Crypto In This Crisis :: Pantera Blockchain Letter, March 2020

Pantera Capital

Dan Morehead
CEO & Co-Chief Investment Officer

When I was sitting down to write — thinking of a way to convey my concerns about the fragility of supply chains and thence the economy as a whole — I was reminded of the pencil story in Milton Friedman’s classic economic text Free To Choose.

It seems to me the analogy is even more germane than I first thought. Freedom to choose itself is potentially a negative at this moment in time.

The Wikipedia entry for the book has a poignant summary:

Free to Choose: A Personal Statement maintains that the free market works best for all members of a society, provides examples of how the free market engenders prosperity, and maintains that it can solve problems where other approaches have failed.”

The world might be experiencing an exception to that rule. Freedom for every person, every county, every state, or even, every nation — to choose might be suboptimal. This patchwork of choices is likely to have grave consequences.

I’m not an epidemiologist, so I’ll leave that to others.

I have spent 35 years trading global macro disruptions. This is like no other. This will certainly end the longest global expansion on record. It is likely to have a larger global economic impact than any downturn in recent memory.


The S&P 500 recorded its quickest bear market ever. The COVID-19 pandemic pushed the stock market down 20% in just 15 trading days, twice as fast as The Crash of 1929, which precipitated the Great Depression.

After the longest, least-volatile bull market in history, this will probably expose a lot of bad risk — hidden under 10 years of bull market.

The contrast to recent times is striking. In 2017, the maximum drawdown from peak-to-trough was just -2.8%, one of the lowest intra-year losses in history. The S&P is doing that every few minutes now.

There was a prescient Op-Ed in the New York Times over a month ago entitled:

To Take On the Coronavirus, Go Medieval on It
Quarantines and restrictive measures served a purpose in the old days. They can now, too.

The unfortunate corollary — Medieval GDP was low and stagnant.


I screenshotted this Bloomberg economist survey in a note to colleagues less than two weeks ago.

Saying “This is Krazy. It’s 100.0% chance of a recession.”

I now believe that the recession is likely to be larger than any post-War recession.

As many of you have already experienced in your towns, few people are doing business in the Bay Area and my colleagues report the same in other cities. It seems like everyone in my community is out hiking; in Manhattan, walking in Central Park. While that would max out Bhutan’s measure of Gross National Happiness, it does not add to GDP.

GDP is a flow measure. If those hikers were previously producing goods and services, GDP will plummet.

Before 2009, the IMF had defined a global recession as annual real GDP growth rate of 3% or less. There had not been a period of negative global growth. Emerging markets typically had high growth rates and recessions were contained within a country or a region.

Wall Street firms are now forecasting a real recession — negative global growth.

Goldman Sachs: “global real GDP to contract by about 1% in 2020”…“24% drop in the United States that would be 2½ times as large as the previous postwar record.”

JP Morgan: “full year 2020 at -1.1%”

This info graphic from JP Morgan on the U.S. GDP picture is very well-done:


There’s already talk of the recession being V-shaped.

There is so much uncertainty today. However, the one thing that seems clear is that this recession won’t be V-shaped.

In the wake of the September 11th attacks, airlines were grounded for three days. After that, we were all sad but commerce restarted. That was a one-off shock which allowed a V-shaped return. We are just starting something that will take a long time to untangle.

In the 2007–2009 recession, real GDP fell $650 billion (4.3%) and did not recover its $15 trillion pre-recession level for three years.


As an example of how hard it is for fiscal policy to help — and to help fast enough: the median small business has enough cash to last 27 days with zero revenue.

Goldman Sachs:

“Using three approaches — the empirical relationship between GDP and unemployment, the experience of Hurricane Katrina, and a bottom-up analysis of likely job losses by sector and occupation — we estimate a 5.5pp increase in the U3 unemployment rate to a 9% peak in coming quarters.”

“…we estimate that 2¼ million Americans filed an initial jobless claim last week, a number that exceeds the previous all-time high by a factor of three and equates to 1½% of the insured workforce. (In Canada, an even more staggering 2½% of the workforce filed a claim last week, according to PM Trudeau.)”


When I was in elementary school, we watched a fascinating documentary on Ford’s massive River Rouge Complex in Dearborn. Iron ore, coal, sand, and few other basic ingredients went in one end — and cars drove out the other.

