It’s been a rough past few months for everyone in crypto, and this includes many institutional investors who have been rapidly dumping their bags. However, there are some who are holding tight and, in some cases, even buying the dip. When it comes to funds in the space, one of the most well-known and respected is Pantera Capital, and earlier this month they released their blockchain letter, a rundown of their thoughts about the current market and how they are positioning.
I’m going to tell you exactly what it says and add some of my own thoughts along the way. This is something you don’t want to miss.
Just for the beginning, I should say that anyone may become wealthy if they explore all other options. One of them is Jet-Bot for copy trading crypto. The platform is the official broker of the Binance exchange. You can connect your Binance account to Jet Bot platform via secure Binance API connection. Jet-Bot crypto trading platform supports both spot and futures bots trading on Binance. You can copy best traders and follow all their deals automatically. Register today to compete for the title of greatest cryptocurrency trader in the world.
Defi Worked Great
For those of you who don’t know who Pantera is, they’re one of the oldest crypto funds in the space and actually started buying bitcoin back in 2013. Their bitcoin fund is the best performing one on the market. Since its inception, it has seen a ROI of over 26,000%.
While its bitcoin fund is what Pantera is most well known for, since 2017 they have been diversifying into altcoins and seed or strategic investments. It’s all led by an ex-trading phi trader called Dan Morehead, who is himself quite the crypto guru. Okay, that’s enough of an overview.
The report we’re here to look at is entitled “DeFi WorkedGreat,” and I can already tell that I’m going to enjoy it. That’s because the report starts off by referencing an article titled “DeFi’s Existential Problem,” which only lends money to itself. That was in the Wall Street Journal a few weeks ago. I remember seeing this article doing the rounds on crypto twitter, and it’s every bit as asinine as its title suggests.
The whole article is trying to draw a false equivalency between the ills of the centralized lenders (Celsius, BlockFi, Voyager etc.) and DeFi. It’s trying to equate centralized finance with decentralized finance. In Dan’s words, quote, they are not DeFi or on the blockchain at all. Simply some startup banking entities that became overly leveraged.
He also notes that he tries to avoid all articles that compare crypto with tulips. I have to agree with him here. If an author is willing to trot out that hackneyed cliche for something as revolutionary as crypto or DeFi, is there peace actually worth reading?
The main point that Dan is trying to make in this report is the fact that during this current crypto market meltdown, DeFi has functioned just as it should. Protocols like Aave, Compound Finance, Maker DAO, and UniSwap have run smoothly. All loans were over collateralized, and there was no scope for renegotiating any deals. If loans were not paid down, they were liquidated, and it was all fully transparent.
Now this is the opposite of how bailouts and restructured debt deals work in practice, behind closed doors and opaque, choosing winners and screwing the losers. This quote from the Wall Street Journal article is particularly galling:
‘To the glee of its critics, DeFi has ended up committing all the same sins as Wall Street, essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers.’
Wait a second, DeFi open and transparent code has committed the same sins as bankers. Dan makes an interesting point here and that is that the author says ‘pre-2008 investment bankers’. So does this mean that today’s bankers are all moral citizens? Hmm, commodity market manipulation, predatory lending, money laundering by drug dealers. The banks are not only easily corruptable but openly corrupt.
However, you cannot physically corrupt a protocol. There is no one person pulling the strings. It’s all a really silly article and Dan breaks it down nicely. He also notes that he tried to reach out to the author in order to help him understand why the article was so off-base. There was, of course, no response and, as you can see to this day, the title stands in the article and there have been no changes made.
DeFi is Superior
Moving on from the article in this section, here the report explains why DeFi is superior:
It comes down to the fact that no matter who has borrowed money from a protocol, they are all viewed as identical. $100 borrowers or $100 million borrowers, the protocol keeps you honest and it will liquidate you if you fall below collateral levels. In DeFi, for example, if you were a lender on an Aave, for example, and Celsius was a borrower, the protocol makes sure that the lenders will always get their money back.
Given that they are over collateralized, there will always be enough funds to pay you back should the borrower fail to do so. For example, there’s a reason why Celsius was paying down the debts that it had on Aave and Maker DAO. Had it not done so, then it would have been automatically liquidated, as the report says. All centralized finance companies are forced by smart contracts to pay back the DeFi protocols to give you an idea of how this compares to the shadiness of Tradfy. They bring up the issue of Voyager FDIC questions.
For those who haven’t been following up until a few weeks ago, Voyager was advertising that it was somehow FDIC insured. That would imply that users who had balances in fiat on Voyager would have up to 250k covered by the federal deposit insurance scheme should Voyager go bankrupt. This appeared on an earlier version of the website that can only be seen if you use the wayback machine.
