Episode #314: Dan Morehead, Pantera Capital Management, “Satoshi Created Bitcoin As A Result Of The 2008 Global Financial Crisis And It’s Really Coming Into It’s Own Now”
Guest: Dan Morehead is the CEO & Co-Chief Investment Officer for Pantera Capital Management. Dan founded Pantera Capital Management LP in 2003. He also co-founded and was CEO of Atriax, an electronic foreign exchange platform. Prior to that, he was head of macro trading and CFO at Tiger Management, global head of FX options at Deutsche Bank in London, and managed derivatives trading units and a global macro fund in North America and Japan at Bankers Trust. Dan began his career at Goldman Sachs as a mortgage-backed securities trader. He graduated magna cum laude from Princeton University with a B.S. in Civil Engineering and received the Carmichael Prize.
Date Recorded: 5/12/2021
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Summary: In episode 314, we welcome our guest, Dan Morehead, Co-founder and Chief Investment Officer of Pantera Capital Management, the first institutional asset manager to invest exclusively in blockchain technology and digital assets.
In today’s episode, we’re diving into how this Tiger Cub turned his attention to crypto and blockchain. We start with Dan’s background, spending time in Japan after the bubble burst and later at Tiger Management under legendary Julian Robertson. Then we hear about starting Pantera Capital and shortly after solely focusing on Bitcoin and digital assets. He shares what originally caught his interest in crypto, the different ways to value Bitcoin, how to size it and other digital assets in your portfolio, and what he believes this biggest risks are.
Please enjoy this episode with Pantera Capital Management’s Dan Morehead.
Links from the Episode:
- 0:43 – Intro
- 1:37 – Welcome to our guest, Dan Morehead
- 2:46 – Starting his career in the Japan after the bubble
- 5:28 – Moving back to California and becoming a Tiger cub
- 7:18 – Looking back to the Japanese stock bubble
- 8:41 – Dan’s early macro focus and portfolio construction
- 10:01 – Trying to quantify asymmetry and ways to see investing through a macro lens
- 12:12 – Emerging from the global financial crisis and starting Pantera
- 14:07 – Becoming a Bitcoin convert in 2013 and creating an early-stage fund
- 17:06 – Sponsor: Bitwise
- 18:08 – Dan’s bull case for Bitcoin
- 21:29 – Growing crypto stability and user friendly accessibility
- 24:17 – Five Orders of Magnitude (Morehead) Dan’s paper showing the data of 1 million people = bitcoin rises $200
- 30:30 – Tricks for investors to take the longview on Bitcoin’s short term volatility
- 34:24 – Is allocating 1% of your portfolio to Bitcoin a good starting point?
- 36:32 – Things that could potentially create a bear case for Bitcoin
- 40:53 – Is there a sovereign geopolitical blockchain risk
- 44:51 – The evolution of the crypto space
- 50:54 – Expected times horizons when investing in Pantera Capital funds
- 52:03 – Dan’s most memorable investment
- 53:22 – Learn more about Dan; panteracapital.com; Monthly letters
Transcript of Episode 314:
Meb: Today’s episode is sponsored by Bitwise. You’ll hear more about them later in the episode.
Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Hey, everybody, we have an incredible show for you today. Our guest is the co-founder and chief investment officer of Pantera Capital Management, the first institutional asset manager to invest exclusively in blockchain technology and digital assets. In today’s show, we’re diving into how this macro Tiger cub turned his attention to crypto and blockchain. We start with his background beginning his career in Japan, and after their bubble burst, later joined Tiger Management under the legendary Julian Robertson. Then we’re going to hear about him starting Pantera Capital, and shortly after, solely focusing on Bitcoin and digital assets. He shares what originally caught his interest in crypto, the different ways to value Bitcoin, how to size it and other digital assets in your portfolio, and what he believes the biggest risks are. Please enjoy this episode with Pantera Capital Management’s, Dan Morehead. Dan, welcome to the show.
Dan: Hey, thanks for having me on.
Meb: Where do we find you today?
Dan: I’m in Puerto Rico.
Meb: I’ve stayed in the hostel or whatever it was many years ago in Rincón, trying to surf. I’m a terrible surfer. I’m more of a Colorado ski guy. But love the island. Been there a few times. Need to get back. So, what’s the vibe down there like right now?
Dan: Oh, it’s good. Yeah. And there’s a huge crypto community here.
Meb: So, Dan, you have, I wouldn’t say the singular honor, there’s probably about five. And you won’t know this, because I don’t think it ever got to you, of my trying to get a job at your firm in about ’02, it would have been ’02, ’03. So, I’m sure this doesn’t ring any bells. But there’s maybe three or four companies on this podcast where that’s the case, did you know that?
Dan: Pantera or Tiger Management?
Meb: Pantera, this would have been Pantera.
Dan: Oh, awesome.
Meb: I was just out of university early 2000s, ended up quasi-ski bum in Tahoe. Look, it worked out well for both of us because I would have been an awful operations higher. And I would never have started Cambria as well. So, good call on whoever was running HR at the time.
Meb: But let’s rewind back. You started your career, and you’re going to have to correct me here. I think I’m directionally correct on the calendar, late ’80s, early ’90s in Japan. Were you there pre or post-bubble?
Dan: Yes, sir, in 1987, Goldman Sachs down on Broad Street here in Wall Street.
Meb: So, for the listeners on the show have heard me talk about Japan a lot. It is one of the defining sort of market events of probably our lifetime being there in sort of that late ’80s, early ’90s, and then kind of what’s transpired for the next three decades. What was it like at the time, can you take us back just for a minute?
