WBD211 Audio Transcription

Bitcoin's Coming of Age with Dan Morehead

Interview date: Friday 3rd April 2020

Note: the following is a transcription of my interview with Dan Morehead from Pantera Capital. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to Dan Morehead, a veteran investor and the co-founder & CEO of Pantera Capital. We discuss the effect of coronavirus on the economy, how the markets will recover, and Bitcoin’s coming of age.

“Bitcoin was born in a financial crisis, it will come of age in this one.”

— Dan Morehead

Interview Transcription

Peter McCormack: Morning Dan, how are you?

Dan Morehead: Great Peter, thanks for having me on.

Peter McCormack:  Not a problem. You probably don't know this, but I've wanted you on the show for quite a long time.

Dan Morehead: Well, thank you! We did a period of not doing much media, but I think there's something really big going in the world right now so we're very happy to share what I'm thinking.

Peter McCormack:  I've always had a question I've wanted to ask you. The answer's either going to fill me full of joy, or leave me flat, but where did the name for the fund come from?

Dan Morehead: Oh, I can tell by the smile on your face you might be hard rock aficionado. We did not, in fact, name it after the band, which would be great! I used to work at Tiger Management, and all of the fund names were named after big cats, panther, puma, all that. So as a homage to Julian Robertson and Tiger, I picked Pantera, which is panther in Italian and Spanish and then it also suits a global macro hedge fund perfectly because pan terra means spanning the Earth in Latin.

Peter McCormack:  Well for me, Pantera means a global vulgar display of power, it's a ‘90s hard rock. I was a massive, huge Pantera fan. I saw them play Donington.

Dan Morehead: Are you serious?

Peter McCormack:  Serious! I saw them play Donnington Monsters of Rock. Phil Anselmo, the singer, had his knee fully clothed up because he popped his knee, one of the highlights of my childhood. So whenever I see the fund name, I was like, "Really? Has this got anything to do with the Pantera?" But no, clearly it hasn't! Anyway, great to get you on the show finally. So you know this is a Bitcoin only show, and I also tend to keep things a little bit more simple.

I tend to dedicate my show for people who don't have maybe the time to spend hours upon hours reading about markets, reading about Bitcoin, so sometimes when you're explaining things I might get you to maybe explain it a little more simply than you would normally do it. Are you okay with that?

Dan Morehead: Oh no, yeah, that's my level of my understanding as well.

Peter McCormack:  All right, good. Well, listen, look, very strange times right now, and I'm here in the UK, which is very strange at the moment, and I believe you're in San Francisco?

Dan Morehead: Yeah, in Woodside, Silicon Valley.

Peter McCormack:  And how are things there at the moment?

Dan Morehead: It's actually kind of calm. Our county was one of the first to go shelter-in-place, so it's actually almost three weeks now and people seem to be kind of getting into the rhythm of it. I saw a really cool stat the New York Times did today on movement of people in various cities and San Jose, which is right next to us in San Francisco, a certain segment of the society literally has zero movement. They're literally staying at home. So it really has everything's kind of shut down.

Peter McCormack:  Wow! All right, well listen, before we get into this, because I'm going to use your most recent newsletter, Crypto in Crisis, as a structure for what we're going to talk about today. But just give people a background to your career so they understand the context of this interview and the things you've done in your career.

Dan Morehead: Sure, so I started out as the first asset-backed securities trader at Goldman Sachs. So it was the mid ‘80s, mortgage-backed security were just coming into their own, and trading-asset backed securities, like auto-loans, credit cards was just starting and it's pretty wild now to be trading asset-backed tokens, so we've come full circle in 30 years.

Then I transitioned into global macro hedge fund trading, so trading big disruptions, which is incredibly relevant today and then ultimately went to Tiger Management in the late ‘90s, working with Julian Robertson, and really to try to find big disruptions in the world, things like Russian privatization or Middle Eastern equities or Argentine farmland, something like that would come up every once in a while. But when I saw Bitcoin in 2011, it started kind of really piqued my interest.

It took a year or so to really get my head around it, but I came to believe it was going to be by far the biggest disruption of my career, and I still do believe that. I think it's orders of magnitude bigger than those other trades that I did. Those other trades I did were fun, they were interesting, we made some money, but I think Bitcoin's actually going to change the world for the better, and I think billions of people are going to be... Their lives are going to be better off for Bitcoin.

So obviously, it's my career and we manage money for other people where our job is to give them the best returns we can, but a huge part of this is and I really think when we look back a couple decades from now, Bitcoin is going to have changed the world and it's kind of fun to be a small part of that.

Peter McCormack:  Okay, so you've had a career over 30 years in financial markets. I guess you've never stopped looking at the markets, and you've probably traded and lived through some very complicated times. 9/11 obviously, for the US that impacted globally buzz was a human disaster, but also it was a economic disaster of a short period of time, and you've also lived through 2007 to 2009, the recession there. What we're going through now, how do you take this all in and put that into context for you and your career so far?

Dan Morehead: Yeah, I'm actually really grateful that I've had 35 years of trading these disruptions and cycles, because I think that perspective has been in been very helpful. We sent a note around internally, just three weeks ago, was March 10th where only half of the economists on Bloomberg were predicting a recession in the United States. I sent a note saying this is crazy, it's 100% chance of recession and since then, obviously the virus situation has gotten much worse, and then the kind of follow on economic situations much worse.