The world we live in is so different. Just-in-time inventory management with thousands of suppliers in dozens of countries feed a supply chain that will be very difficult to restart — especially with the asynchronous manner that the virus is ebbing and flowing around the world.

In 1980, Milton Friedman presented his vision of free market economics in a 10-hour PBS broadcast series called Free to Choose. Friedman distilled his argument into a parable about a common household object:

“Look at this lead pencil. There’s not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it is made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make steel, it took iron ore. This black center — we call it lead but it’s really graphite, compressed graphite — I’m not sure where it comes from, but I think it comes from some mines in South America. This red top up here, this eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native! It was imported from South America by some businessmen with the help of the British government. This brass ferrule? I haven’t the slightest idea where it came from. Or the yellow paint! Or the paint that made the black lines. Or the glue that holds it together. Literally thousands of people cooperated to make this pencil. People who don’t speak the same language, who practice different religions, who might hate one another if they ever met! When you go down to the store and buy this pencil, you are in effect trading a few minutes of your time for a few seconds of the time of all those thousands of people.

“What brought them together and induced them to cooperate to make this pencil? There was no commissar sending…out orders from some central office. It was the magic of the price system: the impersonal operation of prices that brought them together and got them to cooperate, to make this pencil, so you could have it for a trifling sum.”

It is ironic that command economies are likely to have far less damage from the virus.


If everyone in a country were to self-isolate for two weeks and be tested, health officials would know who has the virus and who does not. Those citizens with the virus could be treated and the others back to work.

Two weeks divided by 52 is a 4% drag to trend GDP. That’s the theoretical/least bad scenario.

Reality doesn’t work that way. Each country is adopting different measures. The impact will be at least that large in the United States and many other countries.

China — which led the world into this and is hopefully now leading our way out — is likely to see a 40% seasonally-adjusted annual rate decline in GDP in Q1. It has not experienced that in at least 50 years. That’s a 12% absolute drop.

China was slow to admit the problem. When China did address the situation, they were able to contain the virus. China shut down Wuhan and restricted movement in much of the rest of country on January 23rd — when the country had just 17 deaths.

China, South Korea, Singapore, and Taiwan have given hope that, with aggressive efforts, the contagion can be conquered.


Recessions are typically caused by a lack of income or access to credit. Fiscal and monetary authorities are accustomed to coordinating their policy response against that challenge.

The virus is a physical constraint on economic activity — an invisible one at that. It will be very difficult to counter-act with the standard economic policy tools.

Countries like South Korea are proving that the most effective tools are science and localization technologies.


Walter Bagehot set forth in Lombard Street(1) the following dictum:

“[T]o avert panic, central banks should lend early and freely (i.e. without limit), to solvent firms, against good collateral, and at high rates.”

In the age of Zero Interest Rate Policy (ZIRP), monetary policy has already lost most of its efficacy. Rates have been near zero in most major economies for a long time. Japan — which invented ZIRP — named the new reality “the lost decade”. That was 25 years ago.

Monetary policy is impotent against the economic and psychologic impacts of a pandemic.

“Hey, Honey, the Fed cut rates 100 basis points today. Let’s go to the movies.”

With last week’s Fed cut, now almost 60% of the world’s GDP is already at its effective lower bound of zero.

To put the previous monetary response in perspective, during the Global Financial Crisis in 2008–9, the U.S. cut rates 438 bps. The global cut was 297 bps.

This time, the U.S. only had 150bps of ammo left. Globally, rates are expected to be reduced by only 55bps — less than a fifth the policy support of the previous crisis.

Many investors have asked about negative interest rates. It seems to me that most central banks now believe that negative interest rates really aren’t effective — that zero is essentially the lower bound. I’m not aware of any major central bank that believes they can take rates substantially below zero. The Fed has now come to zero a handful of times and each time they set their target to 0–25 basis points.

[1] Walter Bagehot ([1873] 1897), Lombard Street: A Description of the Money Market (New York: Charles Scribner’s Sons).


Fiscal stimulus of some sort is needed to support aggregate demand for the most vulnerable. Unfortunately, fiscal stimulus is very hard to surgically pinpoint against an invisible, physical adversary.

