NYSE ‘BACKED’ Exchange :: Pantera Blockchain Letter, August 2018

Pantera Capital
Aug 15, 2018 · 19 min read

Dear Community,


The launch of a new company on August 3rd could result in one of the most important developments in blockchain history. Pantera is one of the founding investors in Bakkt, a newly-formed subsidiary of the parent of the New York Stock Exchange — Intercontinental Exchange (NYSE: ICE).

When I appeared on CNBC Fast Money last week all they wanted to talk about was the bitcoin ETF continuing to NOT happen. Reminded me of the classic Saturday Night Live update:

“This just came in from Spain…Generalissimo Francisco Franco is still dead.”

A bitcoin ETF not being approved is not news. The huge news of the week was the Bakkt announcement.

“On Friday, the parent company of the New York Stock Exchange, which also owns $42 billion worth of other exchanges, launched a cryptocurrency exchange called Bakkt. That is huge news. The other investors — including Pantera — are the Boston Consulting Group (BCG) and Microsoft. That is going to have a big impact over the next ten years.”

Starbucks is partnering with the exchange for its cryptocurrency offerings.

Bakkt (pronounced “backed”) will develop open technology to connect existing market and merchant infrastructure to the blockchain, and create an integrated platform that enables consumers and institutions to seamlessly buy, sell, store, and spend digital assets on a global network.

Pantera Capital has been investing in the cryptocurrency exchange space for five years. For example, we are the largest shareholder and only major outside investor in Bitstamp. We have invested in regional exchanges in the Middle East, Southeast Asia, North Asia, Africa, Europe, and China (BitOasis, BitPagos, BitPesa, Coins.ph, Coinsuper, Koinex, Korbit, Paradex, and Ripio). We were fortunate to contribute our exchange expertise early on in Bakkt’s development, working with ICE to design the proper protocol and establish custody requirements.

The potential ripple effect of Bakkt’s success could reverberate across the Blockchain ecosystem by expediting commercial use and widespread institutional adoption. This is the first of several exciting projects the Pantera investment team has identified for Venture Fund III. In alignment with our Venture Funds I and II investment strategies, Bakkt, as well as the two other projects in our pipeline, reflect a continued focus on infrastructure.

In case you missed the Bakkt press coverage, the press release can be found here. Additional articles worth reading:

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Excerpts from the interview:

Scott: Let’s bring in Dan Morehead. He’s the CEO of Pantera Capital, one of the world’s largest crypto hedge funds and, despite the plunge, he is still betting on Bitcoin. Dan’s with us as you can see from San Francisco. Dan, welcome. It’s good to have you on Fast Money tonight.

Dan: Hey, thanks for having me back.

Scott: I’m sure you’ve heard Pisani’s report just now. What do you think of the correlation between the ETF trouble and this decline in Bitcoin that we’ve seen.

Dan: I think the main thing to remember is that Bitcoin is like very early-stage venture, but with a real time price feed. That’s a unique thing. People get really excited about the price and I think over-react to announcements. There have been a couple of big things coming out in the last week and the ETF rejection is the same story we’ve had for you know for five years.

Scott: Right. Well how much do you think an ETF actually matters to the success of Bitcoin, or at the very least, to help right this what’s seemingly is a listing ship.

Dan: It’s all perspective. Bitcoin’s up 82% year-on-year, so it’s doing very well. The perspective one should have is, given that Bitcoin is such an early-stage venture type asset, it needs to be done as hedge funds first. Pantera launched the first cryptocurrency product in the U.S. five years ago. We looked at ETFs, we looked at a lot of different products, and we picked hedge fund structure. I still think that’s the best way to go and I think it’s going to be quite a long time before an ETF is approved.

Here’s some perspective: the last asset class to get approved for ETF certification was copper. And copper has been used for 10,000 years. It just got approved in 2012 after a very long multi-year process. I think ETFs in Bitcoin still have quite a ways to go.

Tim: Hey Dan, it’s Tim Seymour, welcome back. So what does get you excited then? What is the next catalyst here and why shouldn’t it just be about an ETF? Because you’ve been doing this for a long time. You weren’t doing it for the ETF.

Dan: That’s what I love about markets — news comes out and some people take things really positively and make a big deal out of them and some people don’t. In the last 3–4 business days we’ve had two pieces of news. The ETF being rejected for the fifth time. That doesn’t seem like it’s very interesting to me. But on Friday, the parent company of the New York Stock Exchange, which also owns 42 billion dollars worth of other exchanges, launched a cryptocurrency exchange call Bakkt. That is huge news. The other investors — including Pantera — are BCG, Microsoft, and Intercontinental Exchange. That is going to have a very profound impact over the next five or ten years for the markets. And to my mind, that’s what people should be focused on.