So to put this in perspective, all the previous disruptions that we traded, like you mentioned 9/11 was particularly a United States issue, there's been a few recessions that have been regional, something like the Southeast Asian currency crisis in the ‘90s, that have affected more than one country, but this is really the first thing that's affected every single country, that's what's so unique about it. Up until 10 years ago, the IMF called a global recession if growth was less than 3% positive, which this thing's going to be huge negative. So from World War II until 2009, we hadn't had the global GDP go negative, ever. We had 50 years of always going up.

The US might be in recession, but the rest of world is fine or Southeast Asia might be in recession, and the rest of the world is fine. This is the entire globe is going into a recession and just to put things into kind of, you asked me to dumb it down, this is simplest way to think about it, is the least bad way to combat this virus is if everybody on earth sheltered in place for two weeks, and then we test the people who have symptoms, and they get medical treatment and everyone else gets back to work.

That is the minimum to deal with this thing. In two weeks divided by 52 weeks is 4%. So the minimum hit from this thing is 4% of GDP and right now, we're certainly not doing it that way. We're not having everybody in our stock, we're kind of... China stopped and now they're starting and now other places are stopping and so I think the impact to global GDP is going to be unprecedented.

Peter McCormack:  All right, so have someone like me understand this, when you talk about a 3% growth of GDP can still lead to recession, somebody like me thinks, "Well, hold on. If we're bigger than last year, and we were good last year, how does 3% growth still lead to recession? How come we can't just take even a small haircut?" Help someone like me understand why the rate of growth is so important and what is the trickle effect of not having the right levels of growth?

Dan Morehead: Since the Industrial Revolution, we've seen incredible increases in growth per capita, and we've really come to expect that and so we view trend as being several percent of positive growth. It's just kind of the natural benefit of enhanced productivity or other ways that we become more wealthy per capita.

The stat about the IMF thinking a recession was anything less than 3% positive growth is very similar when I moved to Japan in the early ‘90s, right before, essentially during their disruption and I was trading interest rates and equity derivatives. Japan had been in a 50 year growth expansion and they were just starting to reel from the decline of the Nikkei.

The Nikkei fell 80% ultimately and they have overnight rates at 6% at the time, and we're forecasting what they call a Japanese recession, which is like the IMF definition, positive growth but less than 3%. So I think just it's hard for people to get their heads around, growth doesn't always have to happen and if there's something like this, which is global in nature, it really can make all of growth shrink. It's amazing how fast things are changing, we wrote our investor letter about a week ago and at the time, it's on the edge of being the most strident forecast what's happening.

Since then Goldman Sachs has revised their growth rate for the United States to -34% seasonally adjusted annual rate and they're just numbers that are just off the charts. We just saw on unemployment claims the last recession, I think the peak was 400,000 or something like that per week, and we've had 6 million. These things are literally off the charts!

Peter McCormack:  Yeah and one of the things you mentioned early on is the fragility of supply chains, and I was thinking about it the other day. I was trying to think about different kind of scenarios. So we're going to do our shopping and they're keeping the food supply chain going, which is great. But then I was thinking about well, what about the companies that build the machinery that the farms use? Are they still going? Or what about the chemical companies that are providing the supplies for the shampoo manufacturers?

And then we're starting to think well, this even the basic supply chains that we need in terms of food and keeping the energy services going, are they at risk because of breakdowns in other areas of the supply chain and then I can help you think how so? What about all the small islands, all the small holiday resort islands that rely on all their food to be imported? And I guess some of the effects on this we're not going to see for perhaps months.

Dan Morehead: Oh yeah! So we did feature Milton Friedman's "Free to Choose" pencil clip in our investor letter, and I think it's a great analog for what's going on here. It's a couple minute videos on YouTube, if anyone's interested, take a look at it, it's great. He just said there's no one on earth that could make this thing, he's holding up just a normal lead pencil and it costs 5, 10 cents, but there's nobody that has the skills and complete ability to make it on their own.

Somebody had to cut the lumber down and somebody had to build the saw and to get the saw, somebody had to make steel and it's just an incredibly complicated thing to build even the simplest little household item. I really think that's the issue here that trying to restart all these supply chains can be very, very difficult, especially with the asynchronous nature that the virus is ebbing and flowing around the world. So China basically shut down completely for two months.

It's trying to restart but all the people they'd be selling their products to are now shut down, so it's going to be really hard and the supply chain breakdown is evident in things that are not very high tech, like toilet paper. It's completely sold out in every store in our area and then might be irrational and I'm not going to use that as like some super deep metaphor, but it's just saying if you can't keep a supply chain for something so simple as toilet paper moving, it can be really hard to put a ventilator together. There's 1,500 parts to a ventilator that come from 25 countries, that's really the issue is that with the entire world kind of frozen, it's really, really difficult to restart these supply chains.

Peter McCormack:  Yeah, it's interesting you mentioned that piece from Milton Friedman, because I'd heard the statement before about making a pencil but I'd never heard the full explanation. I've actually even printed it out here in front of me just in case I needed it. But you also put another quote from Milton Friedman at the start "Free to choose", a personal statement maintains that the free market works best for members of society.