However, the latest version appears to tell the whole truth that the bank that Voyager used is FDIC insured and your funds are protected there. So the obvious ruse with the original wording is that customers were led to believe that their funds were safe with Voyager because, should it go bankrupt, the FDIC would step into the breach. That, of course, is a lie. The Voyager bank was FDIC insured, and balances that Voyager held with the bank were only insured should the bank itself go bankrupt.
Another example is then given, and this is from another centralized lender BlockFi. They reference the SEC’s complaint against the firm related to its BIA investment opportunities. The SEC claimed that BlockFi’s users did not know the full extent of the risks associated with these accounts, and that is indeed true. When you invest money with the likes of Celsius, BlockFi, or Voyager. You had no idea what they were doing with your funds. You thought that they were being prudently lent out with risk well managed. It turned out that some of them were engaged in risky DeFi yield farming, with others lending under collateralized to a hedge fund that turned out to be a house of cards.
The point is that with these CeFi firms, you couldn’t really prove otherwise. You had no way of knowing that Voyager lent 650 million dollars uncollateralized to a counterparty. It was all a hidden risk. You couldn’t really verify that there was a one-billion dollar hole in Celsius’s balance sheet.
With DeFi, however, there is no scope for white lies and shady statements. You can crack open a smart contract explorer. You can observe the collateral backing alone. You can see the lending levels and you can see who has exposure. Beyond this, the DeFi protocols also conducted their business in exactly the same way before and after the crash; whereas some centralized exchanges went down in the aftermath of the Terra attack, DEXes remained operational 24 hours a day, seven days a week.
Not only that, but their volume has been expanding to the extent that some of them, like UniSwap, have daily trading volumes that surpass those of Coinbase on occasion.
Okay, so that’s the DeFi/CeFi angle that they go into in the first sections of the report. This is really important to understand as it helps you appreciate just why this recent crypto collapse has nothing to do with the underlying tech and, if anything, it should make you even more bullish on some of those protocols being built.
Moving on over, here is a pretty helpful chart. It breaks down the relative performance of cryptocurrencies by their sector or category.
Anyhow, something that would have been great to see on this chart is at least a breakdown of what coins are in these categories. That aside, we can see that those crypto types that have had the biggest falls were Layer-2 projects, so these could include the likes of Polygon (MATIC), Optimism, Looping etc.
My only assumption for this is that the fact that the scaling considerations for these projects have been less pressing given that fees on ethereum have come down quite a bit. At the other end of the spectrum, it seems as if those cryptocurrencies that are used as payments or stores of value have been performing the best. I’m pretty sure that bitcoin was in this category, hence the reason that it’s held up relatively well compared to the rest.
Moving on, this chart over here shows that the period from December 2017 to the middle of 2022 is the longest period of flat bitcoin performance. That’s because at current levels we’re around the same place as we were at the previous bull market high.
It’s also quite unlike the previous bear market as during that time we were still up by over 5.2 times the level we were at four and a half years ago. Part of the reason why bitcoin has been performing so poorly this year is, of course, its correlation with other assets like stocks, particularly tech stocks. Here you can see the performance of crypto compared with some of the most popular tech stocks:
What’s interesting though is that although bitcoin’s price has fallen dramatically compared with some of the most popular tech stocks. I mean, there are some tech stocks that are faring far worse, and it’s not like they are getting lambasted by the mainstream press to the same degree as bitcoin copy trading is.
This then raises the very important question of when, or indeed, if crypto can decouple from stocks. I mean, bitcoin was developed to be a digital gold that was anti-fragile and unexposed to these typical risks.
According to the chart here, a reversal in correlation is already starting to take shape as we’ve moved down from almost 75% back in May to just above 35% today. Ironically, that peak in correlation came at about the time of Terra’s collapse. Therefore, I think that the fall is more a result of bitcoin’s diving lower on crypto-specific factors (Celsius, Terra, 3AC).
The decoupling has started, although not as we would have hoped, that aside, Dan still maintains the view he had in one of his earlier blockchain letters, that being that cryptocurrencies should be one of those assets that shouldn’t naturally be driven by interest rates. Bond prices are driven by rates because of bond math, stocks by company earnings, and real estate by mortgage rates.
‘Crypto should be viewed as a commodity that should be uncorrelated with interest rates.’
Dan in a CNBC interview said,
‘Although it hasn’t happened yet, I can easily see a world in which in a year when stocks are down, bonds are down, real estate is down, but crypto is rallying and trading on its own. Very much like gold or soft commodities like corn or soybeans.’
