Author: DAN MOREHEAD. Translated by: Cointime.com QDD
Martian[1]
If a Martian landed on Earth and had access to all the economic statistics for the United States, and were then asked what the appropriate monetary policy should be, I doubt he would say, "Cut rates immediately to 2.45%."
The market priced this in a few months ago. Martians might say, "7% for a few more years."
Traditional markets may face difficulties, and blockchain may become a safe haven.
Bond bubble prediction: 18 months later
In our December 2021 Blockchain Newsletter, we forecast that the federal funds rate would rise from zero to 5% and that the 10-year Treasury yield would double.
CPI inflation has reached 7.0%. Real interest rates are negative 700 basis points. No kidding, inflation is soaring and asset bubbles are emerging!
The Federal Reserve is still injecting record amounts of liquidity into the housing market and the broader economy.
The Federal Reserve has been more stimulative than ever before, including during the dark days of the 1970s. The real federal funds rate (the federal funds rate minus the core inflation rate) is looser than ever before (the gold shading in the chart below). Meanwhile, core inflation (the white dashed line) is higher than at most times in history.
Red areas indicate errors in Federal Reserve policy, where the federal funds rate was below the core inflation rate for too long.
I marked the positive real interest rate in gold because it is like the central bank "gold standard". Paul Volcker and many other successful central bankers kept interest rates above inflation.
Even in the 1970s, there has never been such a large gap between the actual federal funds rate and the inflation rate. We are already way past the 1970s.
You don’t need a PhD in economics to guess which two periods of high inflation we’ll be in: right after two periods when the Federal Reserve was lending money at well below the rate of inflation (the red areas in the chart above).
The market is beginning to realize the impact of this once-in-42-year tectonic shift, but unfortunately, I believe there are more changes on the horizon.
We are still at that point. We believe that interest rates will have to continue to rise for longer than the market expects.
Failure of imagination
Sometimes robots are better than humans. Professor John Taylor's rule would have lifted record stimulus more than a year ago and the gains far exceeded market expectations.
Even three months after inflation hit 7.0% and we forecast the bubble would burst, the Fed continued to buy bonds until March 2022, when house prices had risen 40%.
"The Taylor rule is an equation proposed by John Taylor in a 1993 paper that provides a value for the short-term interest rate (i.e., the federal funds rate) targeted by the Federal Open Market Committee (FOMC) based on the values of inflation and economic buffers such as the output gap or the unemployment gap." - https://www.atlantafed.org/cqer/research/taylor-rule
The reasons for all this inflation are clear:
Long ago, central bankers kept interest rates above inflation, at an average of 1.80%. In the new era of quantitative easing, they are keeping rates below inflation at 1.52%.
That’s a -3.32% swing!
This gave people a huge incentive to borrow money and buy homes and other speculative investments, with the resulting price increases.
Policy gap
The Fed Funds rate minus the Core CPI is recovering from its lowest point in the past 50 years (-6.32%) and is below the previous low (-5.81%) in April 1975. Currently it is at -0.08%.
The Federal Reserve needs to continue raising interest rates.
WILE E. COYOTE MOMENT
In the 247 year history of the United States, the Federal Reserve System has only started manipulating bonds in the past 15 years. This has had a devastating effect on housing, regional banks, tenants, etc.
With the Federal Reserve no longer able to manipulate the markets for Treasury and mortgage bonds, bonds are having a Willy C. Cayote moment.
Bonds reach an overvaluation of $15 trillion in January 2022, a few weeks after our forecast. Unfortunately, we are still $700 billion away.
Investors should be very careful when investing in interest rate sensitive asset classes. Blockchain should be able to trade independently of rising interest rates.
Real interest rates are significantly negative
The real rate of return is the rate of return that bond investors receive after inflation.
For the US 10-year Treasury bond, the average real interest rate in the fifty years before the money printing began (1957-2007) was 2.63%.
The Fed decided to print half of our GDP and use it to push up bond prices, which brought real interest rates down to -0.35%.
The grey area in the chart below represents our new unlimited bond-buying era. We are still 2.98 percentage points away from our pre-QE average.
Bonds still carry huge risks.
S&P 500's longest sideways period
The working age population has never invested in a rising interest rate environment.
It’s hard to comprehend a situation so different from the “buy the pullback!” we are used to. It has destroyed the value of interest rate sensitive asset classes. Our theme for the past 18 months has been: a repeat of the 1970s.