Have you always been a believer in free markets or is this something that you're considering at a deeper level now, because of what is actually happening in the decisions that the governments are having to make with regards to bailing out companies, for example?

Dan Morehead: Well yeah, I think the last century is proven that a free market is better than the other systems people have tried and growing up in the ‘70s and ‘80s, it was almost a religion, because we were in kind of an active war with the command economies on earth and ultimately, the command economies all kind of failed now and our market driven.

But when I was rereading it, it is ironic that Milton Friedman's concept that a free market works best for all members of a society. It might not be true that if every county in every state in every country is free to choose their own policies, it might be suboptimal right now, and it is a poignant thought that right now we actually need to all be pulling together and using the same policies rather than every small group around the world trying their own thing.

Peter McCormack:  It's funny, I would have researched him afterwards. I know who Milton Friedman is, but I found an interesting quote where he said, “I am a libertarian with a small l and a Republican with a capital R."

Dan Morehead: That's funny!

Peter McCormack:  Okay, so what is your view on this? Do you believe that the US government should let companies fail? Do you believe they should be bailing out companies? It's a quite interesting time because I saw a quote somebody put on Twitter that I can't remember exactly, but it was along the lines of company owners have never had a time like this, where they have zero income, and they can't plan for when the income will start again.

Dan Morehead: Yeah, so I saw a great tweet where somebody said "$2 trillion and then 330 million Americans, that's $6,500, where's my other $5,200?" That is a great way to say is if we're going to spend $6,500 per person which is $20,000 per family, it'd be great to see it get to the people who are really vulnerable and my partner actually has read the Stimulus bill, I haven't yet but there's huge things in there about like chargebacks of real estate depreciation and stuff like that. I'm not entirely sure how that's really going to help the economy.

Peter McCormack:  You also talk about The Great Depression and then I was watching a documentary about that the other day and it's very hard to even comprehend what it was like to live through that but you know to the crash of this was twice as fast as the 1929 Great Depression. Now the circumstances are different, like Donald Trump has obviously said, "This is a pausing of the economy, the economy was in a very good shape".

I don't 100% agree with him, I think something was ready to pop anyway. But have you looked at The Great Depression, and are there any parallels with that, that we can look at, for this in ways in which the market may restart?

Dan Morehead: Probably a better analogue would be the 1918-1920 Spanish flu, influenza epidemic because it has similar imports of what we're doing here and there's very clear data that the cities all did very different things. San Francisco did essentially nothing on social distancing, Los Angeles was very, very strict and shutting down everything. Minneapolis and Saint Paul had very, very different policies, even though they're right across the river from each other.

So you had these great control group experiments, and it showed that the cities that were very aggressive at doing social distancing early and kept it the longest, obviously had much, much better health outcomes, much lower fatalities, but they actually had better economic outcomes and that's the bit that I think over the next three or four weeks, people are going to start really digging into. There's been some talk on the national level that everything is a trade-off, you want to protect people's health or you want to have the economy on alarm, and it does seem to...

My belief is if we really address the virus in a very intense national way for a very short period of time, ultimately, it will do less damage to the economy than what we're doing now, which is a very kind of rolling piecemeal way. So in our investor letter, my partner Joey Krug did a analysis of how the financial markets performed into and out of the Spanish influenza, which is very similar to what we're dealing with here and then the graph about the price of the S&P falling twice as fast as prior to The Great Depression. I think it's a great way to emphasize to people, this is completely a unique thing.

All those other recessions were caused by a lack of either income or credit, and we have policies to deal with that. We have monetary and fiscal policy, we've dealt with scores of those recessions over the last two centuries, we really know how to deal with that. This is an invisible barrier to commerce. It's completely different. In a couple of weeks ago, the Fed cut 100 basis points, and my thought was, "That has absolutely zero impact on the economy." In the old days, you kind of had basis points, people re-financed their mortgage or do something different, spur the economy, but what are you going to do say to your wife, "Hey, the Fed cut rates 100 basis points, let's go to the movies."

They could cut rates 1,000 basis points and we can now go to the movies. So I just think that the policies that we're used to using fiscal and monetary stimulus, really are going to have very little impact against this virus. But the net of it is, we're probably also going to this discussion is, if you're using a policy of essentially just increasing the quantity of money at unprecedented rates, it probably will inflate the price of things, you can't increase the quantity of like stocks, or gold or Bitcoin.

Peter McCormack:  Okay, just so somebody listened to this, if they're not somebody who really understands the difference between monetary and fiscal policy, what are they and how do they work together?

Dan Morehead: So in typical times, recessions are caused by either a lack of income because companies have laid off workers and so people don't have the income to buy goods and services or the 2008-2009 crisis, it was essentially a lack of credit that there was some unwise lending done in the residential mortgage market, and so it's very hard to get credit. To soften those blows, you can lower interest rates and for example, in the 2008-2009 crisis, the United States lowered interest rates 4.5%.