Dan: Japan is kind of the precursor of so many things that have slipped around the world. In late ’80s, they had a massive bubble, real estate, stocks, all that stuff. I got there in 1990. And everything was just starting to unwind. And a great example of how they’d led the world into big, big things. They had overnight rates at 6% at the time. And I was like, “You got a big recession coming.” And at the time, Japan said they were going to have a Japanese recession, which meant growth that was below 3% positive. And I looked at all the numbers and I was like, I don’t know, this looks like a real recession, like western style. And you’re going to have to have rates much lower. And they slowly started cutting rates. But ultimately, they invented ZIRP, Zero Interest Rate Policy that we’re all now very familiar with. They subsequently invented quantitative easing, buying equities with government cash, a lot of these policies that have, unfortunately, swept around the world, and most countries have followed Japanese policy.
Another perspective would be, at the time, they’ve talked about the lost decade, Japan had relatively stagnant growth. It’s been a score of years and maybe a bit more now, they really have led the world into a lot of these economic issues that we’re still struggling with.
Meb: I feel like there’s so many lessons wrapped up in that bubble. And in, like you mentioned, subsequent multiple decades, no longer lost decade, lost decades, although a lot of people are really getting interested in Japanese stocks now. But when you think of trying to become asset class agnostic, which is what a lot of, I think, macro investors are really good at. Seeing some asset classes and opportunities sometime is great and other times is not so great. But you realize the effects that these markets and aftermath have. We’ve talked in the podcast before about, you go over to Japan any time in the last decade and talk to a lot of investors on the ground. And the concept of buy and hold is a lot different for equities than it is here because they’ve had this culture of equities going nowhere for 30 years.
All right. Well, let’s walk forward. So you come eventually back stateside. And get started in the macro world where we have our big bubble and bust, which is of course, where I started my career. I didn’t get there ahead of time, sadly, so I missed all the San Fran dotcom parties in the late ’90s. I didn’t get there till right afterwards in early 2000s. And you were in the Bay Area at that time, starting Pantera?
Dan: Yeah, moved back to California in 2002. I was in New York at Tiger Management before that, and a couple stints in Tokyo and London, but mainly in New York. And then moved back to California 2002, started Pantera in 2003, trading kind of disruptions, global macro-style investment.
Meb: And I can’t let you just gloss over this too quickly. Because Julian being one of the Mount Rushmore’s of old school, real security analysis, kind of long, short legends, any particular memories from that time as one of the Tiger macro cubs?
Dan: It was a blast working with Julian and all the other Tiger cubs. And speaking of Japan, one of the main drivers of Tiger’s performance over 20 years was being long great companies mainly in the West, mainly in the United States, and short a lot of companies mainly in Japan. And so, a huge amount of the performance of Tiger Management over that period was high-conviction longs, which a lot of people have. But being short and getting shorter as the price goes down takes a lot of courage. And that’s one of the things I most admire Julian about is, when you’re short something, it goes down 50%, if you want to keep your exposure on, you got to sell 100% more of it. And he was literally just shorting Japanese equities for 20 years and being long U.S. western counterparts.
Meb: That’s an interesting point, because I’ve heard Chanos say this before where he says, look, it’s a common misconception, people are like, “You can only make 100% on a short.” And he says, “Well, no, you can continue to double down if you know the short is garbage on the way down,” kind of like what you just mentioned, you can actually do much better. But again, it takes cojones, like you mentioned, the short game, as we’ve seen, again, in 2021, particularly is a tough game. But Japan, before we move on, the example of that, about markets and just getting crazy. I mean, we look at long-term P/E ratios as a sort of anchor, just as an example for history. And the U.S. hit 45 in the late ’90s and Japan is the single biggest outlier in our entire database where it hit almost a 100 in ’89. So, as crazy as the high 30s sound now, just for perspective, that’s a double, over a double from here. So things can get pretty batty for sure.
Dan: Well, that’s when bonds had a 20 P/E, they were trading high yields, so you get 5%, 6% of bonds back then. So, having 100 P/E on stocks was crazy. These days, bonds have such a low yield, they’re trading at 60 P/E or 70 P/E now. So stocks don’t seem as overvalued as Japanese stocks in 1989. That was, like you said, way off the charts.
Meb: I saw today we’re seeing some of the lowest yields on chunk in history in the U.S. All right, so, let’s talk a little bit about kind of your early macro focus at Pantera before kind of leading into the modern version. What were you guys looking at? Was it a fundamental sort of approach to markets? Was it something where you’re combining in technicals? How did you guys approach it? Was it equities, was it futures, was it a sprinkling on everything?
Dan: For me, macro is great, because I don’t really have an attention span. So, I love learning new things, traveling around the world meeting policymakers and finding good trades. So, essentially, that’s what I did at Tiger and the first 10 years at Pantera is looking for disruptions, things that the upside is way bigger than the downside and could be in any asset class. Either equity indices, commodities, interest rates, currencies. Essentially, the only thing we didn’t trade were single stocks. So, we get long Brazilian stocks, get short Russian stocks, those types of trades. But there’s always, every two, three years, been something really fascinating going on. Like in 1990, I went to Russia and invested in privatization there. Mid 2000s we launched I think the first western fund to invest in the Middle East. Things like that, long, short hedge fund invest in Middle Eastern equities. 2002 did a fund to invest in Argentine farmland. There’s always something coming up. And it could be any asset class, any type of expression, but it’s just when the odds are stacked in your favor.
Meb: This concept of asymmetry is probably a good lead in to what we’re going to talk about next. I think the challenge for so many investors is trying to quantify that, particularly when the upside is kind of in the power law sort of mindset. I think investors, it’s easy to wrap your head around, hey, this bond yields 4%, I’ll probably get 4%, or the stock market could do, instead of 8% historical, maybe it’ll do 15%. And those are sort of easily comprehendible numbers. But when you start to talk about, and I put sort of angel investing in the same category, or the things like the Russian privatizations, where you start to get into multiples, rather than low percentages, as the listeners have heard many times the trend following concept applies to that as well. How do you think about these sort of asymmetric bets? How do you think about, is there any ideas about finding them? So many people get beholden to just one approach. Any general comments on kind of the macro way of thinking?
