Panic over: it’s time to buy crypto again

June has not been a wonderful month for cryptocurrencies, but Dan Morehead, CEO of Pantera Capital, is confident that “we’ve seen the most of this panic” and that the sell-off is slowing down.

I read his newsletter published on 14th June with interest. He names three things that caused the markets to fall sharply:

  • China banning bitcoin (again)
  • Tax day
  • Elon Musk

The first point, regarding China, he says is one that happens in a cycle, as China has ‘banned’ bitcoin in 2013, 2017 and 2021. So, that’s every four years. Will they do it again in 2025? It’s hard to say, but by that time the cryptocurrency markets will look rather different one suspects. Morehead warns “Investors who sell on China “bans” usually end up bummed.”

Tax day is also something that comes around with an inevitable regularity. It is also important for crypto prices. In 2013 and 2017 when we also had spectacular bull runs, “bitcoin peaked four months before Tax Day and hit a low about a week before Tax Day.” People sell their crypto to pay their tax bills, especially when they are being asked to pay on their crypto gains. As for Elon Musk’s swivel over bitcoin, Morehead stays silent on that. He’s right, enough has been said to inflate the entrepreneur’s sense of himself as a market mover.

What Morehead does address is human behaviour and our love of acting in cycles. As he says, “Humans have an innate herd instinct.” He explains it like this:

  • It’s human nature that we want to buy when the market is surging up — when the FOMO devil is whispering in our ear.
  • When the markets are crashing – and our spouse/friends/boss are all WTF, we want to flee…we want the pain to stop..

And that is what happened in May and June. Although, Morehead does add another warning: “I could imagine that the traits we imprinted on the plains of the Serengeti might not be optimal for trading early-stage protocol tokens.”

It is worth noting that the Pantera Bitcoin Fund is the oldest cryptocurrency fund, so Morehead speaks with some authority when he says of this moment in the markets, “The volatility has presented a very compelling opportunity.  We are eager to deploy assets of the new Pantera Blockchain Fund on June 30th.”

Buy in the dip is not a new message, but when the evidence is clearly laid out, as Morehead has done, then it injects investors with renewed confidence that the panic is over and it’s time to buy. 

 Read the full Pantera Capital newsletter

The cost of becoming a Cardano millionaire

On 13th May 2021, Cardano’s token ADA broke an important all-time-high by hitting the $2 mark.  Plus, it was the only top-ten cryptocurrency rising in value during a historic sell-off period. Remarkably, given its price, it is the fourth most valuable token in the world.

Isaiah McCall writes, “I’m confident it will be the next Ethereum and have a massive role in web 3.0,” and if he is correct, it may be a good time to ad Cardano to your portfolio before the price rises even more.

Cardano community members believe that one day ADA will reach $100. To do that, it would need a market cap of $3 trillion. That’s an issue, as Bitcoin’s market cap has a 1 trillion market cap and has been around since 2009. To put this in perspective, Cardano is 4-years-old and has a current market cap of $61 million.

Cardano’s battle will not really be with Bitcoin, which serves an entirely different purpose. Instead it will be with Ethereum, and Cardano has already positioned itself as the ‘Ethereum killer’ (or its fans have). This does make it sound as if it is a heavyweight boxer looking for a title fight.

Both Ethereum and Cardano are smart contract platforms, and McCall says they “stand to become crypto-Google (and maybe crypto-Yahoo).” Google’s market cap is $1.5 trillion, but McCall suggests that the smart contract platforms can double that.

However, here is what you need if you fancy becoming a Cardano (ADA) millionaire. Based on ADA reaching $100, (it’s just under $2 at the moment) you would need to buy anywhere between $15,000 to $20,000 worth of Cardano to become a millionaire. It will take several years to get to this point – McCall says about four to five years – but Cardano is using some interesting tactics to speed this up.

Cardano’s founder Charles Hoskinson invited Elon Musk to tea and a chat about ADA and Tesla on 13th May, and it could be that Musk will see the value in this particular blockchain. McCall says, “Cardano is an institutional investor’s wet dream. It’s available on every mainstream exchange, doesn’t have any SEC allegations against it, unlike XRP.” It is also a more stable blockchain.

You don’t need to be Elon Musk to benefit from a Cardano investment, although as with every market there is risk involved, so please don’t invest money you can’t afford to lose. Its proof-of-stake protocol means transactions are much more fluid by not rewarding miners with a block reward but with the transaction fee.

Furthermore, there are massive amounts of on-chain liquidity on Cardano’s blockchain. Around $16 billion ADA is circulating around the network and $22.2 billion is staked on the Cardano blockchain. According to the stats, Cardano is also the second most staked blockchain, coming in just after Polkadot.

While Ethereum has the first mover advantage on smart contracts, Cardano arguably has it on POS. although Ethereum is transitioning to POS this year. What it does need, and it is something that Etheruem has, is “institutional support and an ecosystem of dApps to become the next Ethereum.”

But it is still worth taking a punt on Cardano, even if it has a relatively small share of your crypto portfolio, and certainly while its price remains in single digits.

