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Blockchain's 2003 Moment

Pantera Capital· 15 min read

Many asset classes are directly linked to interest rates.  However, there are some assets which have no direct connection to rates, such as gold and other commodities. 

It’s likely that “digital gold” (blockchain) can decouple and trade independently like gold.  In the first rising interest rate environment in 42 years, there will be a desire to invest in things that don’t have to continue to go down as the Fed unwinds its twin mistakes.  Blockchain and other commodities are likely the only place to hide in a world with massively rising rates.

It’s beginning to happen.

“For the first ten years of crypto’s life, it traded with 0.08 correlation to the S&P.  This time, it has been very different.  Admittedly, it did look correlated to the Nasdaq for eight months or so.  If you squint and look at the graphs, it’s starting to break down.  That’s the big trade in my opinion, risk assets are still going to struggle, but I could see a world where blockchain does really well, even if the other risk assets are impacted.

“Most of the normal asset classes are really connected to interest rates.  Bonds are mathematically connected to interest rates, stocks are discounted cash flows, real estate is connected to mortgage rates.

“Whereas, Bitcoin is like digital gold.  There’s no interest rate component to it.  It should be able to trade independently.  It hasn’t for the last eight months, but I think it really can for the next period of time.

“In fact, performance from June 30, 2022, the S&P was -0.7%, gold -8.1%, U.S. treasuries -18.6%. Encouragingly, the Bloomberg Galaxy Crypto Index was up 7.3%. So, it is starting to happen.”

— Dan Morehead, Bloomberg Invest Conference, October 12, 2022

Blockchain has been rallying through its first twelve years because it’s a massive, secular trend.  There should be only short-term correlations to cyclical changes in interest-rate-sensitive asset classes like stocks and bonds.


“Bitcoin is very close to its low of June 18, 2022 (+7%), but Ethereum is +43%, Optimism +108%, Uniswap +76%, Curve +57% since the lows.

“Bitcoin hasn’t done much over the last four months, whereas some of the other protocols are really ripping.  The important thing to stress for investors is, there was a time that Bitcoin was everything and all you had to do is put your money in Bitcoin and that was it.  Then there was a time you put half in Bitcoin, half in Ethereum, and you were fine.  Now a huge amount of the value creation is coming in other projects and it’s not surprising.  There wasn’t one company that became the internet, there were a lot of important internet companies.  There will be quite a number of important protocols.”

— Dan Morehead, Bloomberg Invest Conference, October 12, 2022


A few months ago we featured a chart showing how most cryptocurrencies have fallen against bitcoin since the market peak in November – the exception being a few exchange tokens.  Below is a table which shows the declines by sector and adds the market cap of each sector.


The common narrative that DeFi failed is backward.  DeFi worked great.  Aave, Compound, Uniswap, MakerDAO – all functioned flawlessly 24×7.

This is an example of why we’re so bullish at these levels:  ALL of DeFi is only valued at $20 billion.  Traditional, centralized finance is worth $3 trillion.  I’ve spent a career looking for very asymmetric bets.  That’s an epic one – buying DeFi at 150-to-1 odds.  Great trade.


Alexander Hamilton founded the oldest bank in America – Bank Of New York –  in 1784.  He founded it at the coolest address:  1 Wall Street.  (His tomb is just across the street, too.) 

It was cutting edge then.  It’s cutting edge now.  Bank Of New York Mellon now offers custody of blockchain assets.


If you had a time machine and it took you back to the beginning of 2003, with the Nasdaq having just bottomed off a 78% drawdown, how would you have thought about investing in technology?

All of the promise of what we would call Web 2.0 seemed to be illusory.  Maybe it would be best to avoid tech investing altogether?  Too volatile.  Too risky.   

2003 was the start of the golden age of tech venture investing.  After years of poor returns, venture capitalists started to create tremendous value for their investors.  

The market got ahead of itself because our ability to imagine the applications that could be created outstripped the actual capabilities of the systems that existed to support them. 

In the wake of the market bubble’s bursting, the marketplace got a bit less crowded, and the hard work of building the infrastructure, and ultimately the applications that could be delivered by that infrastructure, ensued.  Those with the vision to see that change would be slow, but inevitable, were rewarded.

If that story sounds familiar, that’s because we have just gone through a remarkably similar moment. 

Once again, we were all dreaming of an amazing future, and once again, the market got ahead of itself and required a major correction.  

It’s amazing to see the parallels between these two periods. 

History doesn’t repeat, but it rhymes. 

The opportunity we have at Pantera as venture capitalists at this moment is to find the next generation of leaders that will make an enormous impact – ones like these:

As we saw after that October 2002 bottom, the first phase of recovery will be the continued buildout of the infrastructure that can support the applications that will be Web3.

Facebook, YouTube, Twitter, Netflix streaming – pervasive usage of these applications could only happen when broadband capacity was sufficient to support them.  In 2000, people were using 56K dial-up connections – that evolved into 20 MB DSL connections in 2006.  Now, some of us are running up to 10 GB of fiber optic broadband.