Dan: I think more of it is just trying to think big-picture about what are the tectonic movements happening? What are the huge imbalances that need to be worked out or the huge disruptions. And again, they don’t come by every day, but when you do see them, you got to kind of dig in and spend some time on them. An example would be Chanos, his line about shorting, that is, you can only make one times your money will get to Bitcoin and crypto, but in my opinion, that’s the most extreme of these disruptions in asymmetric type trades. And you can only lose one times your money when you’re long something. So the worst case is you buy an asset and it goes to zero. Whereas sometimes you find a trade that has much more upside. It is rare. And I was thinking about how many things that normal securities traders trade, they actually don’t really ever go that far. Dollar-Yen is a great example. Dollar-Yen has been within 20 points of 120 my entire career, and I’ve traded a ton of it up, down, whatever, but it actually hasn’t really even gone anywhere. It just basically stays the same. So you’re looking for trades that do move and are going to move and are going to move over decades. And those are rare. There are a few that have come about.
Meb: Okay, so the years start piling up early 2000s, we have the Internet bubble burst. The market is slowly recovering, everyone’s clamoring for, let’s see, mid-2000s commodities, real estate, emerging markets, the bricks. And then we have the big daddy, the global financial crisis in ’07, ’08. Walk us through sort of that time and then the origin story for you turning the page into this new chapter.
Dan: That global financial crisis is actually the first time in history that the globe had a negative GDP print, there’d been regional recessions. Obviously, the U.S. had gone through business cycles every six or eight years, everywhere else did. But it was asynchronous. So, the globe had actually never printed a recession, which is really while since World War II, obviously. And so the global financial crisis, the first time it hit the whole world at the same time, that really was surprising how kind of connected everybody was to subprime mortgages in United States. Like there was…a very small thing drove a lot of disruptions around the world. And then coming out of that…well, literally, Satoshi created Bitcoin out of that financial crisis. And I love the fact that in the first block of Bitcoin, the Genesis block, there’s a quote from “The Times of London” talking about another financial bailout of 50 billion pounds for British banks. So Satoshi was totally focused on how governments debase the value of paper money, and wanted to create a new version.
So, a year ago in our investor letter, we said that Bitcoin was born in a financial crisis, and it was going to come of age in this one, I really think that’s a great way to think about it, that Satoshi created Bitcoin as a result of the 2008 global financial crisis, and it’s really coming into its own now in this new version of that.
Meb: I’m going to read an excerpt. By the way, your firm’s website, listeners, we’ll add a link to the show notes. But Pantera capital has a ton of content, both with shareholder letters as well as conference calls. So, check it out. I spent some time with all of them. And there’s particular passage I want to read, because it’s so timely and great. And it illustrates a couple points that we can jump off of. I’ll start, it’s short, it’s only two paragraph, it says, and this is Dan, I think, speaking, “I wanted to share my strong conviction that Bitcoin is about to melt up. I recognize that by normal securities market standards, this statement sounds insane, but I believe Bitcoin will explode through $200 within the next eight weeks,” Bitcoin was 100 bucks at the time. And then he said, “Look, for those who plan to invest or invest more, the opinion that now is better than later. And for those who have a half position on, I’d suggest two possible scenarios a year away. We split a bottle of wine over good stories, how Bitcoin project seems so promising, but, shit, it just didn’t work. We each lose out on a small fraction of our net worth, no tears. If it’s trading at 5,000, might need something stronger than wine to erase the feelings of regret.” Take us back to that time. Obviously, those numbers have added a couple zeros then, but, what did you see to become a convert that most didn’t in 2013?
Dan: My brother actually introduced me to Bitcoin in 2011. I read the handful of things that were out there on it, there really wasn’t much. And I thought it would be really cool if it happened, but that was kind of it. I didn’t actually do anything. And then, in 2013, Pete Briger and Mike Novogratz wanted my opinion on Bitcoin and I came in for a coffee, and I stayed for like three months. And it just, it was so fascinating. The coffee itself went for like four hours. And I just had an intuition that something big was happening. So I spent about three, four months thinking through it, working through it, talking to people, but I didn’t realize it really was going to disrupt huge markets, it’s going after the biggest markets on earth. And that really is the difference that all these other trades I’ve done, Russian privatization or whatever, impacts one country or maybe one region or whatever. This is going after wealth storage, credit cards, cross-border remittance, all these, and money. Money is $100 trillion market, right? It’s going after these massive markets. And, again, it took four or five months to really get my head around it. But by then I thought this was the best trade of a generation, and I still think that. I just think we’re in early days, couple more decades of this to go. And this is going to be bigger than any other trade we’ve ever seen.
So then I wrote that…we’d launched Pantera Bitcoin fund when Bitcoin was at $65. And I was trying to get people to see how important this was, and frankly, most people thought I was totally crazy. And so I sent that note out to maybe 30 people that had been interested, Wall Street executives, things like that, and tried to get people engaged. And luckily, a handful did.
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Meb: Kind of walk us through the basics of your case. One of the big things I like about your writings and research is, you clearly do the work. I think I saw you met with something like 1,000 companies, maybe not you personally, the team met with 1,000 companies last year. But like most great investment thesis for a security or an asset, it comes down to some simplicity. And a lot of what you work out with the Bitcoin case, to me, is pretty simple reasoning. Can you walk us through a little bit of the bull case and why people should take note?
Dan: Another analog would be, it’s the final piece of the protocol puzzle that is the Internet. So, the Internet is a bunch of protocols, SMTP, TCP/IP, it moves all kinds of data around. But even in the ’90s, Milton Friedman said, the only thing missing from the Internet was an e-cash system. That’s what Bitcoin is, that’s what the other blockchains are. It’s just a protocol for moving data around. That is massive, because the Internet, those other protocols, disrupted everything else in our lives. Commerce, communication, everything, but it didn’t touch finance. Banks are basically the same way as Medici set them up in the 15th century, credit cards still charge the same rate they did in 1958, Western Union has been doing the same thing for 140 years. Finance didn’t change with the internet. That’s what Bitcoin and blockchain is. It’s bringing the Internet to finance. And those are huge market opportunity. So, you’re going to be able to send money within the United States or across borders, essentially real-time, essentially for free. And think about it. If you want to send $1,000 to the UK, it’s literally faster to go to the mall, buy a suitcase, go to the bank, put $1,000 in the suitcase, go to the airport and fly over there than it is to send it by Swift, which is insane. It should take one second to send money. On Bitcoin or other blockchain’s, you can send money in one second, and that’s the disruption.
