Dan Morehead: Crypto - The Most Asymmetric Trade in History

0:00Blockchain will be, I think, like 10x higher in five years than it is today. And so when it goes down to 85%, yeah, it's not fun. It doesn't, it's not, you don't feel smart. It's not fun. But I think it's inevitable that it will do well. And so that's what we try and encourage our investors to hold as long as they can. So that is a simple way to view blockchain is it's basically doing to finance what the rest of the internet did to everything else. I actually strongly believe that Bitcoin and other blockchain assets are going to generally have a very low correlation with risk assets. The reason is smart money doesn't own it.

0:39The majority of institutions literally have 0.0 risk in crypto. So when they have to reduce risk and they say, hey, let's just take 5 % of our risk off across the board. They actually don't have any crypto to sell. And even your own currency, which is the oldest on earth, not currently the best. of us. Try and convert it into a pound of sterling silver. It doesn't work anymore, right? They've printed so many pieces of pound sterling paper. It takes 340 pieces of those paper to buy a pound of sterling silver now. That's the best argument. Buy Bitcoin. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge.

1:29My guest today began his career at Goldman Sachs before moving on to Tiger Management, the famed hedge fund of Julian Robinson, where he rose to be head of macro trading, amongst other roles. But he left to found his own hedge fund, Pantera Capital Management, in 2003. Initially, a traditional macro hedge fund, he pivoted it to be a crypto-only hedge fund as early as 2013. And today, Pantera manages some$6 billion in crypto investments. He is, of course, Dan Moorhead. I'm delighted he is with me here in London. A very good morning to you and welcome to the Master Investor Podcast. Thanks for having me.

2:10And Dan, I mean, you were very early to have a crypto-only hedge fund way back in 2013, quite possibly the first to do that. What would you say, compared to everything else back then in 2013, struck you to say, I need to do this. I need to have a pure crypto hedge fund. Sure. So my career was in global macro style investing, looking for asymmetric trades around the world. And every two or three years, a cool trade would come up that would impact just like one asset class or one region. And it'd have some impact. And there have been some great trades. I went to Russia in 1990 when Gorbachev was the premier to look at trades and invest in Gazprom's privatization and things like Argentine farmland and Middle Eastern equities.

2:59There's been kind of cool trades like that over the years. But in 2011, my brother, John, introduced me to Bitcoin. Back then, there was almost nothing you could learn about it. A little tiny bit of Wikipedia, the white paper, obviously. It was so little kind of loved that a classmate of mine, actually, Gavin Andreessen, was the chief scientist of Bitcoin at the time. Satoshi Nakamoto gave him the keys to the kingdom, and they were giving away free Bitcoins. There was a thing called Bitcoin Faucet. You just go on, and they would give you free Bitcoins because nobody knew about it or cared. I have a little bit of a libertarian streak, so I was like, this is really cool, but I didn't actually do anything.

3:43And then about 18 months later, Pete Brigger and Mike Novogratz of Fortress asked if I could help them think through Bitcoin. And I was like, yeah, it's really cool. And I came in for a coffee, and it lasted like five hours. And I was like, oh, man, this is the biggest trade ever. And Pete gave me an office in the Fortress office in San Francisco. And basically, I didn't leave for like eight years. They finally kicked me out like a few years ago. But it just hit me that it was the biggest trade ever. It's a macro style trade, but it impacts literally every asset class, every person with a smartphone, 4 billion people.

4:19It's just the biggest trade of all time. And I really do think it's the most asymmetric trade of all time. And we're still really early. And so in 2013, I spent about three or four months just reading everything I could find, meeting everybody I could meet in the industry. I flew around the world, went to all the exchanges. And just kind of had this life-of-home moment that it was just the trade. So just expand for the layperson on that. Why is it the trade? This comes back to the monetary debasement argument? Yeah. So the reason I love Bitcoin and blockchain as a trade is there are like 20 reasons it's going to be huge.