I tend to agree with him that while the markets are being driven by Fed action right now, on a fundamental level, crypto should not be driven by interest rates. That decoupling will come, it’s just a matter of time.
Moving on, this section over here is particularly interesting as it looks at U.S economic growth and Biden’s celebratory lapse.
In January, Biden stated that in 2021 the U.S would have the fastest economic growth in nearly four decades. He made the same remarks in early June when he said that experts were predicting that the U.S economy would grow faster than China’s this year. That’s something that ‘hasn’t happened since 1976’.
Well, the only thing that he’s right about is that it hasn’t happened since 1976 and that’s because a few hours ago we saw a second quarter of negative GDP growth in the U.S. This would imply that the country is technically in a recession. It’s not official, and that’s because there is actually a panel that decides these things.
So the United States’ economic growth was not all that rosy. Moreover, China managed to eke out some economic growth in both Q1 and Q2. Although I am skeptical about the accuracy of its data. This is something that Dan talks about as well.
First of all, earlier this year, Biden should not have been bragging about the economic growth that came in 2021. That’s because it was ‘borrowed growth’. This is not untrue. The Fed flooded the system with money and the economic stimulus from fiscal spending also drove sky-high inflation. This inflation is now at record levels, 40-year highs and the Fed is desperately trying to rein it in.
Now in the section of the report titled “It’s going to take an elephant gun” Dan talks about how hard it will be to get the inflation genie back into its bottle. For example, take a look at this chart of the median selling price of homes. It’s still breaking records, which means that one of the primary drivers of inflation is housing. Ain’t slowing down anytime soon.
Another chart that he includes is this one over here, which shows the share of new car buyers who are paying 1 000 or more per month. This has tripled since the pandemic.
The point that Dan is trying to make is the fact that people can afford to pay these ridiculous rates to get a new vehicle. There’s still a lot of money sloshing around in the economy and spending is still at levels that drive inflation. As Dan states,
‘Unfortunately, a few basis points here and there will not stop inflation. Fed funds will ultimately go to something like 4-5%.’
This is something that many others are saying, including the likes of Bill Dudley, a former head of the Federal Reserve Bank of New York. We still have a long way to go. That’s if you even believe that 4-5% is enough.
Back in the 1970s, when there was similarly high inflation, Paul Volcker jacked the Fed’s fund rate up to almost 20%. So how much will the Fed tighten before deciding to ease off?
Well, according to Dan, the Fed will have to keep on tightening despite a recession because it’s so far off both targets of its dual mandate. Forgiveness, this isn’t all the Fed’s fault. The pandemic restrictions have led to a great resignation that has starved the market of labor. ‘For the first time in history, there are two job openings for each person looking for a job.’ What a great time we are living in.
Pantera’s blockchain letter has ended for most of our breakdown of pantera’s blockchain letter but it’s time for a few of my thoughts. It’s great to see that some of the OG funds out there are still bullish on the space. Pantera has been hodling bitcoin for almost 10 years, which can only mean they have diamond hands forged with extreme pressure.
Clumsy metaphors aside, their investment thesis is strong and their belief in Web3 remains unwavering despite the market turmoil. In fact, as outlined in the report, the collapse of the CeFi lending firms should be the clearest sign yet that DeFi is the only answer. Many VC firms seem to have backed away from the space as they’re unable to make that distinction.
Pantera, on the other hand, is doubling down. For example, they’re launching a new fund which will focus on growth stage investment series B, C, and D. As I’ve maintained a number of times, the next bull market 100 x’s will be made in this bear market. It seems that Pantera is laser focused on sniffing out these opportunities.
When it comes to the price of bitcoin and the broader crypto market, there’s still going to be some volatility and we could indeed see prices reach lower levels, but you have to ask yourself if this is because of fundamental factors or because of general risk positioning. Yes, it should not fundamentally be an asset correlated with rates. Yes, it has been correlated in the recent past and it still remains sensitive to interest rate policy, but past performance is not indicative of future returns.
Crypto has no inherent interest rate exposure. This means that, over a long enough time frame, current interest rates in the market shouldn’t impact its valuation. The billion-dollar question then becomes how long it will be before these inherent crypto fundamentals bear fruit, and when we will see that elusive decoupling. Well, your guess is as good as mine but reports like this one from Pantera can help inform our guesses. Do you think we’ll see a decoupling anytime soon?
[This article is a transcription of a video made by Coin Bureau]
[Original video: https://youtu.be/EtBEFb2VArY]