The other analog would be, it’s going to do to finance what VoIP did to the telephone monopolies. There was a time AT&T was 16% of the entire market cap of the United States. It was a huge company. They had a monopoly on every phone in the United States. And if I want to call somebody in the UK, I had to use British Telecom. It was really, really expensive when I was in college to make phone calls. Now, you can route Voice over IP, no one even thinks about the cost of bandwidth. It’s like totally irrelevant. You’re streaming Netflix to your iPhone, you don’t think about it. And the value of phone companies, no one ever thinks about it anymore. That’s basically what’s happening in finance, is you can do money over IP. So it’s like MoIP. It’s like the ability for any person with a smartphone to send money to anybody else on earth with a smartphone. That’s it. You don’t have to pay a middleman, you don’t have to pay all these high fees. And so, it’s going to dramatically increase the quantity of financial transactions, it’s going to dramatically increase financial inclusion, just the same way fiber optic did for the internet. If the Internet were still run on copper, we literally don’t have enough copper on the planet to run the Internet. Like there’s so much data going through. That’s basically what’s going to happen with finance, is everyone’s going to be involved, it’s going to have huge positive impacts on 3 billion people.
Meb: Good. Well, the finance and asset management industry historically has had one of the highest profit margins of any of the 150 industries in the country. So there’s some fat that needs to go. I was shaking my head or laughing, I’m not sure which, as you were talking about that. Because I remember, and this wasn’t too long ago. I mean, this is within the last 10 years. When we first started launching ETFs, we had to fax in our trade confirms. I mean, my goodness, fax.
Okay. So, part of the challenge in the early days, I think, is that crypto is certainly full of jargon, maybe complexity, depending on how you look at it. And as you kind of walk forward the adoption curve of sort of the normal institution or individual. And you could probably make an analogy back to the early adopters of computers, whether it was the Commodore 64, which I had, which worked like 1 out of every 10 times. Whereas, today, your iPhone or computer just always works. Like the young kids don’t even have this knowledge of what it was like to have a computer in the early days and have to blow the cartridges, floppy disk, all that stuff. It just works. It feels like crypto is kind of that way now with Square and Coinbase versus the early days of exchanges disappearing and the jargon, is that a reasonable approximation of kind of where we’ve been the last five years, 10 years? What is that, eight years?
Dan: I think it’s great what you said, is, in the early days of PCs, and if you think of the acronym is personal computer, when there was a time when people thought computers were only built by companies and to have one by yourself was kind of weird. To have it always work always do everything, that’s a new thing, probably mid-’80s, most people didn’t even have a computer, it wasn’t in people’s normal lives. So they were for hobbyists. And early days of Bitcoin it was for hobbyists. People that were into cryptography, people who were into … or whatever monetary philosophers would draw people to Bitcoin, because it was clunky, you had to store your private keys somehow and that’s all really hard. But now it’s mainstream. All these firms like Coinbase, or BitGo, or Bitstamp, or whatever, just make it really easy to interact with Bitcoin.
The other important thing is, there’s a lot of firms that put Bitcoin in the background and allow you to send money across borders, like Abra, or Bitso, or at least firms that are allowing remittance to happen. The migrant doesn’t know anything about how Bitcoin works, and they’ve never heard of Satoshi, they just know it’s better than spending a month’s wages on their remittance provider. It’s just a lot cheaper to send money via Bitcoin. So, the early days where everyone kind of wanted to know everything about it, and kind of had a libertarian philosophical bend about why they were doing it, that suited a small minority of people. But most people just want to send money faster, cheaper than they can in the other legacy finance system.
Meb: If you look back on my crypto journey, back in 2013, I had added the ability to pay for one of our research services online with crypto, and I think zero people used it. I was kind of hoping years later that a lot of people use it. And I just didn’t know where the money went on Stripe and somehow I had a lot of crypto I didn’t know about. I don’t think that’s the case, it may be correct, I still got to do some digging. Anyway, my conclusion, erroneously at the time, was focused on one specific use case, which was as a medium of exchange or transacting. And you can come up with probably 20 different use cases and approaches to crypto in general today. But I think most investors and users, like you mentioned today going on in the background, don’t need to know about a lot of the specifics with halvings and forks and everything. But the one question I consistently get from allocators individuals is, they kind of throw their hands up and they say, “I don’t know how to value this, this could be worth $1,000, $100,000, $10. Like, there’s no cash flows. And you have a pretty cool, I think you call it the stock-to-flow model. Maybe you could tell us a little bit about that. How to think about, is this a reasonable price? Is this a price that’s totally in the clouds, or how to think about Bitcoin in general?
Dan: Yeah. So, that is a question that I get a lot too. And I even had a fun conversation with a Tiger Cub friend of mine that runs a TMT fund. He said, “Hey, we don’t trade Bitcoin because there’s no cash flows to discount.” And I’m like, “Well, there’s no cash flows to the euro either, and nobody thinks twice about trading euro.” So you trade currencies based on all kinds of data, like current account deficit, interest rates, all those types of things. And we have all that kind of data for cryptocurrencies. How many people are using it, what they’re using it for, how many fees they’re paying, all that kind of stuff. So, although it’s not very satisfying, that is the answer is you have to do essentially a relative value analysis on how one currency is performing relative to another. And the simplest is just to view it as a econ 101 supply and demand graph. That if there’s a certain number of people that want to use Bitcoin, and you mentioned there’s 20 different use cases, there might be thousands of use cases. And that’s why it’s so powerful. Some people call it a cryptocurrency, the IRS calls it property, the CFTC calls it a commodity, people call it digital gold. It’s doing hundreds of different things. And you don’t really even have to worry about why people want to use it to the extent people want to use it, that’s the answer enough.