5:00And monetary debasement is one of them. But then there's like 20 other things. And so when you really look at it, like right now we're all focused on monetary debasement. That is happening. at a faster pace, but it's been happening, you know, for a couple hundred years. And so that's one of the reasons. But if you zoom out, there's 20 really important reasons why blockchain is going to be massive. And one of the analogs I like is there's a bunch of protocols that we now call the internet that revolutionized everything else in our lives, commerce, communication, everything. Didn't touch banking, didn't touch finance, didn't touch credit cards.

5:38They're all exactly the same as they were in 1958, right? So that is a simple way to view blockchain is it's basically doing to finance what the rest of the internet did to everything else. And there are huge margins. Credit card companies are half a trillion. There are banks that are almost a trillion in market cap. Remittance companies charge migrants a month's wages just to move money across the border, which is crazy. So all of those use cases are what blockchain is doing, and they're all massive. I guess some blockchains are also quite expensive at the moment, but maybe that will be competed away.

6:14We'll come to that in a moment. But just want to, again, continue this overriding argument for crypto. What you're saying to me there is it's more about the blockchain, about the technology and the way it can power certain industries, particularly finance, than some of these cryptocurrencies being the currencies in which we transact our everyday lives going forward. Or do you believe in that argument as well? I do. I believe in that. And that's kind of coming back to my original statement that the reason I'm so bullish is there's dozens of really important reasons. And when you have a new technology, people want to have an analog to the old school world.

6:47Like SMTP became electronic mail. And people want to call Bitcoin cryptocurrency. But it's a payment rail. It's a, you know, property title storage system. You know, it has 100 different use cases. Currency is just one of them. People call Bitcoin digital gold. That's another use case. And so cryptocurrencies are really, really important as currencies, but they're also payment rails. They're also ways to transfer titles, all these other use cases. And so I think they are equally important. And a perspective I love is you really can't have blockchain technology without the tokens, without the cryptocurrencies.

7:24So you can't – there are sometimes popular to say, oh, I don't like Bitcoin, but I really love blockchain tech. Like you can't blockchain tech money from here to Tokyo without buying a Bitcoin. You actually have to buy the token because it is kind of the space on the pipeline or whatever analog you want. So I think there are kind of two sides to the same coin. Again, I want to come to the costs of sending money to Tokyo by crypto soon because I think it's still pretty cheap at the moment to do it through traditional finance. But just rounding off the sort of bull case overall and where we are in this argument, how significant was it the extent to which the Trump administration has embraced crypto?

8:05I mean, clearly, you've made a lot of money since 2013 already. But back when I started talking about it and thinking about it, 2016, 17, 18, I used to think no government, particularly if you've got the reserve currency in the world, is going to want to let this proliferate in a big way. And at some point, they'll stamp it out. They've done the opposite. I mean, is that your reading of it? And how big a moment was that, that the Trump administration has come in so clearly behind crypto? Yeah, there's a couple of interesting layers to that onion there. The first one is this kind of instinct that governments hate blockchain.

8:36It's really the opposite.

8:40Bitcoin was originally supposedly a great way to commit crimes, right? The Silk Road guy used Bitcoin. He's in jail, right? And all of his Bitcoins got confiscated. The U.S. government owns 1 % of all the world's Bitcoins. They didn't get them from good guys, right? It's from seizing it from criminals. And so the governments around the world, I think, fairly quickly realized that anything that has a permanent paper trail of every trade that's ever happened, published every 10 minutes, is a terrible thing for committing crimes. And so governments actually love blockchain. When was that moment? When did they fall in love with it?

9:13So I was the chairman of Bitstamp eight or 10 years ago. And the CEO said there was two FBI agents laundering money on Bitstamp. And I said, you watch too many Tom Cruise movies. That's definitely not happening. I looked at it and I said, oh, that's bad. So there was first one agent that was doing it. So we reported it to another DEA agent that we knew. He quit that day. And I'm like, OK, that's really bad. And so we reported to a third person. This is in probably 2015 or 16. Ultimately reported to a federal prosecutor named Katie Hahn, who's now in the Bitcoin blockchain venture business. Print out the whole blockchain ledger and they're both.

