This article comes fromPantera Capital, original author: Pantera Capital founder Dan Morehead

Odaily Translator |

Odaily Translator |

More than a century ago, economist and legendary journalist Walter Bagehot once said such a "famous saying"——

"To avoid panic, the central bank should lend early and freely (that is, without restriction) at high interest rates to solvent companies, especially those that can provide good collateral."

After more than a hundred years, the Federal Reserve still has not realized the real problem, and is still actively amplifying the bubbles in bonds, stocks, real estate and other fields, which will require a larger-scale policy U-turn to offset related 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 speed 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 much debate about whether to raise rates five weeks from now.(Shouldn't they have raised rates five months ago, or right now?)

We predicted in December 2021 that the market bubble might burst. Since then, the US 10-year note rate has fallen by 5 basis points and 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.

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How Much Impact Do Fed Policies Have on Bitcoin?

When the U.S. 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 outcomes:

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

2. The market is wrong, and market changes have had a huge impact on encrypted assets.

Dan Morehead:  Here, we share some from Pantera Capital's investor conference call on February 1:“The market has clearly changed dramatically since our last investor call. As we predicted in November and December, the U.S. bond bubble is going to burst and the Fed is going to have to expand on rate hikes. Invest Those also need to act accordingly.But at the time, we did not predict such a severe recession in the cryptocurrency market, which means that traders will have doubts, whether their own analysis and judgment are wrong, or there is no relationship between raising interest rates and the decline in the digital currency market. In this case, I firmly believe that the market is really wrong, and”

Joey Krug：Rising interest rates (I think it's clear that it will and will continue to happen) haven't had that bad effect on the crypto market, and relative to other asset classes, crypto asset prices are actually doing pretty well."We put forward a macro view that cryptocurrencies have definitely been hit by the Fed's planned rate hikes. But at the same time, I also think that the crypto market is a bit sensitive to the Fed. So far,The cryptocurrency market has seen about five rate hikes, several of which have been overblown.

There was a huge panic in the market when Ethereum was down to about $2,200 lows, but if you look at the U.S. 10-year Treasury rate, it peaked at about 1.9%, it's about 1.8% now, but at the end of last year It fell to 1.35% at one point, then quickly rose to 1.9%, and the volatility is also very obvious, so I think this is a wake-up call for the market.However, if you look at the changes in the cryptocurrency market, you will find that when the traditional macro market is down, the change in cryptocurrency correlation tends to occur in about 70 days, which is a little over two months. I think,Cryptocurrency is still a relatively small market, so even if the fed funds rate falls from 1.25% to 0%, it will not make a big difference for the cryptocurrency market.After all, this market only grows four to five times a year. Even if some DeFi assets can bring a price-earnings ratio of 10-40 times, it is really nothing compared to the technology stock market's earnings ratio of 400-500 times. Our view is that”

Dan MoreheadThe encryption market may decouple from the traditional financial market in the next few weeks and start a new wave of trading again. I personally think that the bottom of ETH may be $2,200.: “I completely agree with Joey Krug that the correlation between the S&P and cryptocurrencies may not last long. Since Bitcoin was traded in 2010,There have been six dips in the S&P, but Bitcoin rallied within a few months (about 71 days) of each. I think it will happen again this year, and then the encrypted 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 have a choice: they have to invest in something,Crypto assets are undoubtedly the most attractive investment targets if interest rates rise.

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 definitely rise next week, nor that it will not fall further in the next month or at any time.When the market is in an extreme state, the chances of Bitcoin rebounding relatively quickly are 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 am also very bullish on the general trend of the market, and I thinkThe price is still relatively cheap.

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.

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Why is Web3 important?

Why is Web3 important?

Following Elon Musk's and Jack Dorsey's attacks on Web3 late last year, which sparked a heated debate in the crypto industry, we decided to host a "Why Web3 Matters" investor call featuring Nader from the DeSo Foundation Joining Al-Naji and Audius' Roneil Rumburg, here are some highlights from the discussion.

Nader Al-Naji：Q: How do you define "Web3"?"I personally think Web3 is something built on the blockchain, and if you're using blockchain, that's Web3 to me. You might ask, what's the point of that? Why are blockchain-based applications so Interesting and different? I think the biggest reason why Web3 is interesting is that all on-chain assets and content are shared, which enables developers to reference each other and innovate. This concept is called composability. This method cannot be realized in Web2. To give a specific example, using the DeSo blockchain, the applications built on it actually share the same content pool. When you post a post in an application, it will actually appear in all in other apps. If you build followers in one app and then you want to move to another app, all your followers will be accessible on that new app as well. As I mentioned,”

The concept of sharing data across all applications is called composability, and I think it's what differentiates Web2 and Web3 applications.

Nader Al-Naji：Q: Recently on Twitter, Jack Dorsey and Elon Musk openly questioned the reality and vision of Web3. Elon Musk said on Twitter that Web 3 is more like a marketing buzzword. Is he right?

"People who are giving up on Web3 may not understand the power of composability - the power of assets and content to be shared and truly owned by users. When there is composability, there will be platforms that fully support it (Layer 1 or something similar) ) is inevitable because a single killer app built on Web 3 would share all these users and data, enabling more apps to be built and creating a virtuous cycle. We saw composability in Ethereum, I think it's impossible to ignore Web 3 when it happens."

Roneil Rumburg：“I both agree and disagree. Most crypto networks today are in their infancy, which usually means that the distribution of token ownership among the wider community is not decentralized. However, when you think about it compared to existing When comparing Web2 products to Web2 products, these companies are aggressively giving ownership to users who are so young in their life cycles, but more importantly, the way these products are actually designed is that they are constantly assigning ownership of themselves to make them become valuable users."

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Metaverse and the "play and earn" game mode

From the start, defining the "Metaverse" has been an impossible task. We believe that the person who gives the best definition at present is Matthew Ball. As an investor, the definition he gave is:

"The Metaverse is a large-scale and interoperable network of real-time rendered 3D virtual worlds that can be created with a 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 industries: the metaverse of technology giants

In 2022, two large 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

Some of the virtual worlds created using blockchain technology primarily 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 Created a new type of activity, 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.An open, decentralized, and community-owned metaverse will beat closed legacy systems.

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Internet VS. Blockchain

It’s cool that Brave released this chart (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 Joey Krug, Co-CIO of Pantera Capital puts it:

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, compared to just $875 for an internet user in the 90s.

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Summary: The bond bubble has burst, and a new wave of "crypto 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.