And there’s about 100 million people that use cryptocurrency right now. And we did put a table out a few months ago in our investor letter that shows the number of people using Bitcoin in one column and the price of Bitcoin in the other column, it has gone up, both data series went up exactly five orders of magnitude, which is just mind blowing, and maintained exactly the same ratio. It’s incredible. For every one million people that use Bitcoin, the price goes up $200. And it’s literally hit that every time for 10 years, with one exception, and one of the five steps it didn’t hit it. And to my mind, that’s satisfying, I totally get that. Every time you add another million people using Bitcoin, the price goes up by $200. That’s fine. And you’ve seen in markets, sometimes things change, but sometimes they just keep doing the same thing for a while. And I’ve been doing this for eight years, and it just keeps doing it. So, I don’t have any reason to not believe it will keep doing it. It won’t do it for the next 1000 years, someday that’s going to have to break down. But I think it can do it for the next several years, which is an eternity in the investing world.
Meb: It’s been eerily accurate thus far, and listeners, we’ll post a link in the show notes to the letter, it’s a great letter. But it takes you, I think, up to 100,000, 200,000 possible over in the next couple years, which I think we’re in the ballpark of 50, 60, somewhere in there now, where it’s certainly quite a move still for something that’s had some strong run thus far.
Dan: If you want to talk about supply and demand and valuing it, I think there are a couple other perspectives like that. I mean, one was stock-to-flow analysis we did about the halving, and again, don’t want to get too technical. But in Bitcoin, the money supply is known. Every four years, the amount of money that’s issued is cut in half, until 100 years from now when they stop issuing any more coins. So, each time that happens, the market has gone up a lot. And isn’t that totally surprising that if you cut the supply of something, copper, gold, whatever, and there’s constant demand, or in this case, demand is growing at a rapid rate, the price goes up. And we’ve had it happen twice before, in 2012, 2016. When it happened in 2012 there were only about 10 million bitcoins outstanding. And 15% of that got cut out of the future supply of Bitcoin over the year and a half after the halving, the price went up an enormous amount.
And then in 2016, the halving obviously was half as many Bitcoins cut, but there were 15 million Bitcoins outstanding, so, it decreased the supply by 5% of the existing stock. And it still had a really big impact, but it was about a third as big as the first one. This one is half again as many Bitcoins being cut, and there’s 18 million Bitcoin. So, it’s about 2% of the existing stock that’s being cut out of the flow. So we estimated that would have a one-third as big impact as the last time, keeping those ratios together. And in April of last year, we published a table showing our forecast for the price of Bitcoin for the next year and a half. And we predicted that Bitcoin would hit $62,968 on April 15th. And it did. And so, to my mind, when people say, “Oh, Bitcoin is crazy,” it’s not crazy. It’s like literally predictable as mathematical, the past is repeating itself. And obviously it doesn’t have to forever. But my point is, Bitcoin has been appreciating in a very predictable rate for 10 years. I just think, odds are, it probably will keep doing that for a while. And that’s why it’s such a great investment, because it is predictable.
Meb: I was laughing as you were talking about the TMT investor talking about cash flows, because you can make the joke in 2021 that half of his universe doesn’t have any cash flows anyway, so. One of the challenges of being an investor, and we see this behavior over and over and over again, it’s as old as time going back to our career years with Japan, is having a long time horizon. And you’re certainly one of the longer tenured fund managers in this space that’s been doing it and continually operating in today’s age where people are looking at every tick every move and you have an asset that is as volatile as Bitcoin not just in the standard deviation, but drawdowns. Do you have any suggestions on how to think about ways for investors to take that long view? I mean, it sounds so simple, but you’ve been through a couple 50% plus losses. And you can make the analogy to Amazon, someone who’s held since the IPO in the late ’90s. To get that reward, you had to sit through some doozies. Any suggestions from someone who’s probably macro guy who’s probably had some scars or just challenges of sitting through those drawdown periods?
Dan: So I think the first thing is just admit, this is a unique opportunity in time. If TCP/IP had a real time price feed, we may never have even built the Internet, we all would have freaked out and like sold and it never would have worked. So, all the other big advances in technology, especially in protocols, they didn’t have a price feed. So they got to develop over decades, and really come into their own. Cryptocurrencies, for better or worse, have a real time price feed from the day they’re born. So it encourages a very speculative mindset, which isn’t great for the long run. And like you said, there’s been some crazy bubbles. And there’s actually been four 83% average bear markets, like, it’s crazy. I mean, it goes way up, it goes way down. So, what we’ve tried to stress to people from the beginning is, although there is liquidity, view it like venture. Figure out how much you could invest, and if it went down 80%, your spouse still thinks you’re adorable. Put that amount in, and try not to look at it for like five or more years. And our Bitcoin fund offers daily liquidity with no lockup. So you can come in on a Monday and come out the next day on Tuesday, if you want. But we really stress to people, don’t use that liquidity, really just keep it in. And thankfully, the average holding period is over five years now.
So, although we offer people the ability to come in and out every day, we really want people to put it away, and have that mindset that this is hopefully not a huge part of your portfolio, it’s an amount you could lose if it went bad, but you do hold it for a long period of time. And a couple of cool factoids, if anyone that’s held Bitcoin for three and a quarter years has made money. So there have been some savage bear markets, but they normally last only a short period of time, and the longest one was three years. The other cool stat is, although bitcoins had four 83% bear markets, it’s only had one down year, there’s only one calendar year where Bitcoin hit a new low, which is pretty wild, for something with that much volatility.
Meb: What is that, 2014, 2018? What year would this have been? Just trying to put in calendar context.
