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The Worst Period Is Over
The Most Neglected Asset: Revisiting the Programmability of Bitcoin
Protocols with Fundamental Appeal
The Impact of Halving on Bitcoin Price
On-Chain Government Bonds
In the past year, global economic and political events have presented unprecedented challenges to the blockchain industry. Dan Morehead, the founder of Pantera Capital, delves into these challenges and their impact on the cryptocurrency market in his latest open letter, offering an optimistic outlook for the industry’s future.
According to Dan Morehead, the years 2022 and 2023 have been a terrible and strange period for the financial markets. Edward McQuarrie, a distinguished professor at Santa Clara University, boldly states, “Looking back over the past 250 years, there has not been a worse year than 2022.”
The blockchain market has faced similar challenges, with industry leaders going bankrupt one after another and the total market value plummeting by 70%. Many extraordinary events have occurred during these two years.
However, none of these events have killed the blockchain and cryptocurrency market. Therefore, Dan Morehead believes that the “negative news” being exhausted seems to be a huge positive factor for the future. Additionally, the stock market crash in 2022 has led institutions to withdraw from private markets. As the stock market reaches historical highs again, institutions will return to investing in private markets. This leads Dan Morehead to believe that the next 18 to 24 months could be a strong bull market for cryptocurrencies.
“This is a critical moment where the pains and horrors of the past few years in the capital markets and the blockchain space have been eliminated, coupled with positive events such as halving and clear regulations—all happening simultaneously.”
Franklin Bi, a general partner, highlights Bitcoin as the most neglected asset and believes that Bitcoin will establish its own financial system, indicating that the Bitcoin system will start to have applications beyond storage and transfer. However, Franklin Bi acknowledges that Bitcoin’s stability and security as a value storage tool are both advantages and disadvantages. The immutability of the system, its simple model architecture, and 10-minute block time make it more challenging to build other applications compared to other blockchains.
Nevertheless, Franklin Bi observes a shift in Bitcoin’s development: “Today, the signs I see suggest that the stagnation in Bitcoin’s development is a temporary, non-structural condition. A decentralized financial system based on Bitcoin may finally be forming. Its potential is similar to or greater than DeFi on Ethereum today, though following a different evolutionary path.”
The introduction of the Taproot upgrade, the advent of ordinal texts, and the birth of BRC20 tokens have opened up new design spaces for the Bitcoin ecosystem. Greater macro trends have ignited a psychological shift within the Bitcoin community and rekindled interest in decentralized finance on Bitcoin from Bitcoin investors.
Franklin Bi predicts that if DeFi achieves Ethereum’s scale on Bitcoin, the total value of DeFi applications on Bitcoin will be $225 billion (25% of Bitcoin’s value). Over time, this value could fluctuate between $72 billion and $450 billion (8% and 50%), indicating the emergence of a burgeoning market worth hundreds of billions of dollars.
Currently, several Bitcoin Layer 2 solutions are under development. Franklin Bi believes that winning solutions must possess the following elements:
Economic Consistency with Bitcoin: Any programmable Bitcoin layer should be directly associated with Bitcoin’s economic value and security. Otherwise, users may perceive it as hostile or parasitic behavior towards Bitcoin. Consistency can be achieved by using BTC as collateral for the second layer and paying gas fees. It can also involve settlement and data availability using the Bitcoin network.
Feasibility without Base Layer Modification: Some proposed solutions require hard or soft forks of Bitcoin, implying a system-wide upgrade. Considering that such upgrades are rare, these solutions are unlikely to be compelling competitors in the early stages. However, in the long run, some of these solutions are worth pursuing.
Modular Architecture: Successful solutions need sufficient scalability to incorporate new technological advancements. We have witnessed the frontiers of technology such as on-chain custody, consensus design, virtual machine execution, and zero-knowledge proofs changing. Closed systems and proprietary technology stacks will struggle to keep up with these changes.