9:47They went to prison for 10 years, right? That's when governments realized blockchain is terrible for crimes. So they really are at least neutral. And so you brought us to the U.S. and the SEC in the United States. For whatever reason, the United States political system makes everything partisan and somehow made a technology Bitcoin partisan, which is itself weird. But the really weird thing is if either party was supposed to pick it, it was the Dems. Like it's a progressives dream. Bitcoin is doing financial inclusion for 4 billion people on Earth. So that got it all politicized for a while. The election, massively important for our industry.

10:28Not only is the current president very pro-crypto, Congress swung and changed. There were a lot of people in Congress that were negative on crypto. Our industry participated in 58 congressional races and 54 anti-crypto people lost their seats and 54 pro-crypto people came in. You see the results already. been a stablecoin legislation passed in the US. They're working on market structure. Very, very important to just kind of reduce the risk that investors were feeling in the US regulatory situation was very, very scary, essentially, with the SEC selling Coinbase and Ripple Labs. Another thing I guess has happened this year is it's not just via direct crypto wallets that people get exposure?

11:15There's lots of much more easy ways for people who might have to have a mainstream account because of their job or whatever that people can get exposure to crypto quite easily now. Yeah, so that's another huge advance. And it's tied to the changes in regulation in the US. In the old days, it was really hard to get exposure to crypto. Our Bitcoin funds, the first institutional product for anybody. And then it's taken 10 years to get to ETFs, which I thought would take only a couple of years. Last year, ETFs were approved. The inflows are larger than stock funds, larger than gold. You know, it's a record, record amount of inflows, 100 billion into Bitcoin ETFs.

11:56That makes it easier for people to get exposure. And then kind of the next evolution are these digital asset treasury companies, which make a public equity owner of a token. And those, I think, are actually superior to ETFs. But it's bringing in just a whole new constituent of investors. I want to get into those treasury companies in a second. But with this overall clearly bullish view you've got on the asset class, if we call it that, tell us exactly what you do at Pantera. I mean, we think of hedge funders taking as many short positions as long. Are you trading between the different currencies, net long the asset class?

12:32Or is it really just a case of getting in early to the bullish theme that you're outlining? Yeah, that's a great question. So I grew up as a hedge fund investor, so that was my instinct, is our first fund was going to be a long, short thing. We were going to buy Bitcoin and short gold. We were going to buy Ethereum. Would have been a bad trade this year. Yeah. Gold's rocketed. Yeah, yeah. Short the credit card companies, those things. In the end, if something's this asymmetric, just get long. And so our approach has been to be long. Our first fund is up 1 ,500x. So if we were short something, it'd be, you know, 1501, right?

13:09Like, so you really have to get the long bit, right? We try and provide access to investors from daily liquidity funds all the way through 10 or longer year venture funds. And so we essentially have every, we invest in the entire blockchain spectrum and have funds that allow people to get exposure however they want it. You know, both venture and cryptocurrency tokens. So let's talk a bit about the current. I guess Friday would have been a good day if you'd wanted to have your old hedge fund trading hat on and be short some stuff. Last week, Bitcoin down 17%, Ethereum down 27%, Solana down something similar.

13:46Some of the other coins like Dogecoin was down 50 % in the week. XRP was down 57%. What happened at the back end of last week and Friday in particular? Yeah, so any really disruptive thing brings excessive speculation. and so sometimes the market gets ahead of itself. And then when there are exogenous shocks like tariff wars, risk assets generally come off. Crypto has a very long-term, very low correlation with risk assets, but in very short-term periods, it can be highly correlated. What we've always tried to stress to investors is this is a very disruptive trade. It's a multi-decade trade. And so only put on as much as you could hold if things do go down.

14:31in our 12 years of managing money, Bitcoin itself, the best of the currencies has gone down 85 % three times. So you have to be able to withstand those kinds of drawdowns. But anyone that's held Bitcoin for four years has made money and the minimum they made is doubling their money, which I've never encountered any other asset class that's done that. So our advice on all these drawdowns is definitely keep your position. If you have any resources, add to it. Because in 10, 20 years, no one's going to remember some little tariff spat? Well, there's a couple of things to get to there. So the first is a tariff announcement, which has now been partly unwound, obviously, as the course of the weekend played out, is your classic kind of risk-off moment for equities.

