On Thursday (March 26), Dan Morehead, Founder, Co-CIO, and CEO of blockchain-focused investment firm Pantera Capital Management LP (“Pantera Capital”), explained why the current fiscal and monetary policy in the U.S. is highly likely to “inflate” the price of Bitcoin.
Morehead’s comments were delivered via the March 2020 issue of Blockchain Letter, which is Pantera Capital’s monthly newsletter.
Morehead started by looking at the potential impact of COVID-19 on the economy. He believes under the “least bad scenario”, the GDP of the U.S. will suffer a 4% “seasonally-adjusted annual rate decline” in Q2.
Federal Reserve Bank of St. Louis President James Bullard is, however, much more pessimistic about the economic impact of COVID-19.
As Bloomberg reported last Sunday (March 22), he told them during a phone interview that he believes “the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product.”
Morehead says that “the virus is a physical constraint on economic activity” and that it will be “very difficult to counter-act with the standard economic policy tools.”
With regard to monetary policy, he says:
“In the age of Zero Interest Rate Policy (ZIRP), monetary policy has already lost most of its efficacy…
“Monetary policy is impotent against the economic and psychologic impacts of a pandemic…
“With last week’s Fed cut, now almost 60% of the world’s GDP is already at its effective lower bound of zero.”
As for fiscal policy, he says:
“Unfortunately, fiscal stimulus is very hard to surgically pinpoint against an invisible, physical adversary…
“The United States is likely to exit the coming recession with more debt (as a percentage of GDP) than after fighting The Great Depression and World War II.”
So, how will the current financial crisis affect crypto?
Morehead thinks that the huge amount of money printing being done by the world’s central banks will lead to inflation:
“As governments increase the quantity of paper money, it takes more pieces of paper money to buy things that have fixed quantities, like stocks and real estate, above where they would settle absent an increase in the amount of money…
“… they’ll also inflate the price of other things, like gold, bitcoin, and other cryptocurrencies…
“Now that we’re in the trillions, the deficit just simply has to have a positive impact on the price of things not quantitatively-easable — stocks, real estate, cryptocurrency relative to the price of money.”
Here is his Morehead’s prediction for the price of Bitcoin:
“The price of bitcoin may set a new record in the next twelve months. It’s not going to happen overnight.
“My best guess is that it will take institutional investors 2–3 months to triage their current portfolio issues. Another 3–6 months to research new opportunities like distressed debt, special situations, crypto, etc.
“Then, as they begin making allocations, those markets will really begin to rise.”
Regarding the correlation of crypto with stocks, Morehead says that his firm believes that “the short-term high correlation with general markets is over and that crypto will trade independently.”
Co-CIO Joey Krug explains why Pantera Capital believes that Bitcoin is likely to outperform other cryptoassets:
“We believe bitcoin will probably out-perform other tokens for a while.
“It’s a project that’s already built, it works, it has an 11-year track record.
“Many newer blockchain and smart contract projects are still in development and might be stressed to raise funding to complete their development.
“There’s typically a flight-to-quality where people want to put money in the mega-caps, the safest asset, ‘the Treasuries’ of the industry.
“When markets are stressed and people are trying to sell all crypto assets, bitcoin’s much more liquid than everything else.
“We have increased our bitcoin exposure and taken down risk in other assets.”