🎙 "There's Been a Zero-to-One Switch for Institutions and Crypto:" Pantera's Dan Morehead
In this week’s episode, we speak with Dan Morehead, the founder of one of the longest-standing and largest crypto funds. Dan founded Pantera Capital in 2003 as a global macro hedge fund. In 2013, Pantera began investing in Bitcoin and quickly shifted its e...
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In this week’s episode, we speak with Dan Morehead, the founder of one of the longest-standing and largest crypto funds. Dan founded Pantera Capital in 2003 as a global macro hedge fund. In 2013, Pantera began investing in Bitcoin and quickly shifted its entire focus into crypto. Today, Pantera manages $3.8 billion in digital assets and equity in blockchain companies. Dan said he got into Bitcoin because it was the most asymmetric trade he had seen in his career, and he still believes that’s the case.
We talk about the performance of his funds, with the best performer being his liquid tokens fund, that's up more than 300% this year. Contrary to popular belief that crypto moves together, Dan makes the case that there are big differences in how tokens trade and lots of opportunities for fund managers to deliver alpha, especially by focusing on smaller tokens. He believes DeFi is one of the biggest opportunities in crypto as it will take a large market share from traditional finance and create new use cases that weren’t possible before.
Dan said Pantera is planning on increasing the Bitcoin exposure on its liquid tokens fund from zero to somewhere in the teens, while its main bet will remain DeFi. Dan is most excited about what he views is a shift in institutions’ interest in crypto. Firms which had told him they would never come close to holding crypto, are now wanting to dip their toes. And in a still small market, that has the potential to make big waves.
The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Camila.
🎙Listen to the interview in this week’s podcast episode here:
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Camila Russo: So Dan, you were one of the first major hedge funds to buy bitcoin, I mean, 2013 is pretty early days. I'd love to go through your thought process. What made you shift your focus to Bitcoin in the first place?
Dan Morehead: Yeah, so my career has been in global macro-style investing. Lastly, as you said, as a Tiger Management, where I fly around the world, go to different interesting capitals, and try and find trades that were very asymmetric and looking for disruptions; sometimes the technology like Tesla Motors, sometimes they're political like privatization, but trades where your downside is much smaller than your upside.
And those trades were all interesting, but they're specific to one country, or maybe even a region, but that was it, and typically, just one asset class, like just bonds, or just equities or something like that. So in 2011, I started thinking about Bitcoin. It took a couple of years to get my head around it, but ultimately came to the view that it would be the biggest disruption in my career and that most asymmetric trade, and that's really the thing that I was thinking at the beginning is that yeah, you know, there's a lot of ways that Bitcoin could fail. But if it works, it would be disrupting such valuable things like, store of value and cross border money, things like that, that it had enormous upside.
“In 2011, I started thinking about Bitcoin. It took a couple of years to get my head around it, but ultimately came to the view that it would be the biggest disruption in my career and that most asymmetric trade.”
And I still believe that. I think, although we've come a long way in the eight years since we launched our first fund, it took 50 years for the internet to get where it is today. I think it's going to take decades for this thing to fully build out. So it's really exciting we're really at the beginning of something that's very important.
And then the other reason I'm excited about that is it's not just money. You know, I think we're going to make some good returns. We're going to help some investors get better IRR. But it really is changing the world for the better. And ultimately, I think there's going to be billions of people using Bitcoin and other protocols and that's going to help them save money, help them have their wealth not be confiscated by their government, helps them not pay exorbitant remittance fees, you know, all those things are huge positives that Bitcoin and blockchain is bringing.
CR: Awesome. So back then in 2013, did you shift Pantera completely into crypto or was it more gradual?
DM: No, I fell down a rabbit hole and I haven't bought anything other than crypto in eight years. I often have old friends like Mike Novogratz, call me out, saying what do you think of the Brazilian realorsomething like that? I have no idea. I don't study anything, you know, you'd think S&P 500 or big things like that, I have no idea where they are, or where the value is. So it’s 100% crypto.
Fund Performance
CR: Oh, so interesting. Okay. So I'd like to dive a bit deeper into Pantera and how it's made up. So you have the original Bitcoin fund, which you established back in 2013, but you also have other funds. So there's the liquid token fund, which holds tokens including ETH, Maker, Aave, and UNI; the early-stage fund, where I see a lot of kind of ETH Layer 1 competitors, Polkadot, Near, Avalanche. And then the venture fund, which I assume is also equity investments, right? So there's Brave, Coinbase, Wyre.
