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Pantera Capital Market Prediction: The bond bubble has burst, and a new wave of "trading waves" has begun

Pantera Capital

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Encrypted currency hedge fund Pantera Capital multi-angle analysis encrypted investment boom is coming

Original title: " The Next Mega-Trade "

Original author: Pantera Capital

Original compilation: Moni, Odaily Planet Daily

More than a century ago, economist and legendary journalist Bai Walter Bagehot once said such a "famous saying" - "In order to avoid panic, the central bank should use high-interest loans as soon as possible and freely (that is, without restriction) to solvent companies, especially those that can provide good money. Mortgage companies.”

More than a hundred years later, the Federal Reserve is still not aware of the real problem, and is still actively amplifying bonds, stocks, real estate and other fields bubble, which in turn will require a larger policy U-turn to offset the associated risks. The end result of unleashing a lot of liquidity is to cause chaos in the asset market. So what is the best option for sizing this policy risk? We think it is: crypto assets.

At the same time, the Fed ignored the problem of "low interest rates". In effect, the Fed has been manipulating Treasurys and mortgage bonds and pushing interest rates to record lows. Throughout the history of the United States, there has never been a period of "7.5% annual inflation rate, but zero federal funds" (due to the slow update rate of the Fed, the actual annual inflation rate may be 8.6%). If we pay attention to the real interest rate (that is, the interest rate after inflation), we will find that this figure has reached "-5.52%", the lowest point in nearly 50 years. Would a slightly rational investor still choose U.S. Treasury bonds and bonds?

There is no doubt that the Fed's policy mix is not right and there is a lot of debate about whether to raise rates five weeks from now. (Shouldn’t rates have been raised five months ago or now?) It’s the Fed’s extreme manipulation that makes the current market overvalued by $15 trillion.

We predicted in December 2021 that the market bubble may will break. Since then, the U.S. 10-year bill rate has fallen by 5 basis points, while rates have risen by 70 basis points. Judging from this, a new wave of "trading tide" has already begun. But the problem is that most market participants are not yet fully aware of the relationship between policy and cryptocurrency prices.

How much impact does the Federal Reserve policy have on Bitcoin?

When the US bond bubble bursts and the Federal Reserve begins to raise interest rates, it will usher in a turning point, which will eventually correspond to two endings:

1. I was wrong, market changes did not have any impact on encrypted assets;

2. The market was wrong, market changes had no impact on encrypted assets; Crypto assets have had a huge impact.

Here, we share some content from the Pantera Capital investor conference call on February 1:

Dan Morehead: “Since our last investor call, the market has obviously changed dramatically. Just like we predicted in November and December , the U.S. bond bubble will burst, and the Fed will have to expand rate hikes. Investors will need to act accordingly.But at the time, we did not predict such a severe recession in the cryptocurrency market,This means that traders will have doubts whether their own analysis and judgment are wrong, or whether raising interest rates has nothing to do with the decline in the digital currency market.In this case, I firmly believe that the market is really wrong, and interest rates are rising (I think it's clear that it will happen and will continue to happen) The impact on the crypto market is not that bad, relative to other asset classes, crypto asset prices are actually doing pretty well.”

Joey Krug: “We make a macro point that cryptocurrencies have definitely been hit by the Fed’s planned rate hikes. But at the same time, I also think crypto The market is a bit sensitive to the Fed. Cryptocurrency markets have seen about five interest rate hikes so far, several of which have been overblown.Ethereum fell to a low of about $2,200 At that time, there was a huge panic in the market, but if you look at the US 10-year Treasury bond rate, you will find that its peak is about 1.9%. 1.9%, the fluctuation is also very obvious, so I think this is a wake-up call for the market.

However, if you pay attention to the changes in the cryptocurrency market, you will find : When the traditional macro market is down, crypto correlation changes tend to happen in about 70 days or so, a little over two months. I feel that cryptocurrency is still a relatively small market, so the federal Even if the fund rate drops from 1.25% to 0%, it will not bring much difference to the cryptocurrency market. After all, this market only grows four to five times a year. Even if some DeFi assets can bring A P/E ratio of 10-40 times is really nothing compared to the high price-earnings ratio of 400-500 times for technology stocks. Our view is that crypto market may compare with traditional Financial markets are decoupling and starting a new wave of trading again, I personally think the bottom of ETH may be $2,200.”

Dan Morehead : “I completely agree with Joey Krug that the correlation between the S&P and cryptocurrencies may not last long. Since Bitcoin began trading in 2010, the S&P has seen six dips, but Bitcoin rallied within a few months (approximately 71 days) of each. I think this will happen again this year, and then the crypto market will be decoupled from the traditional financial market. Once people are willing to take a moment to think about this question, they realize that crypto assets are completely different from other asset classes, and in a rising interest rate environment, crypto assets are actually relatively the best performers. Because blockchain is not cash flow oriented, similar to gold, price changes are very different from interest rate oriented products. I think investors will have a choice: they have to invest in something, and if interest rates rise, cryptoassets are definitely the most attractive investments. Let's do a quick recap of the current market position, we've used the chart below a number of times over the past decade and it's very important. You will find that Bitcoin is actually trading about 60% below the overall trend right now.

