Talking Crypto With Dan Morehead, CEO of Pantera Capital

Dan Morehead is the CEO of crypto-focused Pantera Capital, chairman at cryptocurrency exchange Bitstamp, and generally regarded as an expert on the cryptocurrency space. As part of our Fool Live Bitcoin (BTC) Day coverage from March 18, The Motley Fool's Extreme Opportunities head, Aaron Bush, sits down with Morehead for a wide-ranging discussion on Bitcoin, investing in cryptocurrencies, NFTs, and much more. You don't want to miss it!

Aaron Bush: Hi, everyone. I'm Aaron Bush, investor here at The Motley Fool and head of our Extreme Opportunities franchise, and I'm super excited to talk to Dan Morehead, CEO of Pantera Capital, chairman of Bitstamp, and a board member at BitPesa. We're going to be digging into all things crypto today. Dan, thanks for joining me.

Dan Morehead: Thanks for having me on.

Bush: Awesome. So I want to begin by talking about Pantera's journey a bit. For those who don't know, Pantera has been around since 2003, and you used to focus primarily on global macro investing. But in 2014, you made a pretty huge shift and now focus on Bitcoin, the digital currencies, and other companies in this space. Can you just tell us a bit more about why you made this bold shift way back in 2014? What was your mindset at the time?

Morehead: Sure. My career has been in global macro-style investing. Lastly, I was with Julian Robertson at Tiger Management, looking around the world for big disruptions, things that had way more upside than downside. Every three or four years, something would come along -- Russian privatization or Argentine farmland or Tesla Motors. Every once in a while, something would come along that had a very compelling risk-reward asymmetry.

In 2011, my brother introduced me to Bitcoin. I read about it, and it was only a few pages you could read back then about it, and I thought, "Wow, that's a really great idea. I hope somebody does it." And I really didn't do anything about it.

Then in 2013, a couple of friends of mine wanted to have a call and talk about Bitcoin because they had gotten interested in it. I came in for coffee and a conference call. Basically, the coffee itself lasted four hours that night, and I stayed the whole day, and I've been hooked since that day. It took a few months to really get my head around it, but I came to believe, and I still believe very strongly, that it's the biggest disruption of our generation.

It's not like some of these other trades I've done -- Argentine farmland or Russian privatization or whatever, which were really interesting, but they only affected a very small part of the world, a subset of the economy. This is, literally, everyone with a smartphone can be part of the blockchain revolution. That's 3 and a half billion people. It impacts global payments, gold, and even currency. It's impacting the biggest markets. Our first fund is up a couple of orders of magnitude already. I think it could go up another couple of orders. It's just a mind-blowing concept, given rates are basically zero all around the world and getting yield is very hard.

Bush: Yeah, that's amazing. Congrats on your success there. I'm curious just maybe to dig a little deeper. What about the potential disruption order-of-magnitude change really stuck out there at the time they give you the conviction to change everything and go all in on this movement?

Morehead: Yeah, it's a good question. It really was at the time, 2013, it was maybe 200,000 people using Bitcoin at the time, and you'd hear all stories about that it's still growing, all these super negative articles about it. But all Bitcoins on earth were worth maybe $1 billion or $2 billion. It seems like it might be the future payment rate of the world. It might replace gold and it might replace Visa (V) and Mastercard (MA). Those risks just seem so outsized. It's very similar.

I started investing in Russia, when Gorbachev was the prime minister and the entire market cap of Russia was $12 billion, and it just seemed to me -- nuclear superpower with a highly educated population and 160 million people or whatever -- it's probably worth more than $12 billion. That is my view today even on blockchain. All the bonds and stocks in the world are $200 trillion. Currencies, $100 trillion. Gold is $10 trillion. Blockchain is worth a very small fraction of that. Over the next couple of decades, and it will take a couple of decades, I think blockchain is going to go up literally an order of magnitude, maybe two orders of magnitude.

Bush: Gotcha. And I know a lot has also changed since 2014. So I'm curious. How has your investing philosophy regarding crypto evolved over the past few years as the ecosystem has started to take more form?

Morehead: Yeah, so, obviously when we started Bitcoin, it was the only thing one could invest in. Then we started investing in exchangers and custodians like Xapo, the earliest ways to interface between the fiat-currency world and the crypto world.