Dan: Yeah, it’s probably 2015, or 2014. Yeah, when it hit 190, 2014 or 2015. 2015 I think, February 2015, it’s the only time it hit a new low. So, each time it goes down, it went down 50% last year. Each time it’s done these massive drawdowns, it still sticks at a level that’s much higher than the previous lows. And like this year, our low is, I think 28,000 for this year, last year it was 5,000, before that, it was 1,000. It keeps going up at such a rate that even if it has a drawdown, and that’s my main point to people and holding things, is, only put in as much as you can afford to hold, but then try and hold it for a long time.
Meb: The advice that I always pass along to my crypto friends over the past 10 years when they ask about this, and it applies really to almost any asset, is the seduction for anything, this includes your buddy’s restaurant down the street, this includes your buddy’s new movie. I live in LA, so those two are more relevant. Startup, stock, anything. Everyone wants to think, all in or all out, or I got to bet the farm. But I said, a great starting point has always been simply the global market portfolio. And we don’t want to get into market cap weighting. But in general, it gives you an idea. And if you’re looking at a world of let’s call it 200 trillion-ish of assets, crypto is around maybe 1% now, ballpark speaking, but hey, guess what? It goes up 10X from here, well, now it’s 10% of your portfolio, goes to zero it’s a rounding error. We’ve been trying to add it to one of our ETFs for a while, and it’s a huge pain, not even going to get into that. But I say that’s a great starting point. And you don’t feel you have to be all in or all out. Do you think that’s a reasonable take? Is that too low to make it totally not even worthwhile? Or is that a good starting point?
Dan: No, it’s a great starting point. I think it’s obviously situational that if you’re an institutional investor, you don’t have any exposure yet. Obviously, the only wrong answer is zero. Anything other than zero is acceptable. And I think we’re seeing a change. Three or four years ago, I’ve been evangelizing this for a long time, investment committees of institutions would think you’re crazy to bring this to the investment committee. And a few years from now, it’s going to be a problem if you don’t have blockchain exposure, and we’re right now in that kind of uncomfortable middle, where it’s some people do and some people don’t. But having a percent or two for an institution is about right. If you’re an individual and you have enough savings, you’re going to be okay with a higher allocation. But basically, you got to be able to stomach an 80% drawdown is the basic yardstick.
Meb: They’re going to start to get it, whether they like it or not, through the market cap indices through a number of these companies that are holding on corporate treasuries, as well as just the companies exposed to it, like Coinbase, that are going public. A few of the things that attracted me to crypto last year kind of lined up as a perfect storm, we published some research looking at assets down 60%, 80%, 90%. And historically, that’s been a great time to invest. And I’m not talking about individual securities like a stock but entire asset classes, sectors. And then the concept of it’s simply not dying, or not going to zero, or not going away last year. And there’s two kinds of comments I wanted to make. I’d love to hear your thoughts. First is, you’ve started to see a lot of macro investors line up, one after the other. I don’t know if any are left, but all the sort of Paul Tudor Jones, Druckenmiller, obviously Raoul Pal, all these guys, one after another have come out in support. I’m trying to think who’s even missing from this crew. At least maybe they haven’t said it publicly. So if you know anyone who’s missing, we’ll send them this podcast. But second is, as any great macro PM, you have to at least think about what’s the bear case, what kills it? What are you worried about? I’d love to hear, are there things that you think that could be the haymaker in Bitcoin in particular, but what could cause it some serious problems?
Dan: So it’s a great question, one I’ve thought a ton about over the years. And I’d say that, for a long time, I told people, it could go to zero. If you put money in, you have to be able to lose it all. I actually don’t think that’s true anymore, but I think blockchain has really reached escape velocity and it can’t go to zero anymore. It could go down 50% or 80%, that’s definitely true. The things that could make it do that, one of which is, maybe we’re all just drinking the Kool-Aid, and it’s a bubble right now. And a year from now, we’d come back on the show and talk about, yeah, 2021 was a bubble and we should have seen it coming, because it happened in 2013, happened in 2017. And at the time, everything seemed great.
My argument there would be, and we just put this in our letter that went out a couple days ago. Bitcoin is now literally just on its 10 year exponential trend. Although it’s up a bunch since the pandemic started in March last year. It’s right at where its 10 year compound annual growth rate trend is. So, it doesn’t feel overvalued to me, but maybe I’m wrong. Maybe it’s the bubble.
The one that people tried out a lot is regulatory risk. I think in most countries you would kind of work through it, even in the United States, almost every agency has already ruled and in literally every ruling has been the best possible, like the IRS calling it property, long-term capital gains tax treatment, which, if it were gold. Gold’s taxed at a higher rate as a collectible. And currency is always ordinary income. You could have bought the Japanese Yen 100 years ago and sold it, it’s ordinary income. So the SEC is the only one left. And yeah, maybe they do something really draconian. I don’t think so. But like if you’re trying to think of what risks there are out there. The other risk is, we’re venture investors. Well, we invest in cryptocurrencies, but also in companies, mainly fund a bunch of companies and it takes 20 years and they run out of money. Maybe it’s going to happen, it’s just going to take a lot longer than we expect. So, I don’t think there’s any risk anymore and that blockchain 20 years from now won’t be really important. It just maybe we fund a bunch of companies and burn through the money and that.
The only specific other risk I’d say is, Bitcoin brand blockchain does have an energy consumption issue. And I’m not saying it’s undoubtedly a problem. But if you’re looking for issues, Bitcoin consumes probably half a percent of the world’s electricity today. The amount it consumes is proportional to the price. So, you suggested Bitcoin going up an order of magnitude, which I think it can do, then it is using 5% of the world’s electricity. That’s imaginable, but going a lot past that is hard to imagine. So, I would say that energy use is kind of the one Achilles heel of the Bitcoin brand blockchain. Obviously, Ripples never use energy, Ethereum’s going to E 2.0, which is proof of stake, all the new tokens are all proof of stake or some other consensus mechanism that doesn’t use electricity. So, that’d be the only other one. And I have to admit, you hear a lot of drum beats in the background as the ESG worries about Bitcoin. So, again, if we were on the show a year from now where we wondered why Bitcoin is down 60%, that might be one of the reasons, if you’re looking for things to be worried about.