However, this does not guarantee that Bitcoin will be released next week It will definitely go up, and there is no guarantee that it won't fall further next month or at any time. When the market is in an extreme state,the probability of a relatively quick bounce for Bitcoin is very high. We have been in the field of blockchain investment for 9 years, and I have to admit that sometimes the market plummets, and I will be very nervous, but I believe the market will rebound quickly. I think we need a few weeks or months to rebound very strongly, and I'm very bullish on the general trend of the market,while thinking that prices are still relatively cheap at the moment. As you can see, about a year ago, the Fed pushed rates up, really crazy. I think the Fed's actions were a policy error entirely, and they may start raising rates soon. So, if you haven't sold your bonds to the Fed yet, hurry up. Maybe by next month, there will be no buyers for bonds, and more people should enter the cryptocurrency market by then. "

According to the chart above, Bitcoin's 4-year year-over-year return is at the bottom end of its historical range, so Bitcoin is not overvalued, in fact, it still appears to be "very cheap"

Joey Krug, Paul Veradittakit, and Dan Morehead all feel that when the market falls, most people panic, possibly because humans have an innate herd instinct.

When the market is soaring - the FOMO devil whispers in our ears, everyone wants to follow suit, it is human nature .

When the market crashes - everyone around is complaining, we want to escape...we want to stop the pain, that's also human nature.

Why is Web3 important?

Elon Musk and Jack Dorsey attacked Web3 at the end of last year, which triggered a heated debate in the encryption industry. Therefore, we decided to hold a "Why Web3 Matters" investor call featuring DeSo Foundation's Nader Al-Naji and Audius' Roneil Rumburg, here are some highlights from the discussion.

Q: How do you define "Web3"?

Nader Al-Naji: "I personally think that Web3 is something built on the blockchain, If you're using blockchain, to me that's Web3. You might ask, what's the point? Why are blockchain-based applications so interesting and different? I think the biggest reason why Web3 is interesting The reason is - all on-chain assets and content are shared, which enables developers to reference each other and innovate, a concept called composability, which cannot be achieved in Web2 in this way. To give a specific example, With the DeSo blockchain, apps built on top of it all actually share the same pool of content, and when you post in one app, it actually appears in all the other apps. If you build followers in one app , and then you want to move to another app, then all your followers can also accesson that new app. As I mentioned, the concept of sharing data between all apps is called Compositionality, which I think is the key to differentiating Web2 and Web3 applications.”

Question: On Twitter recently, Jack Dorsey Openly questioning the reality and vision of Web3 with Elon Musk, Elon Musk said on Twitter that Web 3 is more of a marketing buzzword, is he right?

Nader Al-Naji: "People who give up on Web3 may not understand the power of composability — —The power of assets and content is shared and truly owned by the user. When there is composability, it is inevitable that there will be a platform (Layer 1 or something similar) that fully supports it, because a single killer built on top of Web 3 Level apps would share all these users and data, enabling more apps to be built and creating a virtuous cycle. We saw composability on ethereum, and I think it's impossible to ignore when Web 3 happens

Q: Jack Dorsey is critical of Web3 ownership, saying, "Nobody owns 'Web3'" and "eventually There is a centralized entity with a different label.” Do you agree with this sentiment?

Roneil Rumburg: "I both agree and disagree. Most encrypted networks today are In its infancy, typically this means that the distribution of token ownership within the wider community is not decentralized. However, when you consider how this compares to existing Web2 offerings, these companies are actively Users so young in their life cycle provide ownership, but more importantly, the way these products are actually designed is that they continually assign ownership of themselves to the users that make them valuable.”

Metaverse and the "play and earn" game mode

From the beginning, the definition of "metaverse" is a An impossible task. We believe that the person who gives the best definition is Matthew Ball. As an investor, the definition he gave is: "Metaverse is a large-scale and interoperable real-time rendering 3D virtual world network, which can be created by Personal presence and data continuity (e.g. identity, history, rights, objects, communications, and payments).”

So, who is building the metaverse? So far, there are mainly two camps: the non-crypto industry and the crypto industry. But what is interesting is that these two camps are not fighting each other to the death, but are cooperating with each other.

1. Non-encrypted industry: Metaverse of technology giants

In 2022, two The big tech companies — Meta and Microsoft — are betting big on the future of the Metaverse, building it directly into their near-term roadmaps. Meta has a Horizon Workrooms product, but they seem to have bigger ambitions. Zuckerberg seems to "get" why interoperability and openness matter, and since he sees this as a new era for the company, he claims to be moving in that direction.

2. Encryption Industry: A Metaverse Owned by the Community

Using Blockchain Technology to Create Some of the virtual worlds in the main include: The Sandbox, Decentraland, and Cryptovoxels, and while they each have different elements and world economies, the power of blockchain and NFTs allows for true digital land ownership, thus opening up entirely new types of activities, For example, you can rent out your own land, or you can custom-build houses for others. For example, on Decentraland, there are almost daily events that users can participate in and experience. Dominos, Atari, and other big-name brands have also purchased virtual land to advertise their merchandise, host events, and build awareness in the virtual world.

At this stage, there is still a long way to go before the metaverse becomes "mainstream". Frankly, we may only be scratching the fringes of this field. But, as businesses and games get deeper, open, decentralized, and community-owned metaverses will beat closed legacy systems.

Internet VS Blockchain

Brave published this chart Cool (pictured below), in the 1990s it took the Internet industry eight years to reach 100 million users, which is very similar to the crypto industry.

As Pantera Capital Co-CIO Joey Krug said: "Cryptocurrency and blockchain technology are the foundation of the new financial infrastructure, similar to the Internet is the foundation of the new information infrastructure."

Compared with the previous generation of information digitization, the value created by financial digitization is much greater. An average crypto user is worth $8,000 today, while an internet user was worth just $875 in the 90s.

Summary: The bond bubble has burst, and a new wave of "encrypted trading" is coming

According to Pantera Capital founder Dan Morehead, since 2013, he has not invested in anything other than encrypted assets. Since then, a bond bubble has started to form, leading to asymmetric trades, so Dan Morehead made a decision: short 10-year notes and mortgage-backed securities, and pick cryptocurrencies.

A new wave of "crypto trading" is coming.