In today’s blockchain ecosystem, we are in a similar 2000-2006 period where the foundational layers are still being built or improved upon.

At Pantera, our goals are to continue to support the development of the underlying blockchain infrastructure and to invest in the future household names of Web3.

Facebook, Twitter, and Netflix did not appear overnight, but ultimately, when the system could support them, they took over the world.


Joey:  “What is ‘The Merge’ for people who may not be aware?”

Noam:  “The merge is a merging of two chains.  There’s the execution chain, which has been Ethereum up until this point.  It’s a Proof-of-Work (PoW)-based chain that has the whole history of the Ethereum ledger.  It’s merging with what’s called the Beacon Chain, which currently agrees to consensus on values of staked ETH, it agrees to this with Proof-of-Stake (PoS).”

Joey:  “Why does Proof-of-Stake matter”?

Izzy: “The idea that Ethereum was going to eventually transition to PoS has always been baked into the strategy.  Vitalik wrote about it before Ethereum was even on Mainnet back in 2014.  There are three main reasons that underpin the transition:

1. Accessibility: Allowing as many people as possible to become participants in the consensus mechanism.

2. Centralization: Mining and hash rate tended to centralize amongst either really large miners or mining pools.

3. Scalability: To be able to process all the transactions. For large-scale protocols that basically execute smart transactions and want to underpin the financial products of the future, you need really high throughput, which isn’t necessarily guaranteed by a consensus mechanism.  The transition to PoS allows Ethereum to incorporate changes into the underlying network infrastructure that will eventually lead to scalability.

“There are two undercurrents that coincide with those three main reasons:

Energy Use: PoW consensus requires vast amounts of energy in order to keep chains that have a lot of value on them consistently running. The idea is that if we can move to PoS and lower electrical costs by upwards of 99%, and still maintain decentralization and security, then isn’t this something that’s worth exploring?

Accessibility: Allowing more and more participants on the network to have a say (although there is no on-chain governance in Ethereum), but to have an impact on the actual consensus by running validators, which you cannot do with PoW. You can run a miner, but proportionally speaking, the amount of impact that you have on a large-scale PoW chain by running one miner is not the same as it would be by running one validator.”

Joey:  “What are the implications for Ethereum’s monetary policy post-merge?”

Izzy:  “The main effect of the merge from a monetary perspective is the large change in issuance (issuance is used to reward block proposers) that occurs.  Issuance is an increase in the monetary supply, based on the code of the actual network/blockchain.  Previously, issuance was quite high because it needed to be high enough to offset the very high cost of electricity needed to run a miner.  Issuance now will drop by around 90% since you don’t need to incentivize miners, instead, all you need to do is incentivize validators.  The incentivization just needs to be on long-enough time scales, a bit over inflation for it to make economic sense to do this. 

“This plus the implementation of EIP-1559, where a certain percentage of transaction fees gets burnt (removed from the money supply; 80 to 85% on average), will result in ETH supply going from inflationary to deflationary following the merge.

“The portion of fees that are not burned will now go directly to Ethereum validators, as opposed to previously when they were going to miners.  This not only incentivizes more people to become validators, and therefore participate in network security, but it also makes it more appealing for people to invest their ETH (in staking products, for example).

“On long-enough timeframes, you will see the lend rate of Ethereum on DeFi rise to meet whatever the average staking yield is.  For that same reason, there’s going to be a natural arbitrage between stakers that are staking and then redeeming their staked ETH – eventually those ETH holders are lending their ETH to the DeFi markets.”


We recently hosted our first Blockchain Summit outside the United States.  We selected Singapore as it’s home to the most Pantera portfolio companies outside the U.S. – thirteen of them.

We’re very excited to invest in the pool of entrepreneurial talent in this region, in addition to building relationships with professional allocators that share our enthusiasm for blockchain.

This year we had 26 industry-leading speakers representing topics as diverse as DeFi, NFTs and gaming, the Metaverse, institutional adoption, and infrastructure.


In our December 7, 2021 investor letter, It’s A Ponzi Scheme, we forecast 10-year Treasury rates tripling. 

Since that call, the 10-year Treasury yield is up +288bps – triple the 1.34% starting point.  Unfortunately, all the data points to our ultimate forecast of Treasury yields hitting 5.00% at the end of the year looking on track.

With the Fed no longer able to manipulate the U.S. bond market, bonds are experiencing a Wile E. Coyote moment.


We first forecast stagflation in our November 9, 2021 investor letter. 

“The Fed’s goal statement:

“The goals of maximum employment and stable prices are often referred to as the Fed’s ‘dual mandate’.”

“Unfortunately, policies have gotten it backward:  50-year low employment participation and 30-year high inflation . . . .

“Wage inflation will cause persistent goods inflation.

“Ultimately stagflation is bad for asset prices.  The Dow Jones Industrial Average was at the same level in 1979 as it had been in 1965.”