Meb: And who knows, maybe that helps drive the push to renewables, nuclear and other things. Is there any risk with sort of sovereign to sovereign? Where maybe U.S. and China get into a spat, and China becomes a dominant player in Bitcoin, whether it’s through mining or trading, whatever it may be, and it becomes actually like a governmental sort of fight. I’m just trying to think of the right word. Is that something that is even in the realm of concern or possibility? Or is that kind of down the list?
Dan: There’s a lot there on the kind of geopolitical issues with blockchain. So, the first one is, governments are in the business of creating blockchain’s now, and China is in the lead and probably the most important out there. They’re about six years ahead of the United States in building their own blockchain. They announced it, not coincidentally, two days after Facebook announced their blockchain venture 18 months ago. A few days after that, the CFTC Chairman, Christian Carlo, wrote a great op-ed in “The Wall Street Journal,” and then he gave a speech at our summit about it, said that the launch of the Chinese blockchain currency was America’s Sputnik moment in finance. And for younger viewers out there, that’s when the Soviets launched the first orbital spacecraft and the U.S. realized we were way behind. And I think it’s the same thing in blockchain, that China’s way out ahead of the United States and other western democracies. And it is a big geopolitical issue. The U.S. and its allies exerts enormous power over the world with its sanctions regime. And if a country like China built a blockchain that’s outside that sanctions regime, it’s a huge geopolitical issue.
So, that’s essentially kind of one way to look at it, one perspective. The other one is just kind of implying that maybe some country like China could take over the mining power, whatever. I have thought a lot about, and it is kind of hard to get your head around. But you can’t really steal Bitcoin. It sounds so easy, oh, all you need is 51% of the computing power and then you get to do whatever you want with Bitcoin, you can double spend and do all these fraudulent things. But it’s very difficult, really, impossible to do that. And we had a great talk at one of our gatherings where Ed Felten of Princeton called the two cases the Godzilla attack and the Goldfinger attack. And there is a great way to think about it. So the Goldfinger attack is somebody, some diabolical, evil genius like accumulating such a huge short position in Bitcoin that they ruin it through this double spend attack and drive it to zero, no one has that kind of capital, and you can’t get $2 trillion of short positions down on the CME. So, there really is no way to destroy Bitcoin from kind of a profit seeking motivation.
But there’s the Godzilla attack. Some monster that wants to just smash Bitcoin, just because it’s fun. These days, it’s now too big, like the amount of hardware it would take to do that is impossible. But even if some rogue nation state want to do that, it’s kind of like you can’t steal Moby Dick. We all have copies of Moby Dick on our shelves. And if someone steals it and starts changing it, it’s fine, we still have it, and it’s the same with Bitcoin. We have a copy of the code, we have a copy of the ledger from no more than 10 minutes ago. So, if some nation state tried to like destroy Bitcoin, we would just say, “Oh, well, that’s cool. You can do whatever you want to do. But the rest of us, the 100 million people that use Bitcoin, we just go on with this,” it’d be called a fork, but this new version, but you just take the old code base, you take the old ledger and keep going. And that happened in 2013. It’s not really well known. But there was a small bug in one of the releases of Bitcoin, and within 10 minutes, they realized there was a problem, within an hour, they decide to just roll back. And yeah, an hour’s worth of transactions had to be decayed, as they say, on Wall Street, had to be unwound or redone. It was a small inconvenience, but the whole network kept going. And that’s the same thing here. Even if some kind of rogue state like went crazy, the rest of us would just keep going. It’s a lot more independent than you would think.
Meb: And so, you mentioned that Bitcoin you guys started out with was really the first use case. And as I think about what could possibly take over, there’s a scenario that, going back to the late ’90s in the U.S. or ’80s in Japan that simply other cryptos are ascendant. I mean, it’s like I love the name Ethereum, or Polkadot, or whatever it may be. You guys have now, maybe give us a quick tour of what the rest of the landscape looks like. Because I know you guys have multiple funds involving tokens, involving companies. Give us a little broad overview of what you guys are up to a Pantera and what you’re looking at.
Dan: Yeah, so the important thing is, there was a time Bitcoin was the only functional cryptocurrency, and now there’s 5,000, but there’s probably 100 that are really important. And so, a couple points to be made there, that it’s going away but there used to be a lot of people that said Bitcoin is the MySpace of crypto and there’s going to be something even better coming out. The perspective is, there were attempts to do Bitcoin for three decades before Bitcoin got it right. So, all those kind of early primordial versions of cryptocurrency, they’ve all been tried. So Bitcoin is, in my opinion, the digital gold of the future, like it’s already won that use case.
But there are people that are almost kind of religious about just Bitcoin and those people are called Bitcoin maximalist. I would say that’s kind of like in the ’90s, being a Yahoo maximalist. Yahoo is a good company, but there were 30 other important companies that one would want to have in a portfolio. And that’s the way I would suggest to your viewers that are investing in this space is, a portfolio is probably a better way to do it. The digital gold use case, Bitcoin has already done that, it’s great. It’s got a trillion dollars in value, so that’s already proven itself. But there are many other use cases out there. Ethereum is programmable money. So it’s allowing smart contracts to happen and other ways to do things without custodians or escrow agents or people in the middle.
Polkadot is a faster and interoperable version of Ethereum, or similar to Ethereum. There’s half a dozen other important features, like privacy with Zcash, all these. And a good portfolio, I think, has a bit of all of those, because it’s not a winner take all thing. I think in 20 years, there’ll be 10 very important blockchain’s. And the important thing from an investment standpoint is, some of those things have incredible upside. Bitcoin is the mega cap of our industry, it’s been around for 12 years, most people have kind of gotten their heads around Bitcoin, so, there’s a lot of people already invested in it. Not that many people really understand Ethereum. Most people probably never heard of Polkadot, or 1inch, or Uniswap, or these new things. So, the new things might have more value, and partly because they’re under-owned, and then just frankly, they’re the microcaps of our industry. Bitcoin is already worth a trillion dollars. Can it go up 100X? I don’t know. Like that’s then the value of all the currency on Earth. You’re starting to get to sizes that are really big. But some of these other projects, Polkadot is $35 billion, that could go up 100X. So, you have the smaller projects under-owned and potentially more upside.