And this year, you launched another blockchain fund, which I understand has exposure to all of these funds. So, just to start digging into all these, which of these funds has performed the best so far this year? And by how much has the top performer gained?
DM: Yeah, so it's a fun question. And it's one of the reasons we're launching a new fifth fund. Having the first crypto fund in the US, was just Bitcoin, and then we did just venture, and then we did the tokens one. So by kind of virtue of being the first to do all these, we ended up with four completely separate funds. And any asset can only go in one of our existing funds, so they're essentially mutually exclusive.
So then you get the question of which one performed best? That's a fun question to answer. But then obviously, one of the four funds has to perform the least good or the worst. And asset allocators don't like that. A lot of them really like to allocate to the concept of blockchain, but they don't want to pick is it Bitcoin or is it DeFi or is it equity? And so that's why we're releasing a new fund that includes all those different asset classes.
But to answer your question, our liquid token fund has performed the best this year, it's up to 322% year-to-date, and Bitcoin itself is at 56%. And then our early-stage token fund is 260% for the onshore and 360% for the offshore.
CR: Wow. Okay. So I guess the worst performer is the Bitcoin fund, and then the other altcoins —I don't like that word, but non-Bitcoin tokens are outperforming.
DM: Yes. Other tokens other than Bitcoin have outperformed. And then we can add some value by taking risk off before the market falls and then adding it at the bottom. So that’s some of the performance of our liquid token fund is that we took a lot of risk-off in the middle of February, and then it was a, I think, 27% correction at that time, and then put some risk on. So, some of the value is from actively trading.
"We took a lot of risk-off in the middle of February, and then it was a, I think, 27% correction at that time, and then put some risk on. So, some of the value is from actively trading.”
CR: Got it. Yeah, I wanted to get into that, because, you know, crypto is so correlated to Bitcoin, and it seems that especially when the market is volatile, it becomes even more correlated. So as a fund manager, how can you actually provide alpha? And when you have these five different funds, how do you manage to differentiate the value proposition of each one when every token trades so similarly?
Generating Alpha
DM: Yeah. So on the second question, first, is to differentiate them. Since our four funds do trade mutually exclusive things, so if it's equity in the venture fund; if it's a liquid token, like Ethereum, or Bitcoin, it has to go into the liquid token fund, if it hasn't yet started trading, it has to go in the early stage. So historically, we had mutually exclusive funds. We now want to have this all in one fund so that we can trade these big swings between value and we've just seen it in the markets, tokens reset instantaneously for better or worse. And just recently, they came off 55-60%.
Well, the interest there is slow-moving. You know, people are still doing term sheets from 3 or 4 months ago, entrepreneurs still want the prices and the valuations they heard of 3 or 4 months ago. So venture at the worst is very slow, it takes 6 or 9 months for the prices to reset. And so in this new fund, where you look, find tokens when they're cheap, like we did at the end of June, beginning of July, and they were very cheap, and then ultimately sold it back out when tokens are expensive and it allows us to balance between those two.
CR: Okay, so how do you generate alpha when everything is so correlated?
DM: Yeah, so that is a great question. It is not as correlated as it seems. And people do have a view that, you know, everything does go up and down together. And for very short periods of time, that's true. But over multiple months, or even years, things really do trade very differently. We have new tokens that are in the top five now that weren't even in the top five a few months ago. And those do change quite a bit.
So there is a lot of alpha opportunity by being in the right tokens at the right time. And I think you've seen over the last four or five years that it'd be fun to calculate how many different tokens have been in the top five. It's been an amazing amount. Obviously, Bitcoin or Ethereum has been in the top five, but there's other slots changed quite a bit.
“So there is a lot of alpha opportunity by being in the right tokens at the right time. And I think you've seen over the last four or five years that it'd be fun to calculate how many different tokens have been in the top five.”
And even just the very simple metric is Bitcoin dominance, the percentage of the entire market cap that is Bitcoin, that changes a lot. In January, it was 70%. It touched 39% a few months ago. Now it's at 44%. And so that's a really good indication that things don't all go up and down at the same time. You know, something’s ebb and flow. We also follow a stat which is the percentage of the market that's not Bitcoin or Ethereum, and those two are very, very dominant. And in January, they had only 16%. So, Bitcoin and Ethereum were 84% of the entire market, and the other 5,000 coins were only 16. That's now up to 37%, so it's more than double. But that's a good indication that things don't all trade the same; they go different things come in and out of favor.
CR: Super interesting. Before I get to the question of how you make sure that you're picking tokens that will be in the top five, I want to get to the question of how much you raised for your blockchain fund.
