The next mega trade that's the title of one of the most recent pantera capital investor letters it was quite a long read but given the reputation of this hedge fund in the crypto space i knew i needed to dive into it and i'm glad i did because it gives one of the most compelling cases for a market reversal that i've seen so.
That's exactly what i'll be covering today so don't go anywhere breaking news it has been reported that crypto youtuber guy from the coin bureau really is not a financial advisor according to our sources rumors have been circulating that people are using his videos for financial advice.
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Into this pantera capital letter i think it's important to understand exactly who is behind this letter so an overview of pantera is warranted pantera capital is one of the oldest crypto hedge funds in the space it was originally started as a global macro hedge fund way back in 2003. the founder is a chap called dan.
Moorhead who has an extensive background in traditional finance for example he began his career as a mortgage derivatives trader at goldman sachs and subsequently held numerous roles in other trad five firms like deutsche bank and bankers trust his most recent role before starting pantera was head of global macro trading.
At tiger management for those who don't know tiger management is one of the most well-known global macro hedge funds out there and was founded by storied investor julian robertson so it goes without saying that moorhead has global macro running through his veins after running pantera as a traditional.
Global macro fund until 2013 he decided to do something radical to focus almost exclusively on being a bitcoin and later crypto hedge fund more people joined the pantera team and these included the likes of paul veraditicut a prolific vc investor as well as joey krug who used to work on the auger project.
Anyways since the funds pivot towards cryptocurrency the returns generated would make most trad fi hedge funds green with envy to give you an idea here are the returns of the pantera capital management funds as tracked by bloomberg up to 31st of december last year its bitcoin fund did an eye watering 65.
761 percent lifetime return while its early stage token fund did a 1 371 return even if you just wanted to focus on the returns from last year the lowest it got was 62 on the bitcoin fund and may i remind you that the price of bitcoin was only up by 15 last year so pantera considerably beat the market consensus.
Things looked even more impressive for its early stage token fund so the point is that the folks at pantera seem to have the midas touch and as such i place a lot more weight on their opinion than that of say my mate mad mike who always says that crypto is going to the moon without anything to back the claim up.
Good old mike okay so that's the background to the fund it's time to dive right in to that letter it starts off with a quote from famous economist walter badgett that says quote to avert panic central banks should lend early and freely i.e without limit to solvent firms against good collateral.
And at high rates this policy of badgets was the one that global central banks embarked upon over the past two years unprecedented levels of monetary stimulus that inflated bubbles in the stock real estate and most importantly bond markets it's not just that though it's the fact that the fed was actively.
Involved in buying mortgage bonds and treasuries through its open market operations the result of which has been the collapse of interest rates on account of higher bond prices that dan says is disconnected from reality he is an ex-bond trader after all then of course we have those record.
Levels of inflation this is the inflation that was either as a result of cost push or demand pull now the latest number was 7.5 percent in january which is the highest it's been in over 40 years according to dan this would be even higher if we actually accounted for the cost of housing in the correct way more.
About that in a bit the end result of these record low levels of rates as well as the high levels of inflation is that the real rates we're seeing are at similarly historic lows real interest rates are sitting at about negative 5.5 percent which is a 50-year low essentially if you go ahead and buy.
The security of a us government bond you're paying for that privilege to the tune of 5.5 of your investment yes it is better than holding cash but it's still a degradation of your purchasing power these actions by the fed therefore imply that the treasury and bond markets are really overvalued 15 trillion dollars.
Overvalued that's according to the prices that should be present with an average 50-year real rate so according to dan if you hold any bonds you should seriously consider selling them before that bond buying program comes to an end in march if you've been following these pantera.
Letters previously you'll have seen dan make a call for the end of the bond bubble back in december of last year since that time the rates have climbed from a low of around 1.3 percent and dan projects them to reach at least four to five percent over the coming months given the sheer size of the bond market such large moves in interest rates could.
Have catastrophic implications for capital that's tied up in these bonds okay so the bond market is a very risky place to be right now but what does this mean for bitcoin the next section of the note consists of extracts from the investor call that both dan and joey had at the beginning of last month.
Dan starts off the conversation and explains that although they were able to call the bond bubble deflating last year they did not anticipate the secondary impact that it would have across other asset classes including cryptocurrency this broader correlation is something that we've known to be true over the past two years but never really.
Appreciated how intertwined the markets are according to dan quote that puts the trader in the position of wondering whether they were wrong and that those things are connected or that the market's wrong and over time that will shake out i will admit it is sometimes hard to tell.
It's important to have convictions in your beliefs about a particular trade but the good traders or investors for that matter are able to discern between the two am i wrong or is the market wrong well in dan's case he says quote i have a very strong conviction that the markets are really getting this wrong he.
Thinks that the rising interest rates we're seeing should not be inherently that bad for crypto relative to other asset classes that are likely to take a bath blockchain assets should not be in that bucket when it comes to joey he thinks that although they were not able to foresee the falls that the crypto market went.