And we’ve seen that so far this year in our funds. Bitcoin is up 95% year to date, which obviously in any normal market is amazing. But our liquid token fund that trades Polkadot, Ethereum, all the other tokens, is at 500%. So, there’s an enormous amount of alpha to be gained by having a portfolio that’s not just Bitcoin, and again, I think Bitcoin is going to go up a lot. But I think these other things are going to go up even more.
Meb: Yeah, I mean, a simple analogy and the U.S. stocks for the listeners, I mean, Apple, 2 trillion market cap or whatever it is, still could be a great investment. But is it likely to go to 20 trillion, 200 trillion? Obviously not. Whereas something that’s at a 10 or 100 million market cap certainly has that exponential ability. A couple more questions, I got to let you go, Dan. A lot of listeners on this podcast, let’s say I got a million bucks to put to work in the crypto space. How should they think about allocating it? Any broad guidelines between the actual currencies, between the companies, between the tokens. I know you guys have three, four different funds. Is there a sort of pie chart, kind of where it should be 80% the actual currencies and a smattering of companies, or flip flopped? How should people think about it?
Dan: Yeah, so good question. And actually, it is unique that in the Internet, all those protocols we were talking about earlier, you couldn’t buy a piece of SMTP. In the ’90s, if you were prescient enough to think the Internet was going to be a big deal, you couldn’t just buy a chunk of the Internet, you had to invest in companies, that was your only hope. Here, you can actually buy a chunk of the protocol. There’s 21 million shares of Bitcoin. So, it is important, a lot of the value has accrued to the protocols themselves, not just the applications built on top of them. And again, that’s totally different than the Internet. The protocols themselves didn’t have really any value and all the applications built on top get all the value. So, here, roughly a third maybe in venture, one-third in liquid tokens like Polkadot, Ethereum that we’re talking about. And then a great way to invest is also investing in these tokens prior to them going public. We have a fund called The Early-Stage Token Fund that invest in, what you’d imagine, tokens when they’re very early stages like a venture fund. But investing in these projects before most people know about them before they go public, and those are the ones that invest in things like Filecoin, or Polkadot two, three, four years ago.
And so, to my mind, all three of them have a purpose. And blended together, it’s a much more stable return, less volatility, better risk profile, and that’s actually why we’re launching a fund that has all three of them together in one fund to make an easy answer when a friend says, “Hey, which of your four funds should I invest in?” Now we have a single fund.
Meb: And so I imagine on the less liquid stuff time horizon 5, 10 years-ish?
Dan: So, on our early-stage token fund, we have quarterly liquidity but we require 12 months notice. So, we just need about a year to essentially stop investing if we’re having large withdrawals. And then venture is technically a 10-year product. Typically it’s returning capital within four or five years. And then the liquid token stuff, very liquid, we just require 65 days notice to get out of our liquid token fund. We’re trying to pass through the liquidity, which, again, is very different than the Internet. If you invested in early Internet stocks, you had to wait for a year for them to become public and all that. Whereas here, you can put money to work for just a day in our Bitcoin fund or 90 days in our liquid token fund.
Meb: Yeah, I mean, I actually like the idea for most investors of, as a feature rather than a bug that illiquidity, where, look, you’re forced to hold this for a while because a lot of these paths of any investment need, if you look at the historical 10, 100 baggers in stocks, many of these take 10 years to realize the long compounding. And so, just not messing with it. The Rip Van Winkle approach to crypto.
Dan, I’d love to keep you for a lot longer, but I got to end on one more question. Looking back on your career, and this could be a softball toss up, so I may have to ask you for two. Most memorable investment, it could be good, it could be bad, it could be a scar, could be something that takes you to a happy place. What comes to mind?
Dan: Oh, that one’s easy, Bitcoin, because I’ve literally not invested in anything other than crypto since 2013. It’s completely dominated my brain. And the reason I really love it beyond how interesting it is, and how I think we’re going to make a ton of money in this space, is it really is going to bring unbelievably positive benefits for 3 billion people. We’re just at the beginning of that, it’s going to take 20 years for that to all happen. But when everyone has Bitcoin or another blockchain on their smartphone, and in the developing world they are free from their governments like always debasing their currency or stealing their savings from the banks. I mean, it’s going to be great. So, the positive impacts Bitcoin and other blockchain’s are going to make is why this is more exciting than just another great trade.
Meb: I used to give out inflated currencies, listeners, you can buy them on eBay for like a couple bucks. The Zimbabwe trillion dollar. We actually had one hanging up back here. I think that’s actually a good analogy, a good angle. Dan, where do people go? They want to learn more about you, your funds and everything you all up to, the launches you do all across the country, where should they go?
Dan: Yes. Our website, panteracapital.com has a lot of info. We do send out a monthly investor letter because we’re trying to evangelize this space and spread the good word. So, definitely sign up for that because we want to get more people thinking about it. And the thing I found over eight years of doing this is, I still have never found a multi-sentence anti-Bitcoin paper ever written. You occasionally get the famous Warren Buffett type people saying, oh, Bitcoin is rat poison, but I’ve never seen anybody write a whole lot that is bad. And so, any smart person that reads things like our investor letter or peers type work, they normally end up saying, “Wow, this is going to be big.” And they end up getting engaged.
Meb: Well, I like y’all’s work because it seems to be thoughtful and balanced, certainly in a sea of noise that we live in as investors. Dan, thanks so much for joining us today.
Dan: Hey, thanks for hanging out. It’s been fun.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at firstname.lastname@example.org, we love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.