Trust-Minimized Cross-Chain Bridges: Bridging assets from one chain to another is highly challenging and requires addressing various potential issues such as timing mismatches and serious vulnerabilities. So far, very few decentralized bridging solutions have been battle-tested.
Aggressive Go-to-Market Strategy: Two groups are crucial for growth—existing Bitcoin holders and future Bitcoin developers. These two groups are dispersed in unique ways. Approximately 10-20% of the total Bitcoin supply is held by exchanges. Around $10 billion worth of Bitcoin exists in various tokenized forms on Ethereum. Developers’ concerns are spread across a multi-chain, multi-layer technology stack. To attract these two groups, a strategy of “going to where they are” is needed.
In conclusion, Franklin Bi states that adaptation will be key. With the emergence of new technologies and the gradual maturation of the market, blockchain technology and cryptocurrencies will continue to play an increasingly important role in the global economy.
Portfolio manager Cosmo Jiang and content lead Erik Lowe share two investment case studies that they believe are worth considering under the trends of “increased Bitcoin network activity” and “growth of decentralized exchanges”: Stacks, a Bitcoin Layer 2 network, and dYdX, a decentralized trading platform.
Stacks is a general-purpose smart contract network that brings Ethereum-like programmability to Bitcoin (similar to L2 on Ethereum) and is currently the only existing general-purpose smart contract L2 in the Bitcoin ecosystem. Despite the emergence of many new competitors in recent years, Erik Lowe and Cosmo Jiang believe that Stacks will maintain its first-mover advantage.
An important upcoming event for Stacks is the Nakamoto upgrade, scheduled for April. This upgrade is expected to significantly improve the user experience of Stacks by increasing network throughput, reducing transaction costs, and enhancing security. Furthermore, the Nakamoto upgrade, slated for April, is mentioned, which will increase network throughput, lower transaction costs, and enhance security, leading to a significant improvement in the user experience of Stacks.
Regarding the market trend of “growth of decentralized exchanges,” Erik Lowe and Cosmo Jiang believe that dYdX is the most promising competitor. They note that dYdX has begun to turn profitable with a healthy 40% profit margin and has implemented a revenue-sharing mechanism after the v4 upgrade, making dYdX more attractive compared to other assets.
“Taking everything into account, it is reasonable to predict that the value of the dYdX protocol will exceed $10 billion in the next year, representing a more than three-fold increase from the current market value. During this period, token holders will continue to benefit from this dividend yield, in addition to the potential price appreciation of the underlying protocol as it continues to grow.”
Erik Lowe discusses the impact of the upcoming halving event on Bitcoin’s price. While many believe that everyone already knows about the upcoming Bitcoin supply reduction and that the market has priced it in, Erik Lowe quotes Warren Buffett: “The market is almost always efficient, but almost is not always.” This suggests that even if we think everyone knows something, it doesn’t mean there isn’t money to be made.
Additionally, Erik Lowe references Pantera’s analysis of the impact of halving on Bitcoin’s price (when Bitcoin’s price was $17,000).
The model predicts that the price of Bitcoin will slightly exceed $35,000 during the halving in April 2024. The peak period after the halving will occur in August 2025, reaching $148,000. However, Bitcoin’s current price has already surpassed Pantera’s prediction by 60% (which did not consider the impact of a Bitcoin ETF), indicating the market’s bullish sentiment.
Paul Veradittkit, a managing partner, shares his views on the RWA track, expressing Pantera’s optimism for asset tokenization applications. He also praises Ondo, a company in Pantera’s investment portfolio. Ondo Finance is the third-largest digital bond issuer on the blockchain, surpassing Franklin Templeton and Mountain Protocol, with over $850 million worth of digital bonds issued on the blockchain.
Paul Veradittkit states, “Adaptation will be crucial. With the emergence of new technologies and the gradual maturation of the market, blockchain technology and cryptocurrencies will continue to play an increasingly important role in the global economy.”