15:14So does it surprise you that crypto gets hit so hard? Or I guess implicit in your last answer, is you saying to people, this isn't like gold. This isn't like a T-bill. This isn't part of the portfolio that you should consider is a hedge to your equity exposure. Yeah. So I actually strongly believe that Bitcoin and other blockchain assets are going to generally have a very low correlation with risk assets. The reason is smart money doesn't own it. And the reason all these other weird asset classes that intrinsically have nothing in common are highly correlated is modern portfolio theory was so successful.

15:48Everybody has the same portfolio. The majority of institutions literally have 0.0 risk in crypto. So when they have to reduce risk and they say, hey, let's just take 5 % of our risk off across the board, they actually don't have any crypto to sell. So that is why it's typically very low correlation with risk assets. I mean, I'm literally your perfect example on this, by the way, because I understand all these arguments. I talk about it. And yet my exposure is pretty much zero as we stand. Where will typical portfolios be to crypto assets by the end of this decade by 2030, do you think? Yeah, so I actually feel like I've seen this movie a couple times before.

16:28I was at Goldman when they did the GSCI, and now everybody thinks of commodities and asset class. I was doing emerging markets in the 90s, and now EM's an asset class. It seems self-evident to me that blockchain will be an asset class. And if you give me all the way out to 10 years, I think every institution will have a blockchain team in something like 8 or 10 % of their assets in blockchain. And as I said, now, the majority literally have 0.0. And even the most, you know, thoughtful endowments out there, maybe 2 % in blockchain. So it's still very, very early. That's really interesting. And we can check in on this in 10 years or in five years.

17:05And maybe I should tell you when I do finally take the plunge, which will almost certainly mark a short term top if I do. Just dwell a little bit more on that sell-off on Friday. Obviously, we've had a number of those 85 % pullbacks that you've said, the most recent one with the FTX implosion. When you look back on the fact that we've bounced back strongly from the FTX implosion and back to comfortable new highs in Bitcoin prices and other crypto asset prices, was that process actually helpful long-term to go through a washout and a bounce? Or does it kind of worry you that it makes the asset class still seem new and risky and all those sorts of things?

17:49And is there a chance, with the type of leverage that clearly must be at play to see Friday and last week's sell-off, that we might have another big one of those sort of blow-ups in the sector in the next 12 months? It's a reasonable kind of instinct to think if we've had one, we might have another one. And I would make the argument that was a once in a generation kind of weird anomaly. So all of those things, FTX or a bunch of other hedge funds like Three Arrows and BlockFi and Celsius, all those things, they were all very opaque, highly levered, basically speculative entities that blew up from either excessive leverage or in a couple cases criminal activity, right?

18:29That's not going to happen again. People don't loan money to opaque, highly levered, speculative things more than once in a generation. So we did that. People realized that was a dumb idea. And now they're investing through BlackRock or Fidelity or Bitwise, right? Very transparent entities, no leverage. And so I would say the industries essentially kind of did that once and that's in the past. And now everything's very healthy, very opaque, no leverage. But those, as you said, some of them was criminal activity. and they might have been opaque. But surely there's a lot of leverage in the system.

19:02How does Bitcoin fall, which is now a 2.5 trillion market cap asset, how does it fall nearly 20 % in a week? How does Ethereum, which is close behind it as the second biggest asset, fall 27 % in a week if there's not a lot of leverage in the system? Oh, I actually don't think there is that much leverage because they've essentially bounced back. Most of them are back halfway to their highs. But that's not healthy. Oh, it's a high of all thing. I agree. like the Indonesian rupiah used to be really high vol, and now it's kind of more boring, right? And so Bitcoin's a teenager, you know, still very young, and not that many people own it yet.

19:38So it will have higher volatility, but ultimately, you know, higher highs and higher lows. And one of the things I like to share with people is we grew up with portfolio theory where people literally say volatility equals risk, and that VAR, volatility at risk, is like a concept. Blockchain is actually not that risky. I admit it's highly volatile, and you just mentioned how volatile it is. We've been investing in venture for 12 years. In the real world, 65 % of venture companies go broke, and then a couple make a little bit, and then one helps your fund make 1.7 times your money or two times your money.