DM: Oh, yeah. So we are going to be in the market for a year from now until March of next year. And in the first three months, we raised a bit over half, I think about $350 million. And most of the institutional investors we're talking to, they're probably going to need 6 or 9 months to do their work. And so we'll know the ultimate size of the fund in March next year.
CR: Got it. Like, do you have a target for it?
DM: We recently targeted $600 million, that is about 15% more than we currently manage, so it's a number that's doable. And frankly, we picked a number that we thought we could raise without an enormous amount of the investment team’s time. The markets are stronger than we anticipated, we didn't think we'd raise over half of it in the first three months. So I would think we're going to ultimately end up with an amount that's larger than our target.
CR: Oh, interesting. Okay, so back to the question I had on kind of the top tokens. What do you evaluate on your liquid token investments to make sure that you are holding those top ones?
DM: So you know, it's funny you ask it that way is, we do own some of the top tokens. We own a lot of Ethereum, and we've own Bitcoin in big positions over the years. But we're not trying to replicate the mega caps, and we're not trying to be an index. So we often actually own a lot of the kind of numbers 20 through 100, if you will, of the list of most popular tokens. Our industry normally has an enormous amount in the top two, is that it went up to 84%. And then it really has another 30% or so sometimes, they're in the next kind of numbers 3 through 10. And then very small amount of the market cap is the tokens 11 through 100. That's where we see a huge amount of the value. Those are the ones that can go up much more than the mega cap.
So we've historically been underweighting the two biggest Ethereum and Bitcoin, and massively overweight the smaller tokens, the ones like the Polkadots, and Filecoines a few years ago that nobody had heard of, but then ultimately will become very valuable.
CR: Right, I guess I should rephrase my question. How would you pick those small cap tokens? Because obviously, those are the ones that have more potential to grow faster than the ones that are larger in theory? So yeah, what do you look for to make sure you're picking the biggest gainers?
DM: Sure. So I mean, it's similar to venture, early-stage venture investing. We're looking for a really strong team, that has a project that is even doable. There have been a lot of white papers that we think are literally impossible that even if they had 1,000 developers, in 1,000 years, they couldn't actually build what they're promising to do.
Looking at the market size, making sure it's a product that is large enough, obviously, valuation matters that if it's a great team and a great product, but that the valuation is too high, there been a few projects that have been valued in the billions, and it's really hard to 100x from there. And then the other thing that is unique to cryptocurrency protocol investing is you have to make a subjective guess as to whether the development team is going to be able to build a community. These are open-source pieces of software. You know, just having a really cool widget isn't enough. You have to motivate other people to build on it to improve the code itself.
“These are open-source pieces of software. You know, just having a really cool widget isn't enough. You have to motivate other people to build on it to improve the code itself.”
And so we're trying to make an assessment of whether the team's going to be able to motivate and rally people behind it. I think, the Ethereum community is a really good example. There's an enormous passion in that community and we're looking for projects that can do that.
CR: Oh, so interesting. Yeah, community, I think, is a really important aspect to protocol-building on something that maybe wasn't considered as much in Web 2.0 investments where you just need the right team. So, like, what are good indications for you that a project will be able to rally a good community behind it?
DM: Yes, it is subjective. We've met a ton of entrepreneurs, and we're trying to get a sense of whether they’re communicating, whether they’re building a broader base. And like you said, in a lot of Web 2.0 applications, if you build a really good product and watch if the consumer is using, that's all that matters, you don't need other people to build other applications on top of, whereas in blockchain you do need to motivate people to build things to make your blockchain useful.
Bullish DeFi
CR: I want to get into your thoughts on DeFi. So you've said before, that you think decentralized finance is one of the biggest opportunities in the blockchain space. Why do you believe that's the case?
DM: Yeah, I think a way to think about it is the other protocols of the internet have radically changed, everything else in our lives; commerce, communication, everything. But finance really hasn't been touched by the internet. You know, banks still operate basically the way they did centuries ago, credit card companies still charge the same rate as 1958. You know, remittance companies are still doing the same thing they know for 140 years.
So the internet really didn't come to finance. And that's basically what blockchain generally is. But DeFi specifically is bringing the ability for anybody with a smartphone to interact with anybody else on earth with a smartphone, and not paying an expensive middleman. And those payments that were actually really expensive. 300 basis points per credit card transaction is really crazy in this century. The average remittance cost is 8%, which for people, finance is just a number. But for the migrants, it’s a month’s wages. They have to spend entire month working to pay their remittance company.