So that really helps if you lower rates 4.5% and a lot of Americans can get a lower rate on their mortgage and the extra money they're saving on their monthly mortgage payment they can use to buy car or go to the movies or whatever. In this instance, we only had 150 basis points of ammo left, rates were already very close to zero, so it's very difficult to do any more than that and on a global basis this time, it's even more striking. The last recession 2008-2009, globally rates were cut about 3 percentage points. So many countries are already basically at zero, that JPMorgan is forecasting only 55 basis points or 0.5% of cuts globally, a half percent it's a pretty small amount in any case, and especially when you're combating and an invisible little virus.

So it seems like the policies have worked in the past, cutting interest rates and increasing spending just won't do much. On the spending thing, it's very typical for the government to try and run what's called a counter cyclical fiscal policy. So when the economy's booming, the government typically should be running a surplus, taking in more tax receipts, because lots of people are earning money, so they're paying taxes and lots of people are selling assets like stocks or real estate profits, paying capital gains tax.

So the government should be running a large surplus in the boom times and then when the economy enters recession, the government should be able to essentially counteract that by spending more money either through things like unemployment insurance, replacing lost income, or in infrastructure spending. It's a great time to build hospitals, universities, interstate highways, things like that.

This time unfortunately, we entered it with a huge structural deficit right in the best of times, the US government was spending 31% more than it was taking it so the government already had a huge deficit, even with record stock prices. So switching from that to this new, unprecedented Stimulus will add an enormous amount of debt onto the balance sheet of the United States.

Peter McCormack:  And if this lockdown is lengthened, we go on for many more months, which is a potential or we go through a period whereby we allow pass the economy to get going, that's going to hamper the ability for things to pick up again quickly. So they only have the ability to keep printing money and keep giving money out there. So what is the risk there?

Do we run the risk of, I don't think perhaps a hyperinflationary situation say like Venezuela or Zimbabwe, but do we run the risk of having an inflationary situation similar to say Argentina had with the Corralito? I've never really experienced issues with inflation in the UK because it's always been such low levels. You don't feel the pain, like maybe the countries when they have 10%, 20%, 30% inflation. Are we at any risk of this happening?

Dan Morehead: We are and I would say there's two really important parts to that question. One is the one that you said, you're talking about not really feeling the pain in the UK. In the developed world, the debasement of our currency happens slowly enough, we kind of don't notice it. Obviously, if you live in Zimbabwe, you are an expert on the impact of hyperinflation, you know everything about it and Argentina has devalued 7 times in this century, or in the last 100 years. So if you're in Argentina, you completely understand it.

But if you're living United Kingdom and the United States, you don't notice it, but it is happening. My best example of how crappy paper money is the British Pound sterling obviously used to be worth a pound of sterling silver. They have printed so many pieces of paper money, it takes 184 paper pounds to buy one pound of sterling silver. So every day you go about your business, you don't notice it, but your currency is very quickly being debased and even just from a simplistic standpoint, in my lifetime, quarters and dimes were made out of silver.

It's thinkable now, we've printed so many of them, there's no way we could print them out of silver and even pennies which used to be copper now are worth way more to melt them than they are as at one 100th of $1 increments. So even the least bad paper currencies are pretty terrible. The US dollar has lost 90% of its purchasing power since 1950. Again, it happens slowly, it only happens 3%, 4% a year so you don't notice it, but it does happen. So that's kind of half the answer.

The other half of the answer is when you talk about hyperinflation, most people kind of think about the price of bread or some consumer good that's in our minds and what's happened over the last 25 years basically, is there's been a split between things that are very easy to produce by the exploding supply of global labour, sometimes called the peace dividend. There's a couple billion people that used to be in communist regimes kind of cut off from the world who are now entering the global market and they're willing to make flip flops and they're willing to make flip flops at even lower prices than they used to be able to buy flip flops.

So you're getting this enormous influx of labour which is making normal consumer goods cheaper and cheaper all the time. A great example is the flat screen TVs. 20 years ago a tiny flat screen TV was super expensive and now you can buy a 7 foot wide one for $11. It just gets cheaper and cheaper and cheaper because there's billions of people that are learning how to make a flat screen TV. However there's nobody on earth that can make another ounce of gold, or another Bitcoin, or another share of IBM.

So no matter how many people are flooding the labour market, and we just had the biggest shock to labour market in the last hundred years of all the people that have recently lost their jobs. So I'm not even remotely forecasting inflation in the consumer price index basket of goods with the notable exception of toilet paper that might be the one consumer item that is going to go up in price, but for flat screen TVs, everything else, all that stuff.

But it's because you can make an infinite amount of those, things that cannot be quantitatively eased, like gold, like real estate, like stocks and Bitcoin, those are going to go up, relative to where they would be otherwise and that's the super important statement, is the US stock market is down 26% since the beginning of the year and if we hadn't printed $2 trillion, it would be down 50%. So yes, that's the whole objective of these policies is to inflate the price of things and stocks are just kind of the most famous barometer but they'll inflate the price of all fixed quantity things real estate, stocks, gold, Bitcoin.

Peter McCormack:  It's interesting. I interviewed Raoul Pal the other day, you know Raoul from Real Vision?

Dan Morehead: I know from way back! When I was talking to him last time he was my contact at Goldman, and then he and I did just sit down for an interview a couple days ago. So I'm very familiar with his current views.