20:18We have made money on 86 % of our venture investments, which is just amazing. Partly it's our team's fantastic and we do really good work. But honestly, partly it's just a rising tsunami is floating all boats, right? We're in just such a good industry. And so the concept that blockchain is risky really is refutable. Like it's our venture investing, all of our funds we've returned, all of our investors' capital within four and a half years and then five to 15x over the following years. There's a little volatility admittedly, but for those kinds of returns, It's kind of the best return versus risk ratio I've ever seen.

20:59Clearly for the long-term holder, not the short-term holder.

21:06Let's talk about the different currencies within the space. If we looked at your latest post on X, it's like you're solely focused on Solana at the moment. So I want to come to Solana in a second. But I think these numbers are roughly right. Bitcoin's total market value is 2.5 trillion. Ethereum's the next biggest at about 400 to 500 million, so a fifth of the size of Bitcoin. Solana's at about 125 billion, so about a twentieth of the size of Bitcoin. Are those three the three that will be the biggest over the next decade? And will their relative sizes to each other hold, do you think? Or is there more room for the smaller guys to play catch up?

21:46Yeah, great question. And one of the things I've noticed in talking to investors over the years is there's this desire to know which one's going to be the winner, as if there's going to be one cryptocurrency in the future. Sorry for asking that question. No, no, I love it. I love it. It's important to stress that there'll be hundreds of important blockchains out there. Bitcoin, Ethereum, and Solana are very, very important. but you know tomorrow they might invent something new that has another cool use case that that's equally important and then it should be said that these are layer ones like the underlying payment rails the things that run most tokens are actually built on top of other tokens like they're built on top of ethereum or on top of solana and they're more like digital companies and so you could have thousands of those i think you'll have a single digit number of these underlying blockchains like Solana and Ethereum and Bitcoin, they each do very, very different things.

22:44And that's like, we don't have one internet company, right? We have six or eight big ones and then hundreds of smaller ones. Bitcoin is very good at storing money. It's very good at sending money across borders, but it's kind of clunky at doing other things. Ethereum is really good at programmable money, doing smart contracts, but as well, it doesn't process that many trades per second. And then blockchains like Solana and XRP, Ripple's token, they process thousands of transactions per second. So they just really have different use cases. And right now, our biggest position is Solana, but we have big positions and quite a few other coins as well.

23:22So lots to get to that. I want to get into Solana specifically. Just very quickly, and I know you said there's lots of arguments to own crypto. It's not just one. But the very fact you're saying there's going to be lots, does that not undermine the argument for those that are still looking at it this way for bitcoin to be attractive because of the monetary debasement of fiat currencies because yes bitcoin might be limited in its supply but the very fact that there could be quite a few of these new currencies doesn't that undermine the monetary debasement argument for owning crypto in the first place no uh the the argument there would be there are 118 elements people pick number 79 to store their wealth gold it's been great there's other elements like why not platinum or palladium or something those are prettier right uh same with bitcoin there are 25 ,000 on coinmarketcap.com tokens out there but there's only one that has massive network effect and 15 year track record it's bitcoin so there have been tons of you know hey it's the next bitcoin like litecoin or feather coin whatever uh and those all fail because ultimately both technologies and currencies have amazing network effects and Bitcoin is a technology currency.

24:31So there's already two, 300 million people using Bitcoin brand blockchain. So I think that has already, you know, won its use case. There won't be another digital gold. You know, Solana is very hyper performance. So it's having its day. There might be a new coin come out tomorrow that has some other feature that we haven't envisioned. But I think it's pretty easy to say that Bitcoin has one, the digital gold use case. And so, although you thought it was a silly question, will Bitcoin always be the biggest by market value? You know, that one's interesting. I don't know that I would say that. I think that, you know, Bitcoin's 60 % of the market.

25:08It's been, you know, a huge fraction of the market the whole time. But I do think there's going to be, you know, quite a few other important layer ones, and then there's going to be tons of other tokens built on top of those. So I could easily see a world where there's many, many important blockchains where none have more than 50 % of the market. Let's talk about treasury companies because I think that's part of the reason you're into Solana. The moment you've launched a Solana treasury company called Helios, what is a treasury company? We've talked in the past to Tom Lee about his Ethereum treasury company, Bitmine.