Through because of the more aggressive fed talk the markets appear to have priced them in the wake up call came last year with those unexpected bond moves and analysts now have their interest rate expectations for the year priced in at least five he points out though that the.
Relationship or correlation of crypto assets with these broader financial markets tends to come and go more specifically he states that the correlation lasts for a period of roughly 70 days based on this they tend to think that the markets are going to break that correlation in the coming weeks i.e.
D-couple one of the reasons for this view is because given how small crypto is in the grand scheme of global asset classes a relatively minor move of the fed's fund rate from 0 to 1.25 percent should not have impacted on it so severely moreover he thinks that it's incredibly undervalued based on some fundamental.
Ratios in this case he refers to the pe ratio of d5 protocols quick theory check the pe or price to earnings ratio is a measure of how expensive a stock is relative to its earning power in the case of d5 the price is the market cap whereas the earnings are the amount of fees and value generated on said.
Protocol joey says that the pe ratios of some of these d5 protocols are only at 10 to 40 whereas some tech stocks are trading at above 400 to 500x i tend to agree with them here something that i would like to add though is another measure of potential value and that could be the price to.
Book value generally for a stock it's the measure of the price to the net asset value on the balance sheet in the case of some tech stocks like tesla amazon and google you have price to book ratios of 27 11 and 7 respectively however when it comes to d5 protocols the assets locked in the protocol tvl or book value is sometimes.
Much higher than the complete market cap of the tokens this is true for the likes of uni swap ave yearn and dydx to name but a few so defy has insane value but i digress back to the report dan takes over from joey at this point and says that he tends to agree that we're likely to see a decoupling soon.
That this correlation with the broader markets has come and gone in the past and should return to the historical norm soon enough this is because of all the global asset markets out there blockchain assets should be the least impacted by interest rates bonds are directly impacted because of.
Their inverse relationship equities because of the interest rate that is applied to discount future cash flows property because of the cost of mortgages and the discounted value of rental payments crypto is a unique asset class that fundamentally demands a different valuation calculus.
This is an argument that i made in my recent video on the bond bubble i'll leave a link to that in the top right for you to come back later should you want to give it a watch quite simply the only traditional asset class that comes close to crypto from a global macro perspective is gold something that dan mentions over here he.
Also says that when these rates are rising they're going to have to invest in particular assets as a safe haven and we'll have to make the decision between the likes of gold and blockchain assets the next chart here is also really interesting it shows the price of bitcoin over an 11 year log trend as you can see bitcoin is trading almost.
60 percent below its trend in fact it has only spent 12.7 percent of its entire history so far below the trend so based on a historical perspective this should imply that it's incredibly undervalued as dan notes though this does not guarantee that it won't remain under that trend for a week two weeks a month.
Or more afterwards in fact since this investor call it most likely has remained below but the point is that the markets are at an extremely undervalued point and should eventually bounce back he said quote in the nine years we've been managing money in the blockchain space i got to admit there were times i.
Was totally sweating it when the markets were down this is not one of those times he went on to say that it's weeks or a couple of months until we're likely to start rallying very strongly now one further chart from their investor call is this one over here it shows the market cap of the treasury and mortgage bond market it's quite obvious.
Right here exactly where the fed started its open market operations a massive ramp up in valuations of these assets created artificially by the actions of the bankers and as that march meeting is only a week away one of the only buyers of this stuff will stop buying so what do you think will happen to those valuations.
Something else that dan takes aim at is the notion that all these inflation issues that we've seen are purely because of the supply chain there is another cost push inflation factor that i don't think too many people including myself have considered and that is the cost of labor we all know that there's a chronic.
Shortage of workers in the economy and this means that wages will have to go up to attract more workers back into the labor force higher labor costs mean higher production costs which means more inflation something else that he mentions here that i don't think too many people.
Appreciate is the way in which living costs are calculated in the cpi measure basically instead of measuring the cost of buying a house they use something called the owner equivalent rent or oer i don't have the time to explain it here but feel free to watch my video on the matter i'll leave a link to that in the top right for you.
But the gist of it is that it substitutes the cost of the home by trying to estimate the rent that would be paid on an equivalent home now because rents are usually a lagging indicator given that they're sometimes contracts for a year or more the oer is more sticky but the moment that new rental.
Agreements start getting signed the oer also goes up which therefore means that the rate of inflation will too dan thinks that this oer component will catch up with the reality and when it does inflation is likely to go above the 7.5 percent measure even more reason for the fed to act and start pumping those rates.
Okay so that was their investor call moving on with their letter though this next section on unintended tax selling is particularly interesting basically the argument that they're trying to make is that some of the selling pressure that we've seen during the first few months of this year could be as a result of tax day selling.
More specifically the authors note that there are traders out there who are new to crypto they went all in and have been trading in and out of various cryptocurrencies without consideration of the tax implications every time that they've sold one cryptocurrency for another that's a taxable event and hence they will have.