“So the internet really didn't come to finance. And that's basically what blockchain generally is. But DeFi specifically is bringing the ability for anybody with a smartphone to interact with anybody else on earth with a smartphone, and not paying an expensive middleman.”
So the promise of DeFi is to connect people that want to borrow money with people that want to lend money, people that want to buy security or digital asset with people that want to sell a digital asset. And those are massive, massive market opportunities. A good example would be we've been investing in DeFi since it was kind of just a white paper, and there was really nothing actually happening. A year ago, finally, things started clicking over and people started using it. So we're really excited. There's $100 billion locked at DeFi now. That's so exciting because it’s so much bigger than it was when we got started. But there's $100 trillion of bonds out there. So there's enormous opportunity for DeFi to intermediate between the borrowers and the lenders.
CR: So how big do you think DeFi can actually be? Like, do you think it can completely take over the traditional finance and so the $100 trillion that's out there in bonds will be replaced by on-chain securities, for example and same thing with equities, same thing with all the other assets?
DM: Well, I think it's going to be a big market share of the existing legacy business. But the exciting thing with new technologies, they always create opportunities you didn't even imagine. So I think you're going to have to see DeFi take a good chunk of the market share from the existing borrowing and lending systems, but also there'll be new ways people do business that we aren’t imagining yet.
CR: Totally. With DeFi, how are you investing? So I know you're buying kind of tokens of different protocols themselves, but are you actively involved in staking or yield farming or governance?
DM: Yeah. So I would say that the answer is we are involved in those things. But our main focus is trying to make returns on the token itself. And if you think about our eight different funds over eight years, our average IRR is 110%. So we try to make triple digits returns on the token itself. And then staking, yield farming, other returns are additive, or they're nice to have, but not drive initial decision.
“We try to make triple digits returns on the token itself. And then staking, yield farming, other returns are additive, or they're nice to have, but not drive initial decision.”
And then once we’re invested in a protocol, we're certainly trying to be as active as we can. On governance staking, we're trying to be as positive in the communities we can be, but it's normally not driving our decision. I'm sure in time there will be fixed income type funds that form the blockchain ecosystem that everything we're doing is replicating what's being done in the normal fund management community. And so I'm sure one of our peers is going to soon have a kind of yield-based cryptocurrency fund, and that'll be a whole fixed income market. We're not actively looking to do that ourselves, but I think someone will do it in time.
CR: Right. Yeah, that would be interesting. Are you kind of not looking at that because you're focused on just like the really high yield stuff?
DM: Yeah. I mean, I think that really is the challenge of the blockchain industry, is there's so many opportunities, you really have to triage it and go after the ones that A, you think are the biggest and, you know, you have some competitive advantage. So, we've been in the early stage, venture in the early space, token space, you know, we've added some HFT trading in our liquid token fund. So we're trying to expand into adjacencies. And ultimately, we will do some kind of yield-oriented fund. But there's so many other things we're trying to do that we haven’t that time to focus on.
CR: Yeah, make sense. So you've mentioned you're kind of pretty actively trading these tokens. But like, how active? Like is it like you're in these funds daily shifting positions? Do you have some sort of bot that takes care of that? Like, how do you manage all these tokens?
High-Frequency Trading
DM: Yeah, so our main investing is venture style investing, where we're looking for good products, we invest, we hold it for many years. So our early stage token fund, lot of things like Filecoin and Polkadot to hold them, so it's been a long time.
Whereas in one of our funds, the liquid token fund does trade, actively trading liquid tokens. And even in that fund, I would say that we are mainly making discretionary investments on things that we think will hold for, say, 4 or 5, 6 months. And good example was one that I started out with earlier is Bitcoin dominance. In January, we had a lot of Bitcoin, hit 70% dominance, and we sold Bitcoin to buy more DeFi type tokens. You know, it's eight months later, we’ll probably going to reverse that trade and buy much more Bitcoin, and take down risk in other things.
So that fund’s typically making trades that are 6-8 months type holding periods. However, 5-20% over time of that fund is a HFT quants strategy. So we're looking atthousands of pieces of data, and analyzing which tokens go cheap to go long and which tokens look rich to short, and that is traded with some order routing systems that are trying to communicate with, I think, it’s about 12 different exchanges to be able to trade typically every hour or so. Sometimes, it's less frequent, sometimes, more frequent. But we're trying to buy kind of the discrepancies, kind of the inefficiencies as part of the effort… Yeah, there's a lot of inefficiency in this market.