Karen: There’s been a few people who have said $6,000 it’s sort of the cost to mine and that should be some sort of floor. I’ve never quite really fully bought that, but if enough people think 6000’s the floor, well then it’s the floor. What’s your view on that?

Dan: I think it’s very difficult to ever do those kinda real world mining/cost of mining kind of calculations. All these are sunk costs. People have built these enormously big data centers of computer chips that are doing the mining. I think that it’s unlikely to have any fixed support there. Company might run at a loss for six months hoping that the price is coming back. So I think there really isn’t a level like in copper where you get below the marginal cost of production, people just stop their mines. Here I think there isn’t some kind of fixed floor like that. And again, Bitcoin was half this price a year ago and it was all working great. So the price could go down, but I really do think a year from now it will be much, much higher than it is today.

For those interested, you can watch Dan’s entire segment on CNBC’s Fast Money here.

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On August 8, Audius announced the close of its $5.5 million Series A. In addition to Pantera, other investors include Lightspeed and Kleiner Perkins Caufield & Byers. Audius is the first artist-controlled, community-owned music platform. Developed using blockchain technology, the founders of Audius are putting proprietary rights back in the hands of the artists themselves. In addition to empowering artists, the platform shortens the release and distribution of music, a process that can take up to 18 months with a major label, but is practically instantaneous using Audius. The company’s mission is to “create a fully decentralized community of artists, developers, and listeners collaborating to share and defend the world’s music”. The three co-founders are planning to use this fundraising round to further grow their team.

Co-Founder and CEO Ranidu Lankage graduated from Yale and worked at Google for eight years before his startup was invited to join Y-Combinator in 2017. Forrest Browning, Co-Founder and Head of Product, graduated from Stanford with a Masters in Computers Sciences and was featured in Forbes’ 2016 “30 Under 30”. Co-Founder and CFO, Roneil Rumburg, has a degree in engineering from Stanford and was formerly an Engineering Partner at Kleiner Perkins. Roneil met Paul Veradittakit when Paul joined Pantera back in 2014:

“Paul and I met in 2014 when I was working on my first company, Backslash. We kept in touch, and became good friends during my time at Kleiner Perkins, sharing opinions on blockchain tech. When we started forming the idea for Audius, Paul was the first person I reached out to for feedback!”

To learn more about Audius and its technological use-cases, read TechCrunch’s article here.

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There has been a recent growing interest in stablecoin projects, a handful of which Pantera funds are invested in (including Basis, Centre, and others that are not yet publically announced). If you are interested to learn a bit more about this exciting category within the Blockchain eco-system, below is the transcript from Joey Krug’s interview on the “Unconfirmed” podcast, episode entitled: “How to Create a Regular Cryptocurrency”. It originally aired on June 8th.

Laura Shin: Hi, everyone. Welcome to Unconfirmed, the podcast that reveals how the marquee names in Crypto are reacting to the week’s top headlines, gets the inside scoop on what they see on the horizon. I’m your host, Laura Shin.

My guest today is Joey Krug, co-founder of Augur and Co-Chief Investment Officer at Pantera Capital. Welcome Joey.

Joey Krug: Thanks for having me.

Laura Shin: Before the show, you mentioned that you have some updates on Augur. What’s the latest?

Joey Krug: Yeah, so the latest is it’s currently in a bug bounty program phase. All the security audits are complete. And it’s actually going to go live on the Ethereum main net on July 9th.

Laura Shin: Oh that’s great. And so, at that point do you have some, I guess, prediction markets that you’re going to kind of seed it with?

Joey Krug: Yeah, so we ourselves aren’t going to seed it with anything. It’s really just kind of open to the community at that point. You know, I’m sure people trade markets on things like political events, as well as just some people who want to create security markets, things like, “Will certain vulnerabilities be found in the Augur code base?” Things like that.

Laura Shin: And what are your thoughts on currency?

Joey Krug: Basically what I’m thinking about recently is kind of this idea that if you look at most cryptocurrencies today, they kind of fall into one or two buckets, which is, you have cryptocurrencies where they have a supply curve that kind of drifts off, in very steep chunks. So an example of this is Bitcoin. You know, most people are aware that Bitcoin’s supply curve, every four years, the amount of Bitcoin that is distributed at each block halves. And eventually it tapers off until there’s 21 million and that’s it. So it’s kind of a very libertarian idea. You have a finite supply, and it’s essentially, in the end state, a deflationary currency.