Incurred capital gains then comes that time of year when they have to calculate their taxes they consult their accountant he tells them that they've incurred lots of taxes over the year and that they have to pay the tax man given that they're all in on crypto they will have to sell some of their crypto.
Assets to cover these taxes now according to the report there are billions worth of capital gains that are outstanding there that could mean that there's been a lot of selling of crypto to pay for these outstanding gains and this is not just conjecture there are significant examples of this in the.
Past this can be seen in this table over here which shows the peak date for the market relative to the tax day as you can see we've had market peaks days or months before tax day the average market peak to tax day is about 113 days the average drawdown from this peak is about 59.
In the case of the 2021 to 2022 tax day the peak was back in november and this implies that the time from peak to tax day is 162 days given that tax day is on the 18th of april what's also interesting to note is that the trough of the market has also been close to the actual tax day event although i will admit last year's tax.
Year is a bit of an anomaly on that front whether there was any sort of tax day selling going on over the past two to three months is not a hundred percent clear however it is an interesting hypothesis and there does appear to be some historical precedent although not watertight now speaking of taxes if you think you.
May owe some and have no idea how much then you may want to consider making use of a tax tool now i'm sure that there are videos out there that should be able to point you in the direction of some okay so that's most of the letters thesis on global macro trends there's a lot more that i didn't cover here which goes into other really interesting.
Thematic investing arguments everything from the metaverse to d5 and web3 i'll leave a link to it in the description for you for some light bedtime reading now something that i'd like to touch on now is how this global macro thesis of theirs fits into the unstable geopolitical circumstances we find.
Ourselves in just a week after they published this blockchain letter we had russia invade ukraine the result of this has been a great deal of uncertainty as to how war and sanctions are likely to impact on fed policy more specifically interest rate futures are now pointing to a consensus rate rise of around 0.25.
Percent whereas they were previously at 0.5 percent before the invasion there have even been some people including the likes of bond king mohammed el-erian who seem to think that these events will mean that the fed won't be raising rates in march however despite the prospect of war and a fall in global economic growth the fed.
Is still signaling that it's likely to act governors like christopher waller are still angling for a 50 basis point hike others like atlanta president rafael bostic still expect a rate hike unless there's a severe deterioration in the economic outlook i also happen to think that they're.
Going to act that's mainly because they can't afford not to as has been so clearly pointed out in this video if there is one thing that this invasion is going to do it will most definitely exacerbate the cost push factors driving inflation up oil prices have been skyrocketing and consumers are going to feel that pain not only at the pumps but.
Also in the cost of goods that require oil or energy as an input moreover war and sanctions have an annoying habit of hampering global trade you have no idea how much in the way of raw materials comes from russia apart from just oil raw materials that are likely to now skyrocket in price as well or how about those bloated supply chains if they.
Looked bad before the invasion they're likely to be even more stretched right now the point is that the fed will be pumping those breaks by raising those rates in the march meeting they don't want to be caught asleep at the wheel again and i doubt this conflict is going to change that.
And if pantera's global macro investment thesis turns out to be right this could be bad news for most asset classes but a boon for bitcoin time for a few of my personal thoughts to wrap things up now i really enjoyed reading through this pantera blockchain letter it helped to reinforce my belief that cryptocurrency will be one of the.
Only lifeboats in a sea of turmoil the global bond bubble is unprecedented and it's irresponsible that it's been allowed to grow to these unsustainable levels the only thing worse than that is of course this rampant inflation that we've seen as a result of all these measures it was only in december of last year.
That the fed realized that urgent action was needed inflation was anything but transitory and people needed a solution the hawkish talk started and this of course caused a dump in the markets crypto included i wasn't entirely surprised of course the correlation that we've seen between risk assets like crypto inequities has.
Played out a number of times over the past two years yet if the pantera folks are right about a decoupling then crypto could indeed be the next mega trade as rates start going up and investors are starved of choice they are likely to want to gravitate to assets that have a unique investment case and there are none as unique as.
Crypto could we still see more falls from here yes it's possible perhaps it takes a bit longer for those markets to decouple and crypto gets dragged down in market uncertainty especially if the fed raises rates much more than expected at the end of the day we can't have absolute certainty of what.
Crypto will do especially in such uncertain times markets can be irrational and emotion often trumps logic what's important to do is to formulate your own well-informed thesis and invest based on that adjust accordingly and keep asking yourself the question am i wrong or is.
The market wrong based on what i've covered in this video i will say the latter but then again that's my opinion as a non-financial advisor but you already know that and that's it for my video today chaps and chappettes i'm really keen though to get your feedback so what do you think.
Of the report's conclusions do you think that the fed is still going to raise rates i'd love to know so fire those comments down below and while you're down there you cannot miss my socials page over here i have the only official links to the places you can follow me outside of youtube these include my telegram.
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