CR: Oh, that's so interesting. Okay. So the main kind of most active fund is a liquid token fund. And how big is that fund?
DM: That's $800 million.
CR: $800 million. Okay. And within that fund, you said there's 10-15% dedicated to this, like, high frequency trading strategy, which trades every hour just focusing on whatever opportunity to arbitrage there is in the market?
DM: Yes. And essentially, our main constraint now is order routing amongst all these exchanges, sometimes tokens only trade on one exchange, it's kind of the technical issues of moving money around are the constraints make that harderthan we would want it to be.
CR: Interesting. Are you focusing mostly on centralized exchanges? Or are you going to DEXs as well?
DM: Both. We're both invested in and fans of both centralized exchanges and DEXs.
CR: Oh, no, but I mean, what kind of your platform to buy and sell these tokens?
DM: So we do trade on both DEXs and centralized exchanges. Essentially, we have half a dozen different exchanges we're trying to trade with, and whichever one's the cheapest, or we get the most volume there.
CR: Got it. And then you said something, also was super interesting. You said, right now you are looking to increase your Bitcoin exposure and sell some DeFi tokens. What is driving this move?
Adding Bitcoin
DM: It’s essentially just a reaction to the change in the value of Bitcoin. It used to be 70% of the market, it is down now to 44%. And around here, it's worth increasing it. We've had very low exposure to Bitcoin for the last six or seven months in the liquid token fund and it's starting to be time to add it back.
“We've had very low exposure to Bitcoin for the last six or seven months in the liquid token fund and it's starting to be time to add it back.”
CR: Interesting. So is it a matter of just looking at these levels and where they've historically been? Or do you also look at fundamentals —maybe the DeFi market is, I don't know, if you think is, has been overbought, and maybe the fundamentals aren't there yet with the prices? Is there other things that you take into account to make these moves?
DM: We’re certainly still very bullish. DeFi is our main bet in our liquid token fund. It's just we've been massively underweight, Bitcoin having zero exposure in it. And since it's come down so much, it seems like it's prudent to put some of it back on. I think liquid token funds only averaged 17% Bitcoin over the four and a half years it existed, whereas on a market cap basis, it would have been 55%. So it's been down to zero, so a very big bet and we want to take that up a bit.
CR: Interesting. Do you have like a percentage rate for Bitcoin that way you think it should be for that fund?
DM: I mean, it changes all the time. Over the last six months, it's been zero. It probably would go… And typically, we don't own more than 20% or 25% in any token. So it will probably go into the teens.
CR: Got it. Okay. And then on Bitcoin, what's your latest price prediction or forecast for this year? Do you have one?
DM: So Bitcoin’s grown to around 33% a year for 11 years, and that's essentially my normal forecast, is if it keeps doing what it's been doing for a long time, it's had this huge downdraft. So I'm actually now more bullish than normal. I think and remember this, our investor letters over the last two or three months, which are on our website, if you want to check out the reasoning.
But I think the downdraft in the price of crypto generally, and specifically, Bitcoin has been a bit kind of short-term issues, short-term kind of panics, I would say. And the issues that we think drove the price down are varied. They're not likely to persist. And so it's gratifying to see that the markets already regaining a lot of its losses, and I think over the balance of the year, it's probably going to be very strong.
CR: Yeah, it looks like some of the drivers were China earlier this year, ESG concerns, regulatory concerns. So of those, I've seen you explain why, for each you think it won't have a lasting impact, if maybe you can go through some of those, I don’t know, starting with environmental concerns, why don't you think that will have a lasting impact in like the public's perception of crypto and demand for crypto?
Environmental Concerns
DM: Yes. So in the space of just a few weeks, some high profile people like Elon Musk went from super bullish on Bitcoin to questioning whether there's an environmental issue or ESG issue. And so, we did a deep dive into the ESG questions on blockchain and Bitcoin specifically in our last letter.
And I think the thing that there's a bunch of points that are important. But if you want to start with just the first letter of ESG, environment is, you know, Bitcoin does consume about 1/10 of a percent of all the energy on earth, so it's a noticeable number. The thing to keep in mind, though, is still pretty small relative to a lot of other industries. Bitcoin probably has about 50% of its energy coming from renewable sources, which is five times higher than the US as a whole where 11% comes from renewables.
So the Bitcoin mining industry is hyper-competitive, and incentivizes people to find sources of energy like hydro in areas that are too far away from urban centers to shift the electricity. So that kind of the, you know, kind of narrow, I will say, of excessive worry about energy consumption isn't well-founded.
