Dan Morehead, CEO and Co-CIO of Pantera Capital, and Joey Krug, Co-CIO of Pantera Capital, recently offered their perspectives on the implications of increased interest rates on crypto asset values in the coming months.
“Huge Pivot” On Crypto
The highlights of a conference call with investors about the impact of the Fed’s “huge pivot” on crypto were released on February 16 as part of the firm’s monthly newsletter (“Pantera Blockchain Letter”) for February 2022.
“Our macro view here is that crypto definitely got hit by a lot of the news surrounding the interest rate hikes that the Fed is planning.
But at this point, we think it’s mostly been priced in. As of today, the market’s pricing in about five rate hikes—and I think a lot of that is being overplayed in crypto.
Ethereum went down to a low of about $2,200 or so, and if you look at the 10-year treasury, it peaked at about 1.9% and it’s kind of leveled off since then.
Today it’s trending at about 1.8%. Now that things have gone through this really aggressive move, where late last year the 10 year was 1.35% and then went up to 1.9% quickly, I think that was sort of a wake-up call to the market.
“But if you look at crypto specifically, when the traditional macro markets go down, crypto tends to be correlated with them for a period of roughly 70 days, so a bit over two months, and then it begins to break its correlation.
And so we think over the next number of weeks, crypto is basically going to decouple from traditional markets and begin to trade on its own again.
“There are a couple of reasons for that. One is that crypto is still a relatively small market and so things like the federal funds rate being at 1.25% versus 0% doesn’t make a huge, huge difference for something that’s growing four to five times year over year, especially if you look at stuff like DeFi, where it’s already trading at fairly cheap multiples.
There are a lot of DeFi assets that trade from P/E multiples anywhere from 10 to 40. They’re not crazy high-valued; tech stocks are trading at multiples of 400 to 500x.
“Our view is it’s going to decouple over the next number of weeks and crypto will sort of trade independently again. It’s my personal view that $2,200 ETH was likely the bottom.“
Morrer Had More To Add On Krugg’s Statement
And Morehead added:
“Once people do have a little bit of time to think this through, they’re going to realize that if you look at all the different asset classes, blockchain is the best relative asset class in a rising rate environment.
Most asset classes do have a direct algebraic impact from rising rates. Bonds, obviously, when rates go up, prices go down.
I think bonds are going to get killed. Most other things like equities have cash flows that need to be discounted, which implies lower prices if yields are higher. That’s also true of real estate and most other types of assets.
“Whereas blockchain isn’t a cash flow-oriented thing. It’s like gold. It can behave in a very different way from interest-rate-oriented products.
I think when all’s said and done, investors will be given a choice: they have to invest in something, and if rates are rising, blockchain is going to be the most relatively attractive…
“That doesn’t guarantee it won’t go down next week. It doesn’t guarantee that it won’t go down a lot more next month, or whenever, but it just means the odds are really high that the markets are at an extreme and will bounce back relatively quickly.
I think it’s like weeks or a couple of months until we’re rallying very strongly. We are quite bullish on the market, and we think prices are at a relatively inexpensive place.“
Morehead anticipated that the United States’ “bond bubble” would burst shortly, driving more people into cryptocurrency.
He also suggested that some of the recent drops in digital asset values could be due to investors selling their holdings to pay taxes, which are due by April 15 in the United States.
In January, year-over-year inflation in the United States reached 7.5 percent, the highest level in 40 years.
The Federal Reserve has stated that it intends to boost its benchmark interest rate in order to keep inflation under control. Since March 2020, rates have been near zero.