-tread Macro traders like us love bitcoin/blockchain. It’s the same concept as we’ve worked on, but it’s actually going somewhere (massively higher) – and changing the world for the better.
Now there are even Global Macro angles to blockchain venture deals. For example, being long Circle equity is a great hedge against rising rates. Circle earns the float on the USDC stable coin. As rates rise their earnings go up. Nice counter-cyclical investment! (interesting)
Another cool factoid: the DeFi protocol Celsius paid more interest to customers in 2021 than Bank of America.
INSTITUTIONAL TRANSITION PHASE
Institutional investors are in an uncomfortable moment. A few years ago it would have been massive career risk to propose investing in blockchain. A few years from now, it will be a huge fiduciary risk to NOT be invested. We’re in that uncomfortable interregnum period.
One observation I’d share from having had so many conversations with institutional investors is to not get obsessed trying to figure out which protocol will win. It’s not productive to stress about: “Which is going to win – Ethereum or Solana?” Sometimes investors want to spend the majority of a meeting trying to figure that out.
That’s not how you pick an equity manager. You don’t wait until the manager can explain which one company is going to take over the entire world. You select a great manager and let them buy a portfolio of stocks and trade into new things over time. The investment process should be the same in blockchain.
The beauty is you don’t have to decide between Ethereum and Solana. You are allowed to buy both – and Polkadot and Terra and 20-30 others which we own.
The logjam is breaking. Massive institutions are just now investing. We’re seeing it ourselves. We’re closing our Blockchain Fund next month at well over double our target with a large influx of new institutional investors.
It’s really hard to get from zero to one. It’s taken twelve years to get these institutions to invest. They are generally investing amounts like 20 basis points of their AUM into our fund. However, it’s not that hard to grow your exposure once you get over the zero to one chasm. In my mind, it’s very clear that all those institutions – which have something like 0.20% invested in blockchain – are going to something like 8.0% over the next 5-10 years. That wall of money is coming into blockchain assets. It will drive prices way up.
We’ve raised $2bn since the beginning of 2021. Our peers have raised similar amounts. That money will get invested. It might take a year or two, but it will get invested.
In the next couple of years, we and our peers will probably be seeing those institutions investing an order of magnitude more money into our space. It seems almost inevitable that the blockchain market melts up.
This moment in time is also uncomfortable because traders still think blockchain is supposed to trade in correlation to most other risk assets. I think the markets will soon realize that blockchain is totally different – there are no cash flows to discount. Rising rates have no impact on crypto. Crypto is priced on supply and demand. Every two years 10x as many people use crypto. If there’s a fixed quantity of something and 10x as many people want to own it, it goes up.
In a world where most risk assets have terrible performance, investors will seek out the few – like blockchain – that can perform well.
I think that blockchain prices will soon decouple from other risk assets. I can imagine a world with bond yields above 5.0%, stocks are down from today’s level, real estate is down, and blockchain is up 10x.
https://panteracapital.com/blockchain-letter/the-first-truly-global-global-macro-trade/