Then we've done three venture funds since then, and each one is almost like a geologic era, a snapshot of its time. The first one was all about investing in pretty permanent exchange of the custodians and Ripple, the company. Just the most basic infrastructure in the industry. Then the second venture fund was 2015-16. It was more about using typically just Bitcoin to move money around. The main-use case. Cross-border money movement, remittance, regional exchanges were our main focus. And the third fund that we start investing in about two years ago, it has much wider diversity of use cases, including a lot of nonfinancial use cases, a lot of things built on blockchains other than Bitcoin. Then we're now starting a new fund in the next six months. The DeFi explosions are a huge part of it, and a bunch of other new use cases that weren't even in people's minds six or eight years ago.

Bush: Gotcha. That's super interesting. There are so many ways we can go at this. Part of me even wants to talk more about what you did with all the Russian stuff and everything, too. But let's go ahead and just talk about Bitcoin for a moment, and then we can get to some other things. What is your view on Bitcoin today, and what do you think the opportunity is from here? You've already teased order of magnitude. But maybe to connect into this, what do you think is still misunderstood about Bitcoin today that lends itself to have that order of magnitude?

Morehead: Well, the thing I would say is, I think it's just not understood by enough people yet. As I mentioned, when I started investing in it, there were maybe 200,000 people using it. Maybe there are 100 million people now, but there are still several billion people that don't have any position in Bitcoin. They don't really know about it. And what I've found over the years of financializing this new asset class is there really isn't any well-written, articulate paper that is negative on Bitcoin, and that's the holy grail. I have been asking people for that for years. I'd love I see an intelligent person write a lengthy paper on why Bitcoin is wrong or a failure or not a good investment.

And that's really the punchline, that there isn't that. You occasionally get soundbites or Bitcoin is rat poison or something like that, but no one actually ever writes a very long negative piece on that. That's basically what happens, is that the capture rate on people is so high that once someone actually spends a few days, reads about it, thinks about it, they normally would end up buying some, and that's what's been driving the pricing up for 10 years.

What do I think about Bitcoin now? It's been going up at a compound annual growth rate of 213% for 10 years. Again, I've never seen an asset like that. It's just off the charts. It does have some bubbles, and it has had some crazy bear markets. But if you graph the price exponentially over the last 10 years, it looks pretty consistent. Again, it occasionally gets ahead of itself; it occasionally gets behind. Right now, although it's rallied a lot since the pandemic lows a year ago. It's still below its long-term trend line.

I think Bitcoin is fairly valued. It's certainly not a bubble right now. I think it can go up quite a bit. We have a bunch of things coming together at the same time. The tech being built out for the last 12 years, that story is on track. It's great. But the two big things that happened recently is, the monetary stimulus response to the virus is literally off the charts. The U.S. now prints more money every month than it did in the first 200 years of its existence. That has to increase the price of things, which probably can't be eased. It just that's the way it works. You can print trillions of dollars of new pieces of paper money. It's going to take more money to buy things like gold or Bitcoin or even the S&P 500. That to my mind is the best proof of our thesis here that the unlimited printing of money is going to increase the price, in that paper money, of things that can't be increased.

The S&P has had a huge hit to earnings because, obviously, the pandemic has caused enormous financial damage to companies, but the price of the S&P 500 is way up. That's just because there's so much money sloshing around. It's driving up the price of Bitcoin. It's driving up the price of Ethereum and all the other blockchains. Right at the same time, we're making it much easier for both individuals and institutions to get exposure. A long time ago, it was really hard. You had to take a selfie with your passport and send it to an exchange and wait for a week to get approved and all that stuff. Now, PayPal (PYPL) has just turned on 300 million people, making Bitcoin with a click, so it's just a lot easier to get exposure.

I think over the next six or eight months, you could see major Wall Street firms turn on their wealth-management platform to allow high-net-worth individuals to buy Bitcoin. All those things are going to drive the price up.

Bush: Yeah. I agree. I think I want to touch on maybe some areas where people would have questions or might have doubts. Some people say Bitcoin is like digital gold. Well, I don't think gold is interesting as an investment. Or some people say, "Bitcoin as a currency isn't as good as the dollar. Why would I be interested?" People have concerns about the energy usage and things like that. To these people who have these various forms of skepticism, what would you tell them to add a different perspective to help them think past why those issues aren't a huge deal?

Morehead: Yeah. I've heard those arguments for a long time, and the paper currency one is the easiest one just right away. In the U.S., we don't always think about currency very much. We have one of the least bad paper currencies. People in Venezuela, Argentina, they totally understand currencies. Even in the U.S., the dollar's lost 90% of its purchasing power since 1950. I mean, it's been debased at a very rapid rate. You used to be able to exchange 32 dollar bills for an ounce of gold. Now, it's $1,200 for an ounce of gold. So we just keep paying more and more money.