And then a lot of the arguments against Bitcoin are based on papers like one that says that Bitcoin itself will cause two-degree increase in global warming based on some crazy misunderstandings of Bitcoin where thinking that the number of transactions drives the electricity consumption, and it isn't that way at all. The number of transactions has nothing to do with how much energy is used. It's just a function of the block reward and how much Bitcoin is being supplied to the market.
The important point about bitcoin’s every four years, the number of bitcoins that are issued is cut in half. And so the amount of money that miners have to pay for electricity will be cut in half every four years for the next 100 years. So there is essentially kind of a cap on the amount of electricity Bitcoin can consume based on the halving.
And even as the price of Bitcoin goes up a lot, say if it went up to $320,000 for Bitcoin in the next 12 years, you know, that would be amazing. I think everyone in the industry thanks that's amazing. That would still be minus only the same amount of money as they have today to pay for electricity. So people that draw these upward sloping curves for energy, I think are missing how Bitcoin actually works.
And then many of the other blockchains don't use energy for security and it uses switching to proof-of-stake. So, the energy intensity of the blockchain industry as a whole has been declining. And once you go to ETH 2.0, it will be much less than it is today. So all those energy concerns, I think, are not well thought through.
And then the hugely important point is Bitcoin and blockchain are amazing. On the other two parts of ESG, social and governance, they're going to provide enormous benefits to literally billions of people on earth over the next decade. And if you weigh all those out, I think blockchain is amazing for ESG and that's a point, I think, over the next few years. When people really do the work and really think this through, they're going to realize blockchain is fantastic for ESG.
CR: Yeah, I have to agree. So on the regulatory front which has also been kind of one of the drivers of crypto recently, what are your thoughts there? I mean, are you concerned that the regulatory framework in the US will start to become more unfriendly towards the industry?
DM: I was definitely concerned and we're always monitoring and we try and help with policy bodies with providing facts and help educate. My view is, most countries and the US have been, I’ll say, pretty laissez-faire about blockchain, they don't really do much to help it and they don't do much to hurt it. And in the US, for example, most of the agencies ruled very early and very positively on Bitcoin and blockchain. The IRS ruled that it’s property. The OCC allows their central banks to custody crypto. CFTC has always been very progressive. One of their commissioners came out to my house for a conference in 2013, so they've been very aggressive and then with futures and those things.
So, it really is just the SEC that it still has to work through whether certain assets are securities or not securities, which is a complicated question. So, most of the regulatory bodies have been friendly, that's our essential expectation, that will persist.
CR: So going forward, how do you think the macro environment will continue impacting crypto? So, far this year, it seems that macro has been pretty favorable to crypto, because well, the pandemic incentivizes all of these government aid programs and central banks printing a lot of money, and that money has gone in part to riskier assets, like crypto. And I think there's also this social aspect of people being on their computer all the time. So spending more time buying digital assets, buying NFTs —oh, by the way, I definitely want to get your thoughts on NFTs, question after this— But so it seems like the macro environment has been pretty positive for crypto, do you think that will continue or how do you think it'll change?
Stimulus Driving Crypto
DM: Oh, I think all your points are spot on. I think the macro really is driving crypto, and essentially anything that can't be quantitatively eased. And monetary and fiscal response to the pandemic has been literally off the charts. The amount of money the US began printing in June last year is greater than the first 200 years of the country's existence. So we're really printing just an unbelievable amount of money. And it seems if anything, the size of policy stimulus is growing. So that I think has the inevitable impact of pushing up the price of anything at this point. So obviously, I'm excited about crypto and I'm long crypto.
“It seems if anything, the size of policy stimulus is growing. So that I think has the inevitable impact of pushing up the price of anything at this point. So obviously, I'm excited about crypto and I'm long crypto.”
But other things like stocks, real estate, US median home price have their biggest increase ever in the middle of a global depression, which seems to be indicative there's a lot of paper money out there chasing hard assets. We did a cool graphic on our Twitter feed and our website, showing essentially the price of the US dollar priced in quantities like barrels of oil, ounces of gold, grams of sugar and things like that, and it's pretty much the same story that all those things are relatively constant with respect to each other, it's really the US dollar or paper money in general that's falling.
And so those things that can't be quantitatively eased are rallying in terms of the number of US dollars it takes to buy a unit of those things. But the flip side is to think it's paper money that's crashing. And if we keep doing this, we’re going to start pushing up inflation and inflation is rising at a very fast rate now. And there's a lot of people that say, oh, it's just to kind of a basic factor, is just something temporary.