It’s amazing that almost 40% of economists still don’t expect a recession, but then economists usually don’t forecast a recession until a few months after it begins.  The U.S. has already had two consecutive quarters of negative growth – and the Fed must still deal with YoY core CPI hitting new records.  It seems an unfortunate inevitability.


Stan Druckenmiller is one of the greatest investing minds.  His views are spot on:

“I will be stunned if we don’t have a recession in 2023.  I will be surprised if it’s not larger than the so-called average garden variety.  And I don’t rule out something really bad.  Why?

“If you look at the liquidity situation that has driven this, we’re going to go from all this QE to QT.  We’re following an asset bubble.  We’ve been doing all this running down on the Strategic Petroleum Reserve.  It’s now below ’84 levels, even though obviously oil consumption is much higher.  We’ve had a bunch of myopic policies that have actually delayed the liquidity shrinkage.  QT has been almost entirely offset by Janet Yellen running down the treasury savings account.  She could have sold 10 years for under 1% during this time and instead she runs down the treasury savings account.

“So all that has massed the liquidity shrinkage, but it really comes into full gear and she can continue this for a while.  We could do the SPR for a while, but by the first quarter of 2023 it goes the other way.  So our central case is a hard landing by the end of 2023 . . . 

“The Fed was wrong; they made a big mistake.  It’s not so much that they were wrong.  I’ve been wrong a lot.  It’s the risk-reward bet they made.  There’s some news this morning in England.  Thirty years ago we shorted the pound in the Quantum Fund.  I didn’t know whether the pound was going to devalue.  What I did know was if they didn’t devalue in the next six months, my fund was going to lose 50 basis points.  If they did devalue, I was going to make 2000 basis points.  So it was a 40-to-1, one way risk/reward bet.  If you look at what the Fed did, the radical gamble they took to get inflation up 30 basis points, from 1.7% to 2.0%, it’s to me sort of a risk/reward bet, you bet one to lose 40 and they lost.

“And who really lost?  Poor people in the United States ravaged by inflation.  The middle class, and my guess is the US economy for years to come, because of the extent of the asset bubble in time and duration and breadth that went on.”

— Stan Druckenmiller, CNBC’s Delivering Alpha Investor Summit, September 28, 2022


I think we can decouple from the other risk assets and we will see a world, a year or two from now, where a lot of interest-rate-sensitive assets are lower than they are today and blockchain is much, much higher.


Q:  “In terms of investment themes, what’s got you and your team’s focus?”

Dan:  “We’ve been very focused on DeFi for the last few years – it’s building a parallel financial system.  Gaming is coming online now  –  we have a couple hundred million people using gaming blockchains.  There is still a lot of opportunity in the scalability sector  –  we’re invested in things like Arbitrum and StarkWare, where they’re helping the main blockchains pump a lot more volume through.  Then there’s space for other layer ones like NEAR, that allow for much higher throughput.”

Q:  “The largest driver of returns is buying these selloffs.  The bigger cycles are the single-most important time to deploy capital.  Talk me through that.”

Dan:  “Human nature is so pro-cyclical.  Everybody wants to buy when all-time new highs and the FOMO devil is whispering in your ear.  Our funds have been around for 10 years and we’ve seen massive inflows near the top, and then times like this, everyone’s backing off.  But obviously, buy low, sell high is a good strategy, and so if people have the financial or emotional resources to invest now, this is probably the best time.

“We’ve only spent 3% of the last 10 years as cheap, relative to the long-term trend, as we are today.  It doesn’t guarantee it’s going to go up tomorrow, but it’s one of the best times to get engaged.

“We saw that in our venture funds.  We had just raised Pantera Venture Fund III at the end of 2017.  There was the same crypto winter that we’re in right now, and all of the traditional VC firms left the space, and so it was just the blockchain specialists that were investing.  There were amazing opportunities, at amazing valuations, with very little competition –  those were by far our best IRRs, investing in 2018 and 2019.

“That’s probably happening here  –  all the big growth firms that were very active in blockchain six months ago have left the space, and so there’re only a handful of firms investing now.  The investments we’re making right now are probably going to be some of our best.”

Check out the full interview here.


The wall of paper money washing over us is disheartening.  Time to reflect on an improved money – bitcoin.

October 31st is Bitcoin’s 14th birthday.

I believe Nakamoto-san’s white paper will change the world – in so many wonderful ways:  financial inclusion, property rights, migrants no longer working an entire month just to pay their remittance company, refugee identity/direct aid transfers, etc.

The mind-blowing bit is the revolution was sparked by just 3,192 words.

Bitcoin: A Peer-To-Peer Electronic Cash System easily fits on the wall of a small conference room in our office.

To share a sense of how distilled the genius in the paper is, we’ve shown how few words it took to convey this powerful idea to the world.  The word count of the bitcoin white paper is shown below in relation to a selection of globally-influential texts:

My favorite – it took Satoshi only 5% as many words to completely describe and define the entirety of the project which has already impacted 200 million people’s lives as were used in writing Blockchain for Dummies.  Go figure.

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