Peter McCormack:  So I asked him because I post all my Bitcoin shows to my Facebook and I'm always telling my friends and there's barely ever any interest. Even right now as the government in the UK stepped in, offering to pay 80% of wages, lots of people, my friends who say "this is great, I'm protected, this is good, they're rescuing the economy", but none of them understand what this influx of new money means and I've been saying to people that they need to have a think about this and they need to understand the potential risks of this.

So I turned round to Raoul and I said, "Look, if you were going to give some simple advice to people who are listening to this, people who just go into work and they come into home and while they're not going to work at the moment, but generally speaking, they would be going to work, coming home and just having a little bit of time in the evening, what would you do?" And I'll tell you his advice, he said, "One, you need cash, but you want physical cash, be careful of the banks, so make sure you have some physical cash in the house."

He said, "Make sure you cut your spend, be prepared to hustle, and then he said own some scarce assets, like gold and Bitcoin." So that that was his advice and the funny thing is, look, I'm a Bitcoiner Dan, I don't own any gold, but I've also been tracking the Bitcoin price for this crisis and I was thinking that actually, I probably should have a good balance between gold, Bitcoin and cash. Where are you with this kind of position at the moment?

Dan Morehead: Yeah, so I agree with that sentiment is that in an era where paper money is the least scarce thing on earth, they're just printing it 10% of GDP clips, literally unprecedented amounts are being created, so that is not going to go up in value. The things that are like consumer goods, you can make lots of them, that's probably not going to go up much, but the scarce assets will. So gold is obviously a candidate and it's been a great store of wealth for 5,000 years, so it's not going to go away tomorrow. I think Bitcoin's better than gold, but they're similar and if somebody said, "Hey, your choice is you can either hold a bunch of paper money or a bunch of gold right now?"

You got to buy the gold, gold is going to do way better than paper money. In fact, gold's up on the year when everything else on the planet is down, oil is down 56%, the NASDAQ's down 18%, stocks are down 25%, so having gold beat up, proves my thesis and it's notable. Bitcoin is almost up on the air, it's down to a tiny bit about 5%, so I agree with Raoul's thought is that, when they're increasing the supply of paper money at just these astronomical rates, you kind of want to be in something that they can't print more of and you can't print more gold, you can't print more Bitcoin, you can't print more IBM shares or whatever. Anything that's going to be protected.

But the stock market it's trickier because they have earnings issues and all that, whereas gold, the earnings never change on gold and Bitcoin. So I think the safest place to be is in scarce assets that don't have any impact and then I actually really do believe that this is going to be a really important time to prove out the functionality of Bitcoin. A line that I put in our investor letter, I think it's still resonates with me, "Bitcoin was born in a financial crisis, it will come of age in this one", and I really believe that's true. We're already seeing it. Satoshi created Bitcoin, essentially as a response to the last financial crisis and the use cases are really going to shine here and we're already seeing it.

So many businesses are essentially kind of freezing and not working, whereas Bitcoin still works great. We're invested in a bunch of companies helping people move money across borders, they're all seeing record months of Bitcoin use, and a lot of them don't actually advertise that it's Bitcoin that actually is doing that stuff behind the scenes, they just say it's remittance or money movement or whatever. But they use Bitcoin to move money behind the scenes, and they're all seeing record volumes this month because Bitcoin works great. There's no barriers, it's instantaneous and it's free.

We're invested in one company that has kiosks in grocery stores, and that's the only thing that's open right now. So if you want to send $500, you can go to your grocery store and feed paper money in the machine and the money will pop out in Mexico or the Philippines or wherever you're trying to get it. So I really think that this will be a test. Basically in a year or two, we look back, Bitcoin and blockchain is either going to have been very impactful and it's off to the races or it fails.

Peter McCormack:  I think I know one of those businesses you're talking about as well, because I was texting my buddy last night, doesn't live far from you, Michael Dunworth. He's from Wyre and I was texting him about it last night. So let me ask you, one of the things is if we're seeing record use of Bitcoin at this moment, but the price itself crashed, and kind of there's a lot of correlation there between what happened with the S&P, we are seeing a potential decoupling right now. What do you think is going on there? Do you think the speculation is out of kilter with the actual use? Is that something you're tracking?

Dan Morehead: Yeah so the hope is that Bitcoin is uncorrelated with the rest of the world and there was a time... When I started trading, everything was uncorrelated. I was a bond trader and I came to work every day, and I just thought about interest rates. I had no interest in what was happening in oil, I had no interest in what the S&P was doing, I was able to just trade my market. Then Portfolio Theory took over and basically everybody bought the same portfolio, everyone has a bit of commodities, everybody has stocks, everybody has bonds and even our business, so alternatives isn't alternative anymore, everybody's got them and they're not different.

So crypto is the one thing that is a new asset class. So it's really still a statistically uncorrelated, it has very low correlation over long periods of time. However, there's an Asterix on that when the world freaks out, it is correlated and so in our investor letter, which, if any of your listeners want to see it's on our website, has a graph that shows there's been five big downdraft in the S&P500 since Bitcoin was liquid to trade, and in each of those Bitcoin did become positively correlated with the S&P and did drop with the S&P. However, that correlation breaks down after about eight weeks and it then goes back to essentially zero correlation.