Turn to high-yield crypto for better interest rates

There has been much talk about cryptocurrency as a hedge against inflation, but it is now becoming clear that this is not the sole reason for entering the crypto ecosystem – it also has the potential to offer high-yield rewards and be an alternative to low interest rates. This is especially important as bank interest rates have remained at their lowest point for some time and there doesn’t seem that much movement is likely in the near future.

DeFi has made earning interest on crypto a reality

This new benefit has largely come about with the growth of DeFi products over the past year. The summer of 2020 has been called ‘the DeFi summer’ by some, and since its explosion last year, “the optionality has only increased, along with the amount of “money legos” that are being combined in different ways,” as Benjamin Powers writes at Coindesk.

Consensus 2021 talks up interest rates in crypto ecocsystem

This week Consensus 2021 is in full flow, with lots of interesting ideas coming out of it. For example, Felix Fen, co-founder and CEO of Set Protocol; Zac Prince, CEO of BlockFi; and Stani Kulechov, Chief Executive Officer of Aave, formed a panel to discuss “how people seeking out higher yield on their crypto assets can access a variety of services, and what the tradeoffs there can be.”

Prince said he saw real value in using interest rates to translate something really powerful that’s happening in the crypto ecosystem in the terms that everybody is already familiar with. What exactly does he mean by that?

He said: “If you try to explain how the blockchain works, or why Bitcoin has value, or some of the other more complex and in-the-weeds topics to folks when they’re on their journey into the crypto ecosystem, they might struggle to wrap their heads around it. Everybody knows what an interest rate is. And everybody knows that earning 8.6% on something is better than earning 0.2%.” Furthermore, he quite rightly points out that traditional banks are a long way off “from being ready to finance the crypto ecosystem in a meaningful way.”

Kulechov spoke about how the Aave community governs the parameters of the interest rates, which are then determined by supply and demand and are transparent. “The fact that everyone can participate in affecting what the interest rate will be in these markets is a very big thing because, traditionally, big interest-rate movements have been decided by the banking industry; for example, by a few people sitting down with a room in London,” Kulechov explained.

Fen talked about the variable nature of interest rates. He suggested that users evaluate the risk of a protocol in terms of its insolvency and take that into account when considering where to allocate funds. He also emphasised evaluating the protocol’s community when making a decision. “How stable is a parameter selection, how conservative or aggressive is a community in terms of its parameter selection, and how decentralized is the protocol overall?” he said. “I think those are some of the elements that we look at when thinking about yield, and so not all interest rates should be just looked at as a headline number. One has to dig a little bit more into this.”

Fears about CBDCs are misplaced

Interesting read from Marcelo M. Prates in Coindesk this week with his thoughts on CBDCs who puts forward the idea that there is nothing to fear from central bank digital currencies (CBDCs), although some seem to think it will ‘disintermediate banks’ and ‘facilitate monetary surveillance and censorship’.

He says, “From papers to blog posts, a lot has been said on how a CBDC would deprive banks of deposits, as funds could be easily moved to CBDC accounts or wallets, especially in times of crisis.” CBDCs are also seen as instruments of control “ since CBDC transactions would be traceable in real time.” But the important question he asks is this; would these risks emerge because of CBDCs, or would they happen even if CBDCs never come into existence?

What about disintermediation?

There is a fear that people will remove their deposits to the safety of the digital currency provided by the central bank thus reducing the funds of the commercial banks. If there is no CBDC, the risk to the banks disappears. Not so, says Prates, because “We already have alternatives to bank deposits that could greatly reduce banks’ funding if used extensively.” What he is referring to is “the possibility of converting money from your bank account to a safer option of digital money that is currently available: e-money or its unregulated twin, the stablecoin.” Look at the success of Wise, PayPal and other e-money issuers and you will probably come to the same conclusion.

Surveillance

For some the possibility of state surveillance and censorship is the worst aspect of CBDCs. Prates points out that it is true that unscrupulous governments could use some of a CBDC’s unique features, such as traceability, to discriminate or to censor specific activities or individuals. He adds, “If, moreover, CBDCs were kept deposited directly at the central bank, governments could even threaten their citizens with balance freezing and confiscation.”

This is not something to be taken lightly, but as Prates says, abuse of people via their finances is not something new and cites the story of Fernando Collor, the first democratically elected president in Brazil in 1990 after 20 years of military dictatorship, and his “infamous plan to “kill inflation”: the Collor Plan.” Amongst its various measures, the Collor Plan determined that all bank balances above the equivalent of $1,500 would be frozen for 18 months and paid back in installments after that period. Not only did the banks comply with this order, the judiciary didn’t say a word, and the law was only repealed after two years. Prates says, “This kind of abuse, like many others against individual rights, is typical of countries with a weak rule of law, incapable institutions, and no political accountability.” These have existed long before CBDCs.

Fundamentally, the fears surrounding CBDCs are ones that have long existed in the current monetary system and the advent of a CBDC will not be “the root of all evil” that many fear.