There's a lot of tightness in the labor market, because of essentially disincentives to work. So we have a labor shortage in the middle of a pandemic, which is an amazing outcome. And so wage rates are rising, and then those feed back into the price of goods. And so I really do think that inflation is an issue. And this comes from somebody that's always been early been an advocate of a secular decline in inflation and in a secular bull market. In bonds, so I'm not some kind of person who’s a raving lunatic about hyperinflation for decades.
But right now, I think the world's just changed. There's an enormous amount of money being printed, and it's fueling the price of everything. And a proof of that thesis is the S&P 500 did a record high in the middle of global depression. I mean, that's clearly from tons of paper money chasing a fixed number of assets.
“The world's just changed. There's an enormous amount of money being printed, and it's fueling the price of everything. And a proof of that thesis is the S&P 500 did a record high in the middle of global depression. I mean, that's clearly from tons of paper money chasing a fixed number of assets.”
CR: So if that's the case, how sustainable is it for crypto? I mean, if like if this money printing is what's driving prices right now, it doesn't seem like that should be kind of the long term value for crypto, right? Like, it just seems to me that if there's this like, big balloon of like fiat just like going into all these assets, at some point, that has to pop.
DM: Well, I hear what you're saying. But what I would argue is it's a step up in the quantity of money, which then changed the price of everything, whether it's silver, or gold or oil or being home price. I can't imagine that the government would ever take that money back. Like, they might stop printing more money, but I don't think they're going to do any type of deflationary policy. So it's kind of a step function, then pump up the price of everything, housing, S&P 500, Bitcoin, Ethereum, whatever. And then they might stop printing more money. But we were at kind of this new, low. So while this impetus might stop at some point, it feels like it's going to keep going for a while. If money printing does stop, I think it will be a new price level for cryptocurrencies.
CR: And then the stabilizing factor would come from, so there just there won't be any incentive to take money away, maybe like, central banks aren't going to raise rates super high or anything like that? But I guess the stabilizing would come from people just demanding less assets just because that money will be used for more like productive things and not just buying crypto?
DM: Yeah. We've been bullish on crypto for eight years. And way before the pandemic, way before the money printing, because of all the underlying wonderful things that are happening, remittance payments, all those things that are there going, and once the money printing is over, all those things will still be happening, will still be wildly enthusiastic about blockchain. It's this era which it's been 18 months, it might be another five years, who knows.
But there's going to be an era where monetary stimulus just kind of resets the price of everything on earth. When that's over, the main driver goes back to being the technology, the number of people using crypto, DeFi, all these other things. It's the monetary stimulus is just coming in afterburners pushing this thing faster than it would otherwise go. But when it stops burning, we're going back to all the other arguments that one would want to own a crypto.
CR: Yeah, makes sense.
DM: You know, one thing we try to do is kind of keep things in bigger picture, historical perspective. And we have a graph of the price of Bitcoin all the way back 11 years, graphed exponentially, so you get a compound growth rate. And it's been pretty consistent. The average has been 233% a year, and there's been some bubbles and bear markets. But over the last 11 years, it actually grinds up at a fairly consistent rate. And because of the fall, we've had in the last few months, Bitcoin is a proxy for the industry and it’s 32% below its 11 year compounded annual growth rate trends. So it doesn't feel like we're in a bubble.
And given, if you told me a year and a half ago that we're going to be like trillions of dollars of stimulus every year and multiple trillion-dollar packages, and Bitcoins only $45,000, I would say wow, that's cheap. So I think, given what's happened to still be below the long-term trend line is pretty remarkable, and that's why we're more bullish than normal on crypto.
“Given what's happened to still be below the long-term trend line is pretty remarkable, and that's why we're more bullish than normal on crypto.”
CR: Super interesting. Yeah, I saw that chart, it does look like we're not in bubble territory yet compared to like 2017, 2013. And I guess like tying back to a question I made earlier, so what is your price target? You say you're more bullish than normal, so how much do you think Bitcoin will gain and to what price?
Price Targets
DM: So yeah, Bitcoin’s average tripling every year for the last 11 years. You know, I think in a year's time, it could be $150,000. You know, I think that's quite doable.
CR: How about for ETH?
DM: Oh, I do think he probably will outperform $10,000 in a year’s time, could happen.
CR: Sorry, and those predictions are for end of 2021 or like 12 months from now?
DM: 12 months from now.
CR: Got it, okay. Why do you think ETH will outperform BTC?