That's actually how we've traded it through this crisis is right when the scale this was becoming apparent. We took our risk down, sold cryptocurrencies, we actually increased our exposure to Bitcoin when we talk about that later. But we essentially took down risk, but only for a couple of weeks. And now we're back to full limit long, and cryptocurrency has been grinding up over the last, gosh, basically since March 16. So two weeks, and I think it's going to take a few months for the whole world to kind of sort through their own problems.

Most money managers, they're not thinking about new assets that they can invest in, they're thinking about their kids and their family and what they're doing to protect themselves. But over the next couple of months, people will start kind of refocusing on new opportunities and I think the crypto markets will really explode about three to nine months from now basically, not right now, but once people really have the time to look into it, they'll really explode. From all the cycles I've seen over 35 years, I have a very strong intuition that Bitcoin will hit a record price within the next 12 months and maybe like way higher than that.

Peter McCormack: Interesting! Okay, before we just get into the detail on the Bitcoin, what is your, and as short as answers you can get, but what is your personal thesis on Bitcoin?

Dan Morehead: My thesis is that it's kind of the... When there's a technology that's disruptive it's called the category killer, Bitcoin is a serial killer. It's going to go through dozens of different industries and that's why I think it's so valuable is that some people call it digital gold. Yeah and it is, it's awesome, it's digital gold does that. But you can keep registries of all kinds of other non-financial assets on a blockchain, you can do so many different things with Bitcoin and blockchain and so that's why I think it's going to rip through dozens of different markets.

If you think about it, the internet changed everything, except for finance. Banks are basically exactly the same because as they were six years ago and all those entities are all basically the same. Western Union has been around for 160 years, AMEX has been around for 160 years. All these companies are super old, Wells Fargo used to be a stage code for gold and these are all really, really old companies and they haven't changed much.

That's basically what Bitcoin and other cryptocurrencies are going to do, is bring the internet to finance and it's going to massively drop the cost of sending money. The analogue I've always loved for Bitcoin is its money over IP and VoIP completely disrupted the telephony business. Back in the day, when I was in college, you had to really think about how much you were going to spend on the phone because it was expensive and there was a point in American history where AT&T was 16% of the market capital of the United States. Now you never even think about it, you stream Netflix on your phone and it's all because we're not controlled by a monopolist anymore.

Back in the day, if I want to call you, I had to pay AT&T and British Telecom, and that's the only way I could get in touch with you. Now you can route money or you can route Voice over IP and the price has dropped so that we don't even notice it anymore. The quantity of data is exploded so much that we literally don't have enough copper on earth to run the internet on copper wires. If we try to run the internet now on copper, we literally don't have enough copper. So that's basically what's going to happen in the money business, is we're going to drop the cost of sending money so low that it's going to bring so many new people into the financial markets, micro labour, micro payments, all these really cool things are going to happen.

So I think Bitcoin and other blockchains are going to disrupt the current oligopolistic control money movement. I think about this, the average remittance cost is 9% and we're in the financial markets, that's just a number nine basis points, whatever. That's a month's wages for the migrant. The migrant has to work for an entire month, just to pay the remittance company, and their family only gets 11 months wages. That's crazy! And Bitcoin is easily going to take that out. So when we look back, it's going to take a while and it's going to take a couple decades to really do all this, but when we look back, 10 or 20 years from now, I think it's going to have a huge positive impact on the world.

The reason kind of sum up this whole very multifaceted discussion is the reason I like Bitcoin is it's the miracle whip of finance, like you can do so many different things with it and it's taking on all the biggest markets. If you're investing in some kind of new medical device, and it's only 100,000 people on earth that have a condition, you can kind of figure out the most you can ever make investing in that thing. But this is taking on literally the biggest things on Earth, it's taking on wealth storage, it's taking on digital payments, taking on remittance, taking on gold!

Gold is a $10 trillion thing, if Bitcoin only gets 4% of gold mark, it's a home run and that's why I always love when people say, "Oh Bitcoin failed, it's just digital gold." Man, that's the best failure I've ever seen. That's awesome! Then it's taking money and money used to be $100 trillion thing and now it's $140 trillion and is growing fast. So if Bitcoin gets even a very small fraction of the market for money it's just going to be huge.

Money is one of the only faith based things out there and people get pretty heated about it and there's often people like "Hey, the US dollar is awesome, we don't need another currency." There's already 200 currencies on Earth. What's 201 or 202? That's my view, is we already have 200 currencies, all of them are depreciating a pretty rapid rate and 150 of them are just terrible. So you have one Bitcoin that's going up, that's great.

Peter McCormack:  So we've got you on Team Bitcoin now, we've got we've got Raoul Pal on team Bitcoin, we've got Dan Tapiero, team Bitcoin, we've got my buddy Travis Kling, he's on Bitcoin and so we've got people coming in from the traditional markets in here, but you must have a lot of friends who were called Luddites, who aren't in Bitcoin yet, but you must be talking to these people. Are you seeing more interest and what are the rejections you're still getting from your friends from the old traditional markets?

Dan Morehead: Oh, that's a great question! Yeah so I grew up as a global macro investor and I work with Dan Tapiero and Mike Novogratz and all these guys, and huge, huge take up of blockchain and Bitcoin for that group because we're trained to see disruptions, we're trained to see things that have very asymmetric returns. Yeah, you could lose one times your money but you might make 40 times your money. So it's been fun.

