Pantera: Bitcoin demand is three times the supply?

Author: Pantera Capital

Translation: Li Hanbo

Supply and demand

A Tiger Cub friend/TMT investor: “We don’t invest in Bitcoin because there is no cash flow to discount.”

Me: “Well, EUR/USD has no cash flow either, but no one has thought of trading it.”

How to value Bitcoin?

One answer is that bilateral exchange rates only reflect supply and demand.

I know that to some people this is an unsatisfying answer.

In this letter, we look at supply and demand from two perspectives.

The first is an Econ 101-style supply and demand diagram, where

Y-axis: BTC price

X-axis: Quantity

The demand curve seems to be very insensitive to price. When people want to join - like now - the price doesn't seem to have much of an impact. On the graph, this produces a fairly flat line. Conversely, supply seems to be very inelastic. Many Bitcoin holders hold it more for political/belief in the crypto world etc. than for simple price appreciation. It takes a higher price to induce them to sell. This makes the supply curve very steep.

Over the past 7 months, two huge shifts have occurred - one in demand, one in supply, both in the upward direction.

On the demand side, we already have public companies like PayPal entering the market, which is shifting the demand curve up significantly.

Meanwhile, the supply of newly issued bitcoins was cut in half in May as part of a four-year halving. Fewer bitcoins.

The title of our previous investor letter was “Bitcoin Shortage” and the price performance has confirmed this.

Requirements change over time

For PayPal, the demand curve didn’t just shift upward once; it had been rising for a decade as new entrants discovered Bitcoin.

This is our standard logarithmic price chart. In this, we have the x-axis plotted as the number of people using Bitcoin. When there are only a few hundred people using Bitcoin, its value is close to zero. When 10,000 people use Bitcoin, it's worth more. When a million people have it, the price goes up. Every few years, the number of people using Bitcoin grows by an order of magnitude. So does the price.

There are about 100 million people using Bitcoin right now. I can imagine a world where ten times that many people buy and use Bitcoin, and the price would go up a lot more.

3.5 billion people have smartphones. A smartphone is the only requirement for using Bitcoin. Maybe at first glance they are irrelevant, but in the long run we have to think about why most of them won’t use Bitcoin. It’s not much more complicated than sharing a photo on Facebook.

PayPal has bought more than 100% of newly issued Bitcoin

PayPal just launched their new service that enables customers to buy, sell, and hold cryptocurrencies directly from their PayPal accounts. Last month we discussed the massive demand shift caused by PayPal.

PayPal’s crypto infrastructure provider is Paxos. Before PayPal integrated crypto, itBit, an exchange operated by Paxos, had fairly steady trading volume – the white line in the chart below.

Once PayPal went live, trading volume exploded. The increase in itBit trading volume meant that within two months of going live, PayPal had purchased more than 100% of the new supply of Bitcoin.

Buy Bitcoin with MASSMUTUAL

MassMutual, a 170-year-old life insurance provider, has begun buying Bitcoin in large quantities. MassMutual purchased $100 million in Bitcoin for its general investment account.

MICROSTRATEGY BETTS $1 BILLION ON BITCOIN

MicroStrategy, a publicly traded company led by Michael Saylor, bought $425 million worth of Bitcoin in August and September of this year. The investment paid off quickly, with the price of Bitcoin nearly doubling in the months following their purchase.

The company recently raised $650 million through the sale of convertible notes, which it intends to invest in Bitcoin. For reference, this represents one month's worth of new Bitcoin supply.

Issue reduction--traffic forecast

In our April letter, we unveiled a potential framework for predicting the price impact of Bitcoin halvings based on an analysis of Bitcoin’s stock-to-flow ratio at each halving. The size of the impact has been shown to be proportional to the size of the supply reduction.

If the ratio of this cycle is similar to the previous halvings, then Bitcoin could rise to $115,000 by August next year. The constant growth path from the April price to that point is plotted as a dotted line.

The actual price lags behind this historical prediction - but not by much. According to the prediction, the price will reach $115212 in 9 weeks.

Fund Performance

Pantera funds continue to deliver strong returns in a groundbreaking year for digital assets. We believe we remain in the early innings of a potential multi-year bull market driven by strong macro tailwinds and growing fundamentals in related technologies.