A great example of that is the pound sterling is the oldest currency on Earth. For 850 years, it was worth one pound of sterling silver. Then they said, "Oh, it would be better if we just print money without anything to back it up." It now costs 184 pounds to buy a pound of sterling silver. So the people that say, "Oh, paper money is great. Why would I invest in Bitcoin?" Paper money is no bueno, It's been going down ever since they broke the gold standard or the silver peg. Paper money has been terrible. Bitcoin has been appreciating at a rapid rate. If you take a look at U.S. dollar on a trade-related basis, since the pandemic began, it's crashing because they're printing so many of them that the value is going down at a rapid rate.

Again, people say gold has been a great investment. Well, in my lifetime, you could exchange U.S. dollars at $32 per ounce, and so gold has been a great investment; the dollar has been terrible. Another example is the silver-colored money that used to exist, used to be made out of silver. Again, in my lifetime, quarters, dimes were made out of silver. Now they're made up of cheap metals. Pennies used to be made out of copper, and now they're worth more than one cent just to melt the copper. The government's made it a felony to melt pennies. There is no intrinsic value in paper money. It's being debased all the time.

Crypto, honesty, it can be very volatile. It's going to go up, it's going to go down, but 10 years from now, I think crypto is going to be worth way more than paper money.

Bush: Awesome. Let's shift gears and talk about NFTs and maybe DeFi for a moment. There are some people out here who are probably like, "Yes, I'm digging it and I love everything that's going on." Some people are like, "I don't know what those letters mean." Could you maybe just take a moment to explain what these two terms are, maybe why they're interesting, and then just how you think about it in the context of Pantera. 

Morehead: Yeah, so NFTs are nonfungible tokens. They're essentially buying a digital form of some scarce asset like art or even literature that you essentially own the only version of, the only copy of. We've looked at a handful of investments in the NFT space. We haven't really made a big commitment. I know there are some people out there that are very bullish on this. There are some potential things with music, digital art, or digital-related-type art that could be very interesting for the NFT market, but we really haven't made a huge commitment there.

The place we have made it is DeFi. It stands for decentralized finance. The way to think about it is the other protocols of the internet revolutionize everything else in commerce. How we buy things, how we communicate with people, basically everything in our lives been changed by the internet. Banking is basically the same as it was from the invention of double-entry bookkeeping in the 15th century. It's the same. Visa, Mastercard have been charging the same rate since 1965. Western Union has been around for 140 years. All of those businesses basically weren't touched by the internet. Blockchain is bringing the internet to their businesses, and DeFi is one of the sectors. It's decentralized finance, and everything about the internet is taking the middleman out of the expense base, like Amazon taking out a billion mom-and-pop stores and making it much cheaper and faster for people to do their shopping.

That's basically what DeFi is doing. It's taking the middle man out of borrowing and lending and other applications. The easiest one to think about is borrowing and lending. The way banks work is they take in deposits, typically pay zero on the deposits, then they lend the money out. Most of the time they do a good job lending the money out. Every 10 years they blow up, and the taxpayers have to bail them out. So it's a pretty wonky and expensive system. In DeFi, you're using code to escrow or custody the funds, and borrowers are getting much lower rates to borrow at, and lenders or depositors are getting a much higher rate. You're basically taking the bank or other financial-type company out of the middle, matching borrowers and lenders, and the code takes a tiny spread for providing the service, but it's much lower than it is in the traditional markets.

Then the other benefit is there's no taxpayer bailouts all the time, so it's going to be easier on society. The DeFi space exploded over the last nine to 12 months. It's now about $40 billion of assets locked up in DeFi. In our world, we're all really excited about that, because we've been big investors in that sector for a while, but this is still a microscopic fraction of the $200 trillion worth of bonds and equities out there. I think we still have a decade or two to go on DeFi, but it certainly is, in our opinion, is the most important growth sector.

Bush: It seems pretty crazy to see NFTs in particular blow up recently. I think I saw a Google Trends chart that was basically showing how DeFi has been steadily on the rise and people are thinking about it and NFTs have just come out of nowhere taking the limelight. I think NFTs are super interesting in how they can play out in art and gains and lots of different things. But DeFi, as a concept, feels more disruptive in terms of the good that it can bring, like systemic good that it can bring to financial systems around the world.

Morehead: Also, in the exchange base, we're used to having big, monolithic exchanges that take in a lot of capital and hold people's assets for a few days as things settle. With DeFi exchanges, the buyer and the seller are matched up by code. The code escrows the assets, so there is, again, a lot lower cost, a lot lower risk in society. There's exchanges like 1inch that are now being a massive decentralized exchange aggregator, so they're matching up lots of different individual decentralized exchanges. Or we're investing in a project called Acala that's a DeFi layer on Polkadot, and Polkadot itself is one of the most exciting blockchains we see out there. So there is a lot going on both on the borrowing and lending side and also on the exchange side.