I was talking to Raoul who I've known for 30 years too about this, that people that do what we did in the old days are really drawn to this. Alan Howard and all these guys that are trained to look for these disruptions just can't not be excited about Bitcoin. So it is kind of like an old friend network, all these people that have been doing business for a long, long time. So when you ask like, what are my friends that are negative on Bitcoin say, that is my challenge for your listeners.

I would love somebody to send me an anti-Bitcoin paper that's more than four sentences by somebody that's reputable and I have been looking for that for eight years, and I haven't found it. You get the Warren Buffett's like, "Bitcoin is rat poison" or whatever, that's fine. He's a genius investor. If he wants to do his little one word soundbite thing, that's great. But I'm telling you, I really would love to read the negative case by somebody who's respected as an intelligent investor, that's more than two or three sentences.

Could you do get, there's some famous hedge fund managers that occasionally say it's a bubble or whatever, but I really to promote intellectual honesty and you're investing should always be challenging your views and that to me, is like the great white rhino. I want somebody to bag a paper written about why Bitcoin is not going to go up that has more than three sentences in it and send it to me.

Peter McCormack:  Yeah, you can't find it!

Dan Morehead: Really just doesn't exist. You get a couple Paul Krugman articles once a while, but there's never anything with any substance that's negative. So the point being, I basically don't have too many friends that are essentially vocally against it and I'm sure there's some people out there that aren't long and don't want to say it too loudly, but I really have never heard a very cogent argument of why not to be invested.

Peter McCormack:  See I've always compared it to CDs and MP3. I was buying CDs, probably for at least three or four years longer than I should have. I was buying them because I wanted to hold that CD, I wanted the inlay card and I refused to buy MP3s.

Then I did and then eventually I stopped buying CDs and now I have a cupboard full of CDs that never get touched anymore and I just think for some people, they cannot get over that thought that they're going from a physical asset like a lump of gold, even if they don't own it, they know exists somewhere to this concept of a digital gold and I think it's too much for people to get their head around and it's sometimes it's too complicated.

Also, it may shift, I think that's what someone like Warren Buffett, it might shift his world too much. It might just be too big a step for him to take.

Dan Morehead: Yeah so I love that perspective, and it reminds me of another very positive story I wanted to share with you is the use of USDC stablecoin has exploded in the pandemic. It's up 60% since the beginning of March, and to me that's another great proof of blockchain working that if you have your money in a bank that in the old world provided trust, and that's the term Satoshi mostly used in the white paper, but that trust is levered 40 times and all the assets you're leaving on deposit with your bank, like Lehman Brothers, or whoever it would be, are then re-lent out to 39 other people and when something bad happens, you could end up losing all of your money.

If you own USDC, you can transfer it around the world instantaneously, you can do whatever you want in it is backed by 100% US Treasury bills, and no leverage. There's nobody else involved. There's no other 40 to one leverage and so when the shit really hits the fan, I think I'd rather own USDC then have my money in XYZ bank. Yeah, governments often think things are too big to fail or whatever, but you're going to see things like USDC do really well because it is safer, there's less points of failure in the system.

So I would keep a couple of things, I'm keeping my eye on or the volume of USDC, the volume of transactions at these cross-border payment companies and payment companies like Wyre. Those are the indicators, and they're all real-time of whether blockchain is proving itself in this crisis and so far, it really has.

Peter McCormack:  Yeah, it's interesting you should say that. I'm not sure what the insurance is in US banks, and I think the UK is up to about £80,000, but we did see in Europe, we saw a haircut on the bank accounts in Greece and Cyprus, I think it was. So it is a potential risk, but there's also that potential risk that there may be some limitations on how much money you can take out.

As we've had a run on the toilet rolls, we could have a run on cash, it is a possibility and I had similar, I've been thinking about should I actually be transferring some of my pounds into some stable coin somewhere. It's definitely on my mind like you so that is an interesting point. All right, so listen you know these guys, if they're selling a lot of money we're in a very weird time, investors want to invest, some of them or send them an awful lot of money. What are their options now?

We know Bitcoin is an option but what are other options? Is it gold? Is it Bitcoin? Are there other things I'm not thinking about because they're going to have to start moving this money around at some point?

Dan Morehead: Yeah, so since I got mesmerized by Bitcoin, I haven't really followed the other securities markets like I did back in the day. So I'm not super close to it, but my hunch is, I think that equities are really going to struggle because I think that... Obviously, a month ago, they're at record high, so it's not like they started out super cheap and I just think people are having a very hard time getting their heads around how big this economic impact is going to be.

As an example, I use phrase that you think slipped in earlier, a V-shaped recovery and people are already starting to talk about that. I think this is the most complicated and really crazy environment I've ever experienced and so much uncertainty, the only thing I'm certain of, it's not going to be a V-shaped recovery. I don't know what it's going to look like, but the only thing I know is it's not going to be V-shaped because you mentioned September 11. September 11 a great example of a V-shaped impact, every plane in the United States was grounded for three days, and then every plane gotten in the air and everything restarted. This thing is so hard to restart.

