A legendary crypto hedge fund is riding out this year’s macro madness by moving the majority of its assets into bitcoin.
“While we remain long-term bullish on many of these projects, during the crash we have taken on a larger bitcoin allocation to reduce downside risk,” said Dan Morehead, the founder of Pantera Capital, in a recent investor letter.
Crypto investors are facing uncharted territory. Since bitcoin’s inception in 2009, it’s been a Goldilocks era where growth and inflation have neither been too hot, nor too cold.
Now it’s a different story. Inflation is running hot, interest rates are rising to combat the surge and a
recession
might even be on the horizon as economic growth starts to slow.
To combat this tough economic environment, one of the oldest and most experienced players in the crypto ecosystem Pantera Capital is hunkering down with mostly bitcoin for protection.
Dan Morehead first formed Pantera Capital as a macro hedge fund in 2003 after having spent time as an asset-backed securities trader at Goldman Sachs and as the head of macro trading and CFO at Julian Robertson’s Tiger Management.
In 2013 it launched its first bitcoin fund, which has returned 44,000% since inception, and now it manages $5.1 billion in assets with a specific focus on crypto.
Morehead’s recent decision to reposition is driven by moves from the
“The Fed has really created a self-inflicted disaster here,” said Morehead in the letter. “It’s the two worst policy mistakes I’ve seen in thirty-five years of investing.”
Morehead believes the Federal Reserve kept interest rates “way too low, way too long.” While this is now being corrected with an aggressive rate hike schedule, it’s left a lasting impact on the housing market.
The Federal Reserve’s loose monetary policy approach pushed 30-year mortgage rates to 2.68%, which Morehead refers to as daring people not buy a house.
“When the Fed is offering to lend people money at 2.68% to buy houses which are going up 20% per year on leverage – they do! Not just homeowners, but investors,” Morehead said.
In addition to keeping rates low, the Federal Reserve implemented a bond purchasing program that included mortgage backed securities introducing more
liquidity
into the system.
“That issue is dwarfed by the biggest Ponzi scheme in history – the Fed’s manipulation of the government and mortgage bond markets,” Morehead said.
“They pumped twice as much money – $6 trillion in total = into the mortgage and bond markets,” he added.
The Federal Reserve is still buying instead of selling mortgage backed securities even as they raise interest rates, which is continuing to stoke the very inflation they are trying to get under control.
“I’m very concerned that the Fed doesn’t seem to have any sense of what is causing inflation – their own manipulation of the mortgage market,” Morehead said.
Morehead doesn’t expect the Fed to stop raising rates until at least two of the following scenarios happen:
- Housing inflation goes negative.
- Unemployment rate goes up by two percentage points.
- Core CPI reaches near 2.5%.
- The Fed unwinds the majority of its mortgage positions.
In the meantime it will be a painful process to unwind, Morehead said. He is looking to be allocated to assets with less exposure to interest rate moves continue.
“Pretty soon, when the trauma of this macro dislocation is numbed, investors will evaluate where to put fresh money,” Morehead said. “It would be very hard to want to put it in bonds, it’d be pretty hard to want to put it in stocks, same thing with real estate, because the Fed really has to get the real estate bubble to stop inflating in order to calm inflation down.”
An investing strategy of patience
1) Investing in commodities
“In the first rising rate environment in 42 years, there will be a rush to invest in things that don’t have to go down as the Fed unwinds its mistakes,” said Morehead in the letter. “Blockchain and other commodities are likely the only place to hide in a world with massively rising rates.”
While Morehead’s funds focus specifically on crypto, he highlights commodities, agricultural commodities, oil, gold and blockchains as good investments for this environment.
The Pantera team previously expected bitcoin to decouple from rates and have admitted they’ve been wrong on this so far. Bitcoin’s fallen 60% since rates started to rise at the start of this year. But Morehead believes the decoupling from rates is months rather than years away.
2) Hedging in bitcoin
Another reason for moving into bitcoin is that in times of stress it tends to outperform other smaller cryptocurrencies.
“This dynamic happened in the 2017-19 crypto winter – when investors de-risked out of higher beta tokens,” Morehead said.
“We put a large portion of our assets into Bitcoin in late May,” he added. “When the market starts to rebound, that’ll continue to outperform. “
3) Avoiding alts
Morehead is waiting until the market bottoms before rotating into the “higher risk, higher reward alts.”
“If you look more on the liquid side, my view is that altcoins are going to underperform Bitcoin and ETH, probably at least until the end of the year,” Morehead said.
4) Early stage vs late stage VC
Although Morehead’s team are avoiding alts, they are still snapping up opportunities to grab tokens at the early-stages.
“Some of our best investments have met that profile – token deal, early-stage invested, and
bear market
,” Morehead said.
But they remain cautious on companies in the late stages with elevated valuations.
“Seed rounds on the venture side are still often expensive while seed rounds on the token side are undervalued right now,” Morehead said. “As a result, we’ve been deploying a lot into seed rounds on the token side.”
“Over the next six to nine months, I think valuations will come off in the private markets. And that is literally the best time to invest,” he added.