It's worth remembering that the S&P 500 was trading sideways throughout the 1970s plus a few years before and after.
Blockchain is already decoupled
The blockchain has already been largely decoupled. It’s just hard to notice at the moment.
For most of the history of blockchain assets, they have had essentially no correlation with risk assets. Take Bitcoin, the blockchain’s representative, which had a correlation of 0.03 with the S&P 500 in its first nine years of existence.
This is an important aspect of the argument: when you find a new asset class with extremely high historical returns and essentially no correlation with traditional assets, it’s a fantastic investment.
Unfortunately, all of the over-leveraged concentrated entities in our space and alleged criminal Sam Bankman-Fried caused the correlation to skyrocket, peaking at 0.76 last year.
Since blockchain is agnostic about interest rates, its correlation with major asset classes (stocks, bonds, real estate) should be very low, all of which are tightly influenced by interest rates.
Bitcoin’s correlation with the S&P 500 has dropped below 0.1 again.
But if you zoom out, the massive outperformance becomes apparent.
In January 2020, the Bitcoin price was $8,000. Now it has reached $30,000.
It's been long enough
As a trader who has experienced market cycles for 35 years, I have learned that markets cannot go down forever. Investors can only endure so much pain.
A full year has passed since TerraLUNA/SBF etc. That's long enough. We could use a rebound now.
Pantera Bitcoin Fund 10th Anniversary
Ten years ago this week, Pantera launched the first cryptocurrency fund in the United States.
The fund grew 41,960%[2].
According to Crypto Fund Research, there are currently more than 800 cryptocurrency/blockchain investment funds. Most are structured as venture capital funds, followed by hedge funds and hybrid funds. According to Pitchbook's Q1 2023 report, venture capital firms have invested more than $72 billion in crypto projects since 2012 [4].
It will be interesting to see what changes the next decade holds.
“What’s the difference? It’s just a Bitcoin fund”
I know it sounds counterintuitive that it doesn’t matter which Bitcoin fund you choose, but it is true.
Advantages of Pantera Bitcoin Fund
The Pantera Bitcoin Fund provides institutions and high-net-worth individuals with fast, secure access to large amounts of Bitcoin without the need to purchase and keep it safe. The fund has daily liquidity and very low fees (0.75% management fee, no performance fee).
The Pantera Bitcoin Fund has many advantages over other products in the space. We believe it is the only Bitcoin investment vehicle that offers daily liquidity, no lock-up period, no premium net value, low fees, audited financial statements, and is managed by an SEC-registered investment advisor.
The fund is ideally suited for funds, foundations, and other entities that are unable or unwilling to hold tokens directly.
The minimum investment is $100,000. To learn more about investing in the Pantera Bitcoin Fund, please click the button below. Alternatively, you can contact our Investor Relations team by emailing ir@panteracapital.com.
BlackRock Bitcoin ETF
For certain types of investors, there may be a better option than the Pantera Bitcoin Fund: the BlackRock Bitcoin ETF.
If approved, we expect it to have a significant impact on cryptocurrencies, similar to the launch of the iShares Gold ETF by BlackRock in January 2005, which coincided with gold trading at $423 per ounce. Today, gold is trading at around $1,950 per ounce. Many economic factors affect the price of gold, but the launch of the ETF has certainly played a major role in its rise.
Most importantly, BlackRock’s extraordinary success rate in applying for ETFs with the SEC, with 575 applications approved and only one rejection, cannot be ignored.
It is important to note that BlackRock CEO Larry Fink has made a 180-degree turn on cryptocurrencies.
Six years ago, his position was:
“Bitcoin just shows how big of a demand there is in the world for money laundering… That’s it.” — Larry Fink, October 13, 2017
Fink recently told Fox Business Network:
“If we can tokenize more assets and securities — which is what Bitcoin represents — it will transform finance.” — Larry Fink, July 5, 2023
This reaffirms my belief that when smart people actually take the time to read and think about blockchain — and not just respond with reactive slogans — 95% of them will eventually believe it will be of huge importance.
New believers one after another.
The 10th Blockchain Summit
Pantera Blockchain Summit celebrated its tenth anniversary, as did our first blockchain enterprise and crypto fund.
The summit is curated by the Pantera investment team and focuses on the most important topics in the blockchain industry. Our goal is to discover valuable insights, promote good dialogue, and promote the entire Pantera network to drive industry development.
We are excited to share the remaining highlights from the Summit with you!