There's a great photo of Wuhan opened up, the movie theatre in Wuhan, zero people. Who's going to the movies? Even if on April 30th, CDC or something some entity says everything's totally fine, everybody get back to work, it's all awesome. Man, I think it's going to be hard to get people to come back to work and especially to come back to their old things like, going to gyms or going to movie theatres, those habits, it's a psychological impact and it's not an economic thing, i's a psychological effect. So I think it'd be very slow getting back.

So that means the economy is going to be grinding for a lot longer than people expect and there was an article that I highlighted in our investor letter that was an op-ed in the New York Times, is to fight coronavirus. We got to get medieval on it! I love that, it's a great line and it is what we have to do. We have to go to soup for medieval lifestyle, we all have to basically stay within a couple of miles of our homes, which is the way people live in the Middle Ages.

The only problem is medieval GDP was low and stagnant. If we all have to combat this virus, by essentially not moving, it's really hard to produce goods and services and so I think it's going to be hard in equities, that's a long answer. It's just like, I don't think I'd be buying equities yet. I would be buying things that have no impact from a virus like gold that are in fixed quantity.

So gold is one, I think Bitcoin is a great example because it has probably a positive growth potential from this thing and then they're going to be things like distressed debt, they're businesses that typically do well after these disruptions that have essentially been doing nothing for the last 10 years because there's no distress in the world that will now be great types of investments. So if I were an investor I would allocate a bit of my money to stress debt, a bit of my money in gold, a bit of my money to buying things like Bitcoin and other cryptocurrencies.

Peter McCormack:  You did mention real estate before so funnily enough, when I bought this house I'm in right now, I bought it in June 2008. I bought it the month before the big crash, so instantly the price drops and I was just about to move house. I accepted an offer of mine, I'd made an offer on another house and well, we can't do anything right now at the moment, but I thought there's a chance that the house prices might crash, but you mentioned earlier that might not. What's your kind of view on house and real estate?

Dan Morehead: My view would be, I think all assets that are kind of income-based, like houses or equities or whatever, are probably going to go down a lot, because we've just endured a massive shock, and you call the last recession, the big recession? No, that's the small recession. The one we're in now is a big recession is unfortunately the truth.

Peter McCormack:  This is a big one!

Dan Morehead: So I think they will go down a lot. Obviously, the governments are fighting that with fiscal policy, and increasing the amount of money that people have by $2 trillion, so that'll mitigate the damage to stocks and real estate, but you'd imagine they're going to reprice much lower.

Stock market is already down, in Latin America down 40% and I would just think real estate has got to follow stocks, but slower, obviously. What happens in real estate or venture and things like that is basically just transactions go to zero. Well the buyers and the sellers are trying to figure out where the real price is, where stocks trade every nanosecond, so you get a real-time reset.

Peter McCormack:  Okay. Well listen, this has been everything I thought it would be, glad to finally get you on. Just a closeout question, just similar to what I asked Raoul really. I've got a bunch of listeners who may be aren't macroeconomists, maybe don't fully understand how the economy works and are going through various situations at the moment, maybe into Bitcoin, maybe have a mild interest in Bitcoin, what are the kinds of things that you would recommend that people keep an eye on?

What are the warning signs in the market that you would be looking for that they might not or even myself out there might not even be thinking of looking that and what are the kind of... I know you were not meant to give financial advice and maybe you won't, but what was the kind of advice you'd give people a time like now?

Dan Morehead: Yeah, so to those that are just trying to get up to speed on how the global macro might impact our crypto markets, I'd say we put 8 or 10 pages of our thoughts down in our investor letter, which welcome for any one of your listeners to read. I would then follow things like USDC's total issuance, that's a real-time way to see if cryptocurrencies are actually being used by people in this crisis and try and stay abreast of whether the fundamentals are actually working.

Unfortunately, some of the companies I referenced are private, so don't share much information and so it's harder for non-investors to stay up on it. But what I'm trying to do is put together essentially an anonymized index of our portfolio companies traction so that you can see the change in companies like Wyre or Bitso in Mexico, these companies are helping people move money around. We're going to try and put together almost a real-time index to help essentially prove out our thesis that blockchain is helping when everything else is kind of coming to a frozen stop.

Peter McCormack:  All right, cool! Well, listen, look, appreciate you coming on, Dan. If people want to find out more, where can they find this investor letter? How can they follow you?

Dan Morehead: Yeah, so love to help spread the gospel here. Our website panteracapital.com has tons of information, lots of papers, other people have written books that are interesting. Our investor letter, if somebody wants the easiest way, is to send an email to ir@panteracapital for our Investor Relations and the department will put you on our investor letter list. We're actually hosting conference calls and we're really trying to be transparent and get information out to people in the community. So feel free to get engaged!

Peter McCormack:  Fantastic! Look, the investor update I saw was great and it was a really healthy way to look at the market. It wasn't too in depth someone like me, who isn't a macroeconomist, I was able to follow it very well. But look, I appreciate getting you on finally. Finally, got to find out the Pantera story and wish you the best through this time. Stay healthy, stay mentally healthy and physically healthy, and I hope we all get back to normal as soon as possible.

Dan Morehead: Yeah, thank you so much for having me on and I really look forward to being back on anytime!