Bush: Awesome, yeah. I want to talk a bit about your approach to investing. We have a lot of equity-focused investors that are interested in dedicating a sleeve of their portfolio to crypto but frankly don't really know how to be good crypto-oriented investors yet. So I'm curious, what does it take in your mind to be a great investor in the land of crypto compared to normal equities? How does due diligence differ, and how do you recommend people get studied up?

Morehead: A lot of the space is still on the private or venture side right now. There are only a few public companies in the space. I'll touch on the private side first, and then we'll touch on the public companies.

The venture investing in blockchain is pretty much same process. There are only really two differences, one of which is a lot of the companies we're investing in are very tech-specific and tech-heavy. Compared to analyzing normal a venture type start-up, often there is some pretty complicated technology to evaluate. Then the other one that's interesting is a lot of these things are essentially open-source communities. It's not just the ability for the entrepreneur to build a really cool widget. They actually have to motivate a whole community of people to come together and either help build the open-source code or build applications that run on top of that.

So there really is a very interesting and unique need for the entrepreneurs starting blockchain or any company to be able to motivate a whole community to start using it. It's not good enough just to build a really cool widget and nobody is going to use it.

Up until recently, there were very few public companies that were exclusively focused on blockchain. You have now Coinbase going public. Another one in our portfolio is Bakkt, was just acquired by a SPAC to bring them public. There's a handful of other companies in our portfolio that are in the pipeline to either go public or be acquired by a SPAC. I think over the next two to three years, we're going to see a lot more opportunities for people to buy into blockchain companies in the public markets.

Bush: That's interesting. What do you think about buying into companies in this space versus buying the tokens of projects in this space?

Morehead: It's a fascinating question, and it's one that wasn't presented before. In the early '90s, if you were prescient enough to think this internet thing was going to be a big deal, you couldn't buy a chunk of the internet. You couldn't buy a chunk of TCP/IP or any of the other protocols. You just only could invest in companies, either private companies or public companies. Here you can buy a chunk of the protocols.

Bitcoin, for example, has 21 million shares. There's 21 million units of the protocol Bitcoin. So if you think more and more people are going to use Bitcoin over the next 10 years, you can buy that protocol.

So the difference really is when you're buying a protocol, you probably have more absolute return potential. There's probably more upside. They can go up a lot more. But they also go down a lot more. They're much more volatile than investing in private companies. Then in a protocol, you're buying into a piece of code that really can't change much. Once the protocol's launched and the rules are set, it's either a good idea that the development team raises enough money that they can actually build it out and get it launched, and build the community and make it work, or it's going to die. There's no pivoting in protocol. Whereas if you invest in a venture-backed company, if the entrepreneur decides that the idea that they started out with isn't going to work, they can pivot and do a new idea. We're investing in a company called Alchemy that's pivoted several times into better and better ideas as they go.

Venture has probably lower absolute return, but it has essentially less risk, less volatility, and more chances of pivoting and morphing into whatever the next thing we will be.

Bush: Gotcha. We've talked about Bitcoin. We've talked about DeFi. The last question for you: If you had to name one other zone in this space, one other trend in this space that's really interesting, what would you call out?

Morehead: The yield farming, or ways to generate yield on what are typically thought of as zero-yield assets like Bitcoin. Probably the next big things, ways for people to get return on holding tokens, either through voting rights or any opportunity to generating a yield. For a world that has zero interest rates in most major countries -- a lot of countries have negative rates; about 20% of the world's bonds trade at negative yields -- generating 6% or 8% is very attractive. So that's probably the next thing for people to focus on, is investing in things or even funds that generated a yield of 6% or 8% on blockchain assets.

Bush: Gotcha. Yeah, I agree, that is super interesting. It looks like we're out of time, Dan. Thank you so much for joining us today. For people who want to learn more about you and Pantera, where should they go?

Morehead: We do send out an investor letter once a month that we try and highlight all trends we think are most interesting that our community would want to hear about. Getting subscribed to our investor letter is probably the best way to get connected.

Bush: Awesome. Sounds great. Again, Dan, thank you so much for taking the time and sharing your thoughts on everything that's going on. I'm sure we could have talked an hour more about each specific thing that we just hit on. But this was a lot of fun, and I'm sure our members will appreciate it. Thank you.

Morehead: Great. Thanks, Aaron.