Pantera Conference Call[5]
Our investment team hosts monthly conference calls to help educate the community about blockchain. The team discusses important developments within the industry and often invites founders and CEOs of leading blockchain companies to participate in panel discussions. Below is a list of upcoming conferences, which you can register for via this link.
Navigating Today’s Blockchain Investment Landscape
Discuss blockchain opportunities and how Pantera Funds can capture value in the current and evolving market environment.
Tuesday, July 11, 2023, 9:00 AM PDT / 6:00 PM CEST / 12:00 Midnight SGT
Please register in advance via this link:
https://panteracapital.com/future-conference-calls
Pantera Early Stage Token Fund Investor Conference Call
Tuesday, July 25, 2023, 9:00 AM PDT / 6:00 PM CEST / 12:00 Midnight SGT
Open to fund limited partners only.
Special call: Exploring MEV in Flashbots
Discuss all aspects of “Maximal Extractable Value,” a controversial strategy by which miners/validators extract value by reordering blocks on-chain, with Quintus of Flashbots and Matt Stephenson, Head of Cryptoeconomics at Pantera.
Tuesday, August 8, 2023, 9:00 AM PDT / 6:00 PM CEST / 12:00 Midnight SGT
Please register in advance via this link:
https://panteracapital.com/future-conference-calls/
Join us to learn more about the industry, the opportunities we see and our fund.
Open positions at portfolio companies[6]
Interested in joining one of our portfolio companies? The Pantera Job Board offers over 1,500 openings for high-growth, ambitious blockchain industry teams around the world. Our companies are seeking candidates who are passionate about blockchain technology and the impact of digital assets. Our most in-demand roles span a variety of areas including engineering, business development, product, and marketing/design.
Our portfolio companies are actively recruiting for the following positions:
l Offchain Labs –Product Manager(Remote)
l Alchemy –Engineering Manager(New York or San Francisco)
l 0x Labs –Platform Engineer(Remote)
l Obol –Validator Relations(Remote)
l Rarify –Head of Business Development(Remote)
l Rift Finance –Protocol Engineer(Remote, New York)
l Starkware –Business Development Manager(Netanya, Israel)
l Circle –Sr. Software Engineer(Remote)
l Cosmos –Full Stack Rust Engineer(Remote)
l Worldwide Webb –Graphic Designer(London)
l Waterfall –Software Engineer(New York)
l Injective Protocol –Rust Developer(Remote)
l Wintermute –Quant Developer(Hybrid, London)
l Audius –Social Media & Marketing Strategist(Remote)
l Protocol Labs –Sr. Software Engineer(Remote)
l Bitso –Head of Compliance(Mexico)
l InfiniGods –Experienced UI/UX Designer(Hybrid)
l CoinDCX –Engineering Manager(Remote)
Please visit the job board here and apply directly, or submit your profile here to be included in our candidate database.
[1] IMPORTANT DISCLOSURES - Certain portions of this letter relate to the investment advisory business of Pantera Capital Management and its affiliates (“Pantera”), while other portions of the letter relate only to general market commentary and do not relate to Pantera’s investment advisory business. Pantera has inserted footnotes throughout the letter to identify these differences. This section provides educational content and general market commentary. Except for those specifically marked, any statements in this letter do not relate to Pantera’s investment advisory services and do not reflect or include the offering of any new or additional investment advisory services. The opinions and other statements contained herein do not constitute investment, legal, tax, financial or other advice or recommendations of any kind.
[2] Pantera Bitcoin Fund estimated net performance as of June 30, 2023
[3] https://cryptofundresearch.com/cryptocurrency-funds-overview-infographic/
[4] https://pitchbook.com/news/reports/q1-2023-crypto-report
[5] IMPORTANT DISCLOSURE - THIS SECTION RELATED TO PANTERA'S INVESTMENT ADVISORY SERVICES. The information contained in this section relates to Pantera's investment advisory business. Nothing contained herein should be construed as a recommendation to invest in any security or to enter into an investment advisory relationship, nor does it constitute investment, legal, tax or financial advice or recommendation of any kind. Potential investors should consult their own advisors before making an investment decision. Pantera assumes no obligation to update these materials or to notify recipients of any changes.
[6] This section does not relate to Pantera’s investment advisory services. The listing of job openings herein does not constitute an endorsement of any of these firms or their recruiting policies, nor does it reflect an assessment of the suitability of any particular candidate for a position.