The other idea we’ve seen a lot of are stablecoins, which I think are really interesting, their attempts to make cryptocurrencies that are stable and pegged to some other asset, typically the dollar or a basket of other currencies. What I think is really interesting that we haven’t seen yet though would be a cryptocurrency that aims to be more just like a regular currency. So if you look at the history of currencies globally, over the past 50, 60 years, most currencies that have actually tried to maintain a peg have actually ended up failing, because hedge funds have broken the tags. You know, Dan at Pantera Capital actually was part of the . . . one of the fund managers that pushed the Thai baht over the edge in the ’90s. And so there’s not a huge reason to believe that stable coin tags can’t be broken, either. So what I think is interesting is kind of this idea of: what if you made a cryptocurrency that was much more like how regular currencies worked in the real world? But also have all the benefits in cryptocurrency. The only difference would be the supply issuance curve.

Laura Shin: That’s interesting what you said about Dan and the Thai baht because I was living in Indonesia at the time and I definitely have very, very, very vivid memories of the Asian economic flu.

Laura Shin: So you also mention that you’ve been thinking about scalability. What about it?

Joey Krug: Yeah, so I think the thing with scalability is we’ve kind of realized that in the cryptocurrency space today, it’s really the main thing holding things back, in my opinion. For a while I always said the two main things holding things back are lack of a stable coin and scalability and throughput. And with Maker and Basecoin and all these projects, we’re finally going to have some stable coins exist in the wild. But throughput and scalability is a very unsolved problem. If you take Augur as an example, the version that launches on July 9th, it’s going to be pretty slow, you’re limited to a maximum of around 10 transactions per second on Ethereum. And additionally, your fees are going to be pretty high. It could cost you three dollars to place a trade on Augur. That’s not something that’s sustainable or competitive long-term. So I think for the space to really take off, we need to solve these scalability challenges, and recently, I’ve seen a lot of projects I think are pretty interesting, that’s actually making quite a bit of progress on that angle, so that’s why I’m excited about it.

Laura Shin: It’s been great having you on the show. Thanks for coming on Unconfirmed.

Joey Krug: Yeah, thanks for having me.

For those interested, you can listen to the entire episode with Joey on Unconfirmed: Insight and Analysis from the Top Minds in Crypto here.

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In May, Dan and Joey sat down with Michael Green of Thiel Macro to discuss the current state of cryptocurrencies, blockchain, the overall investment environment, and some predictions for its future. We thought we’d share some highlights from the Real Vision interview.

What are some of the big changes in crypto in the last few months and where is it headed?

Dan: Back in the day there was just Bitcoin, no other currencies. Not really any equities you can invest in. Now there’re 1,500 projects you can invest in, plus maybe 500 different equities that you could buy. And so I think a sensible approach for an investment is not just buy one thing, because that’s not the way you would trade stocks, you’d buy a basket of things.

And I think people should avoid the temptation to worry is it Bitcoin that’s going to win? Is it Ethereum that’s going to win? Or is it Bitcoin Cash or Ripple? And get a sensible portfolio of assets, whether it’s cryptocurrencies, pre-auction ICOs, or venture investments.

Should people invest in a variety of crypto assets instead of trying to predict whether Bitcoin goes to a million dollars vs. one dollar?

Dan: Yeah, I think that’s the right way to look at it. And in my 30 years of investing this is by far the most asymmetric trade I’ve ever seen. Obviously you could lose substantially all, maybe even 1x your money, but you could make 50x or 100x on many of these trades. And it sounds ludicrous in the normal securities market to say those kinds of things, but our fund has returned 140x, so it is possible.

And that’s why I think investors should put a few percent of their portfolio in crypto. Could go to zero, maybe. But, it’s a very asymmetric risk reward.

Some people compare crypto to an asset class, like gold, while others compare it to the dot-com boom. Which is it?

Dan: I’m glad you said that, because very few people go before 1992 when they do their internet analog. If you think about it, ARPANET was around in the 70s, and only 1% of the world used it in 1992. They created a browser, made it easy for the rest of us, and it exploded into use, right?

And I think that’s the way Bitcoin is right now. There’re a couple percent of the world use it, so it is potentially the 80s internet rather than the “Is it 95 versus 99?” argument. And again there . . . I had a fascinating debate on CNN with an academic, who was a very rare breed of animal, a super negative academic on Bitcoin. And had written a paper, “RIP Bitcoin: It’s time to move on. It’s failed. It’s Pets.com.”