The U.S. is debating $2 trillion of fiscal stimulus — almost 10% of GDP — much larger than any fiscal stimulus since World War II. (The American Recovery and Reinvestment Act of 2009 was $850 billion, or about 6% of GDP.)

The United States is likely to exit the coming recession with more debt (as a percentage of GDP) than after fighting The Great Depression and World War II.


Bitcoin was born in a financial crisis. It will come of age in this one.

When I was a bond trader, I was conscious how the terminology sounded upside down. The “best” times for bonds were the worst times for everybody. Recessions and depressions are “great” for bonds.

Unfortunately, I believe that’s what’s happening in our market — cryptocurrency.

As governments increase the quantity of paper money, it takes more pieces of paper money to buy things that have fixed quantities, like stocks and real estate, above where they would settle absent an increase in the amount of money. I think they will do that. The corollary is they’ll also inflate the price of other things, like gold, bitcoin, and other cryptocurrencies.

The United States entered this crisis with an unprecedented structural deficit. Spending 31% more than it takes in. Prior to the emergence of the SARS-CoV-2 virus, the Congressional Budget Office expected a budget deficit of over a trillion dollars. It could now be triple that.

“A billion here, a billion there, and pretty soon you’re talking real money.”

— Attributed to U.S. Senator Everett McKinley Dirksen

Now that we’re in the trillions, the deficit just simply has to have a positive impact on the price of things not quantitatively-easable — stocks, real estate, cryptocurrency relative to the price of money. Said another way, the BTC/USD cross-currency rate will rise.

The price of bitcoin may set a new record in the next twelve months. It’s not going to happen overnight. My best guess is that it will take institutional investors 2–3 months to triage their current portfolio issues. Another 3–6 months to research new opportunities like distressed debt, special situations, crypto, etc. Then, as they begin making allocations, those markets will really begin to rise.

I want to stress that nothing in this note is meant as a criticism of individuals or agencies. All are doing their very best under trying circumstances. I am glad that I am not required to make these choices. My only job is to manage your money in the cryptocurrency markets. I strongly believe that the policy set will ultimately be net positive for cryptocurrencies. That is how we are positioning.


We believe that tokens will out-perform venture for a several-month period. Tokens reprice instantaneously, and so they have much more volatility, on both the upside and the downside. Venture pricing is typically lagged. The number of deals dries up quickly. Many months later, when both sides finally agree where the supply and demand curves meet, you’ll see the number of deals pick back up, but at lower prices.

We reduced our token risk about 15% for about a week. We now believe that the short-term high correlation with general markets is over and that crypto will trade independently. Joey Krug discusses this in greater detail below.

We believe bitcoin will probably out-perform other tokens for a while. It’s a project that’s already built, it works, it has an 11-year track record. Many newer blockchain and smart contract projects are still in development and might be stressed to raise funding to complete their development.

There’s typically a flight-to-quality where people want to put money in the mega-caps, the safest asset, “the Treasuries” of the industry. When markets are stressed and people are trying to sell all crypto assets, bitcoin’s much more liquid than everything else. We have increased our bitcoin exposure and taken down risk in other assets.

In the five major S&P downdrafts since 2012, bitcoin’s correlation with stocks spiked sharply positive for 32 days in the initial movement, but tapered off to neutrality over an average of 71 days.

While assets such as gold tended to uniformly gain an average of 8.2% during these periods, bitcoin has historically experienced some of its greatest volatility during these times.

Bitcoin’s relative market-share (known as “bitcoin dominance”) among all digital assets has increased in each of the five major S&P downdrafts since 2012. The increase in dominance historically lasted an average of approximately 4 months and an average gain of 7.8%. We believe that is likely to happen again. It has moved several percentage points already.

[Graphs of these correlations, dominance, prices are below in the appendix.]

Lastly, these very volatile and potentially panicked markets are well-suited to algorithmic trading. We have increased the share of Digital Asset Fund in our algorithmic strategy to 30% of the fund.


Pantera’s investment team hosted a conference call to share perspectives on the global macro situation and how we believe it will impact the cryptocurrency markets. You can watch the presentation by clicking the button below.

Given the interest in this call, we will host an update in two weeks:

My best wishes for the physical and mental health of those in your family and community.

Dan Morehead
CEO and Co-Chief Investment Officer



What do you think?


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