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Pantera Capital: Shanzhai COINS could outperform Bitcoin over the next year

Pantera Capital

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Bitcoin is no longer the only currency.

The original title: Out-of-Performing Bitcoin: Pantera Blockchain Letter, June 2020

Babbitt

Here's a letter to investors from Pantera Capital:

"Sometimes decades go by and the world is quiet; sometimes a new era begins in a matter of weeks." Lenin.

Dear Investors,

Recently, we have seen unprecedented usage of the word "unprecedented". So, I'm going to skip over some of the more interesting things that are going on and just focus on our core theme:

Unlimited printing of money will drive up the prices of things that cannot be reduced in quantity.

As economists try to understand the seriousness of the problem, there is an escalating series of statements such as "this is the worst deficit since 2008", "... the worst deficit since The second world war "and"... the worst deficit since the Great Depression ".

That's the worst. The US deficit of 19.2% of GDP in 2020 is larger than the largest deficit during the Great Depression and the annual average deficit during the Second World War. (In the fiscal year 1942-1946, the deficit averaged 16.2% of GDP.)

& have spent

Mobile tsunami & NBSP;

The tsunami of money will have a big impact on many things. In our markets, it seems inevitable that this will drive up the price of a fixed number of things, such as Bitcoin. If the number of notes increases by trillions, then the law of supply and demand means more notes to buy the same amount of cryptocurrency.

Bitcoin is a response to previous money printing. The price of bitcoin has risen exponentially during this decade, and the amount of money issued during this period is unprecedented. What is happening in the world today is of an even greater order of magnitude.

(Comparison of US base currency and Bitcoin price from 1996 to 2020)

& have spent The rising tsunami made all the boats float.

Printing money is not a delicate job. It can't affect just one thing -- like the virus itself. It treats all assets equally. An increase in paper money would make all boats float. The most obvious proof of the concept is that, despite a terrible crisis that is expected to lead to a stunning 70 per cent drop in corporate profits and a huge wave of bankruptcies, stocks have been largely flat this year.

Even bankrupt companies like Hertz are bouncing back. There are few better signs of a wave of paper money floating around than the shares of a company that admits it is worthless, is recovering and plans a public offering to "satisfy investor demand".

The currency tsunami has raised the price of cryptocurrencies. We use Bitcoin as a market proxy because it's the most famous. We'll discuss how some areas of cryptocurrency are evolving more rapidly than bitcoin.

(Performance of bitcoin, Ethereum, gold and other investment products in 2020)

It's not just Bitcoin/NBSP;

We've been arguing that Bitcoin benefits from continued monetary expansion -- and the argument is well documented. Bitcoin is up 34% this year against most other asset classes. We believe we are at an inflection point where the excess liquidity the Fed has pumped into the financial system will flow into fixed assets such as Bitcoin and other cryptocurrencies (yes, "other cryptocurrencies").

Bitcoin isn't the only cryptographic asset to rise this year.

(Performance of several cryptographic assets in 2020)

The relative performance of crypto assets in a bull market & NBSP;

During the cryptocurrency bull market, we expect non-Bitcoin assets to perform better. In general, they are test assets, and people tend to buy them after buying bitcoin. This is similar to how people buy Apple or Amazon for the first time, but over time they buy more speculative mid-cap assets in addition to large-cap stocks. Historically, competing currencies have performed better in the middle and later stages of bull cycles. For example, on January 1, 2016, solstice on December 31, 2016, the market share of bitcoin fell from 91% to 87%. But by the end of 2017, that had fallen to 38 per cent. The current figure is 65 per cent.

The idea here is that over time, we expect the performance gap between competing and bitcoin to widen over the next year, and competing currencies to outperform.

(A comparison of the performance of competing COINS and Bitcoins)

Since the beginning of this year, we've seen competitive COINS start to outperform Bitcoin, and we expect them to do well on and off for the rest of 2020. But in 2021, as the bull market matures, we expect competing currencies to gain a larger share of the market than bitcoin. The chart below shows how competitive currencies fared in the bull market of 2017.

(A comparison of the performance of the bull market competing currencies and Bitcoin in 2017)

We believe we are currently in the early stages of a new cryptocurrency bull cycle that will last at least until mid-2021. With the right choice, even in the early days of a bull market, a diversified portfolio can outperform Bitcoin, including both large-cap and small-cap rivals like Bitcoin and Ethereum. So far this year, our multi-currency hedge fund has outperformed Bitcoin by about 20 percentage points, and its benchmark by about 30 percentage points.

A new environment of technology & NBSP;

If you think, "But the competitive currency craze of 2017 is different. It won't happen again."

Yes, probably not.

Over the past three years, the ecosystem has matured -- the market has begun to distinguish between the good and the bad. I don't think we're going to see another substantial progress on token projects raising tens of millions of dollars through ICOs. That's not to say that pointless projects won't exist -- there will be, but only a small fraction compared to 2017.

Applications will focus on non-degrading stores of value and decentralized finance. We are a major supporter of Bitcoin and believe that a non-sovereign digital currency is inevitable. But we also look at the agreements that make real-world financial use cases possible and believe that these assets will get the most value over the long term compared to using/paying tokens. With the market starting to move up around the end of 2019, this is better than a buy-and-hold strategy.

Bitcoin is no longer the only currency.

The following two charts describe the bitcoin portfolio weightings relative to the market and the asset weightings based on use cases.

(Bitcoin portfolio VS Market Weight)

(Use case portfolio VS Market weight)

Blockchain scalable technology on-line & NBSP;

Recently, Polkadot, Matic Network, and StarkWare all launched the main web. This is important for encryption, because in the first decade of encryption, the mainstream blockchain made about 10 transactions per second. We are now seeing the first scalable solutions, and we believe that if we can deploy such solutions, projects in this area could scale to hundreds of transactions per second by the end of the year. We believe that by the end of 2021 or 2022, deploying scalable solutions will be simple and standard. This is huge news because many of the most interesting decentralized financial applications need scale to make their markets more usable and efficient.

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Cryptocurrency market performance & NBSP;

Here's our updated market view from our March letter:

"In one week, we have reduced token risk by 15 per cent. We now believe that the short-term high correlation with the general market is over and cryptocurrencies will trade independently." Cryptocurrencies are starting to trade independently of other assets. Cryptocurrency prices have risen while most asset classes have fallen. "Of the s&p's five major declines since 2012, the correlation between bitcoin and stocks was significantly positive for 32 days of the initial move, but gradually neutral for 71 days on average." Bitcoin's correlation with the S&P 500 has been on a gradual downward trend over the past 98 days. Today, the index is below 0.5. We expect it to fall to the low end of its long-term average in the coming months.

(The correlation between Bitcoin and the S&P 500)

"We believe bitcoin is likely to outperform other tokens for some time. Historically, bitcoin's dominance has averaged about four months, with average gains of 7.8 percent. We believe this is likely to happen again." "Bitcoin dominance" -- bitcoin's share of the overall cryptocurrency market -- stood at 64.60 percent in mid-March. The index peaked at 68.73% on May 19 and is now back up to 64.6%. We expect it to decline as other cryptocurrencies start to do well -- as noted above.