And the story there is when the article was written it was at $400 and now it’s at $9,000, so you’re really missing this massive asymmetry and the leverage. And then again to call it Pets.com is really forgetting who was the majority investor in Pets.com. It was a guy who saw a very disruptive technology, wanted to invest in a lot of different ways to use this disruptive technology. One was selling pet food on the internet; didn’t work. The other one was selling books on the internet. It worked.

And so that’s the way people should view Bitcoin, Ethereum, XRP. Not all of them are probably going to work, but if you have a portfolio of them and it’s as disruptive as we believe, the portfolio will do quite well.

Investors in the traditional securities market are pretty unhappy. Why is that?

Dan: That’s because there’re 10 million people all staring at the same things and they’re getting tiny little crumbs they’re picking up. I was just talking today at a quantitative hedge fund conference, and I was thinking back when I started trading CMOs in the 80s people were managing the book once a week to market on a yellow pad with a pencil. So, huge opportunities.

But now there’re so many people applying so much capital to the normal securities markets the opportunities are tiny. We’re trying to apply state-of-the-art techniques to a very primordial market. The cryptocurrency markets have enormous amounts of alpha opportunity.

. . . Then maybe people will start to vote with their feet?

Dan: People will vote with their feet, because they’re going to want more transparency, better service, and a much lower fee. And that’s basically what we saw when we started routing voice over IP. We used to have national monopolists that controlled each country. AT&T used be 16% of the market cap for the entire United States. And now nobody even thinks about the cost of connectivity to the phone network.

And that’s basically where you’re going to see gambling. Or the other 25 interesting use cases that crypto is. The cost for consumers is going to go way down, and the quality is going to go way up.

The entire interview is available for your viewing by Real Vision subscribers here.

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Pantera partners will be traveling over the next months to discuss Venture Fund III and the blockchain disruption. We have organized group lunches in many cities, should you want to meet other investors who share your interest in blockchain. If you are interested in attending one of our group lunches, please fill out the form on this page and we will be in touch regarding availability.

  • London, August 17 | including a Group Lunch at 12pm
  • New York, August 20–24
  • Seattle, August 23 & 24
  • San Francisco, August 29 | Group Lunch at 12pm
  • Paris, August 28
  • Monaco, 29 & 30 — August 30, Group Lunch |12pm
  • Detroit, August 31
  • Chicago, September 12 | including a Group Lunch at 12pm
  • Boston, September 13 & 14
  • Seattle, September 13 & 14 — September 13, Group Lunch | 12pm
  • Toronto, September 17
  • Hong Kong, September 17–19
  • New York, September 18, 20 & 21 — September 20, Group Lunch | 12pm
  • Boston, September 19 | including a Group Lunch at 12pm
  • Singapore, September 19–21
  • London, September 24 & 25
  • Los Angeles, September 24 | including a Group Lunch at 12pm
  • Orange County, CA, September 25–28 — September 25, Group Lunch | 12pm
  • Amsterdam, September 26
  • Madrid, September 27 & 28
  • West Palm Beach, October 3 & 4 — October 3, Group Lunch | 12pm
  • London, October 15
  • Geneva, October 16
  • Amsterdam, October 17 & 18
  • Las Vegas, October 22–24
  • Napa, October 24–26
  • Prague, October 30-November 2
  • Macau, November 12–14
  • Dubai, November 26 & 27

If you are interested in a meeting, please contact Pantera’s Investor Relations team at 650–854–7000 or ir@panteracapital.com.

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The future has arrived,



“Put the alternative back in Alternatives”

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Pantera is actively hiring for the following roles:

  • Venture Associates
  • Data Scientists
  • Engineers
  • Data Entry

If you have a passion for blockchain and want to work in Menlo Park, San Francisco, or New York, please follow this link to apply.

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Some good material to start with on the development of blockchain technology and cryptocurrencies as speculative instruments:

Two of the best books are Digital Gold by Nathaniel Popper for a fun high-level history and an in-depth technically-minded look Mastering Bitcoin and Mastering Ethereum by Andreas Antonopoulos.

And some additional information on the ICO model specifically:

Additional information on blockchain regulation:

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We tweet blockchain news and insights on Twitter and Medium at @PanteraCapital, @Dan_Pantera, @JoeyKrug, and @Veradittakit.

You can subscribe to our publications by visiting Pantera’s website or by e-mailing ir@panteracapital.com:

  • Blockchain Letter: a monthly letter with our thoughts on significant market and ecosystem-related developments. Also, includes our thoughts on blockchain venture capital and news on our portfolio companies for accredited investors.
  • Blockchain Investor Letter: Public Letter plus exclusive information for accredited investors.
  • White Papers: periodic, original blockchain research and academic papers.

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