DM: Oh, there's so much being built on top of it, and DeFi is mainly powered in ETH. And I just feel like over the next year or so, there’s going to be more interest in Eth and DeFi than Bitcoin. And it's not like, and I think they both kind of go up a lot. But part of our fund is making any bet that ETH and DeFi will outperform.
“Oh, there's so much being built on top of it, and DeFi is mainly powered in ETH. And I just feel like over the next year or so, there’s going to be more interest in Eth and DeFi than Bitcoin.”
CR: So you're overweight ETH versus Bitcoin right now, like overall?
DM: Yes, very much so.
CR: Okay. What are your thoughts on NFTs? Like, are you investing in NFT platforms or on kind of tokens themselves? Like, do you own any CryptoPunks?
DM: Yeah, so it's a great question. And I think NFTs is a very important space. And I think like any kind of new really disruptive thing, there's going to be some amazingly important things created, and then there's a lot of stuff that ultimately isn't important. And we've seen that like, dotcom boom, there's a couple of really important companies that came out of it, a lot of companies went to zero, the ICO boom in 2017, kind of similar. Frankly, I think that's likely to happen in the NFT space.
We’re investors and MakersPlace, and some other projects in the NFT space, that provide infrastructure, foundational products for NFTs. I think that's a great way to play it. In terms of investing directly in NFTs, I do think there's a lot of speculative frenzy and a lot of the things that are being bought, I question whether they're going to have long-term value. And I guess, my perspective would be that there are NFTs being created that can only be done with blockchain and can only be done in this format. And those, I think, are revolutionary and going to have incredible long-term value.
The other things that could be done kind of in the normal world, well, and that's kind of like, Bitcoin and blockchain five or eight years ago, everyone's trying to do XYZ business model, but with Bitcoin, or with its own cryptocurrency, there's no need to have a blockchain or some don’t need to have their own cryptocurrency. And that's what I'd say here in the NFT space. There are some artists they're doing things where the artwork evolves over time, like with AI interacting with it, and changing and evolving, that's really cool.
Performance artists doing work, where the fan interaction changes the piece of art over time, those kinds of NFTs I think, are what happen interesting, I think, are going to, you know, when you look back 20 years from now, they're going to have been the important ones. It's like modern art 80 to 100 years ago, Marcel Duchamp put a urinal on the wall of Paris gallery and that urinal is worth $150 million. So when people have a good idea that well, it hadn’t done before, yeah, that's going to have a ton of value. But those are going to be rare.
CR: Got it. Perfect. Okay. And then to wrap up, what are you most excited about that's happening? Like, of all the things that we discuss, I mean, we talked about a lot of exciting things, what's going on in on ETH, DeFi, NFTs, Bitcoin itself, yeah, like what's most fun and looks like most promising to you?
Institutional Demand
DM: Well, from an investment standpoint, I think DeFi is still the most interesting and our biggest bets are in DeFi. And then from just kind of an industry standpoint, we're a fund manager we're talking lots of investors, and we've been talking to people for eight years, I'm really interested to see if this wave of institutional interest that we're seeing now really kind of changes the industry to a whole new level. My intuition, it feels like there's really massive entities that are thinking about putting some very big investments into the space, but it's going to take 12 months to kind of work through the system to see.
CR: Oh, so interesting. So if you can kind of give us a sense of what kinds of institutions are looking into the space? And how do you think that that could change the blockchain industry?
DM: Well, interesting to say I was talking with a very big 100-year-old firm yesterday, and I’ve met with their CIO four or five years ago, and they said no chance in hell of investing in blockchain. And for whatever reason, they have a new CIO, and it's all go, we’ve got to get invested in blockchain.
And so, we do see a lot of those big institutions we've been talking for a long time that said there was no chance of ever investing now, really flip it around the other way. And you've seen it on Wall Street, right, now at the big Wall Street firms for a long time trying to keep blockchain at bay. And Morgan Stanley, JPMorgan, a lot of firms are now offering Bitcoin or blockchain products, right. So, we're doing a complete zero to one switch from institutions trying to avoid blockchain to really having to get involved.
“We're doing a complete zero to one switch from institutions trying to avoid blockchain to really having to get involved.”
And, again, I don't want to jump up and down, say, I know, this is it, it's definitely going to be every institution changing, but just kind of feels like it. My intuition is over the next 12 months, there's going to be some really big institutions making meaningful commitments to the space. And it is still relatively small space, you know, it's $2 trillion total assets. If some of these big institutions come in, it really will move the markets.
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