Pantera Fund Opens to Investors

All of our funds are available for investment through an IRA. We support more than a dozen providers, including Kingdom Trust, Millennium Trust Company, and Pacific Premier Trust Company.

Portfolio Company Updates

Circle partners with Visa to launch USDCoin-backed commercial consumer services.

Circle enables businesses to leverage USD-backed stablecoins (blockchain-based tokens pegged to USD reserves) for payments, commerce, and other financial applications around the world. Circle provides trading services, business accounts, and platform APIs backed by USD Coin (USDC). Circle and Coinbase created USDC, a regulated fully-reserve stablecoin with a total circulation of over $3 billion and a net new issuance of $100 million per week.

Recently, Circle announced a partnership with Visa to integrate USDC payment functions with some Visa card issuers, so that companies can receive and spend USDC balances through corporate cards. In this way, Circle has opened a path for USDC's open financial network to enter 60 million merchants from Visa's customer base. So far, the Circle platform has supported more than 100 million transactions, nearly 10 million retail customers, and more than 1,000 companies.

Collaborating with Professors Dan Morehead and Dan Boneh is the Stanford Institute for Economic Policy Research (SIEPR).

I had the honor of speaking at the Stanford Institute for Economic Policy Research. SIEPR is "Stanford's thought leader in understanding the economic challenges, opportunities, and policies that affect people in the United States and around the world."

Past SIEPR speakers include:

Jerome Powell, Chairman of the Federal Reserve

Janet Yellen

John Tyler, Senior Fellow, Hoover Institution, Stanford University

Professor Dan Boneh (Head of the Applied Cryptography Group) and I discussed monetary policy and blockchain

Q. The big vision for Bitcoin, and cryptocurrencies in general, is that they will replace money, right? None of that has happened. I can't buy anything on Amazon with cryptocurrency. I definitely can't buy physical goods on the marketplace with cryptocurrency. Some people say this is a failure of the technology, or how would you interpret it?

Dan: "I've been hearing this for 8 years. It's a simple question. Bitcoin is meant to do so many different things, and essentially the last thing it's meant to do is buy a cup of coffee. Like you said, there are 6 billion people living in countries with terrible monetary policy, terrible banking, people don't have to go into banks, are subject to capital controls, and citizens' savings are often confiscated when banks fail. This is great. That's why you see countries like China, India, the Philippines really using Bitcoin. But buying a cup of coffee at Starbucks is not a good fit for it for a few reasons:

One is high volatility, that's just a fact. It has 60%, 70% annualized volatility, so it's not good for pricing as a unit of account. In 10 years, this will calm down, it will be normal.

Another reason this is bad for business is that if you think this asset is going to keep appreciating at this astronomical rate, you probably don’t want to buy anything with it because you’ll end up regretting it. The first business transaction was a developer buying pizza with 10,000 bitcoins. That’s $200 million today. This guy wasn’t a fool. He bought two pizzas, so each pizza was only $100 million, but it’s not good to spend bitcoin because it’s a high-appreciating currency. If you want to buy a TV, you can buy one today and 10 next year. So, you might want to hold off and do it later.

Q. Another point that people always bring up is that Bitcoin has no value. It has no intrinsic value. It's just Bitcoin on a computer, why would we assign so much value to it? How would you respond to that question?

Dan: "Well, two angles. One is, it's a utility, it's useful. If there are 100 million people who think it's useful, then it's useful. Like you said, a lot of people in developing countries think it's more secure than their bank. You talked about the fact that it's protected by a cryptographic key. The idea is that if you live in a developing country and your bank is really not that trustworthy, you can put your entire net worth as a cryptographic key in your mind. That has tremendous value. 100 million people using it, that's what makes it valuable today."

“But if we were having this conversation in 10 years, some central banks would have it on their balance sheets. It would have a 22-year record of transactions. That’s the view I would have. I think in 30 years, every central bank will have Bitcoin, not every central bank will have gold.”

Q. What would prevent another cryptocurrency from emerging and replacing Bitcoin as a new, better, faster cryptocurrency?

Dan: “This is another very common, negative perception. I did an interview with Andrew Ross Sorkin, and he said that he and his wife were walking down the street in New York City, and some guy was pitching a cryptocurrency. So, they decided to make their own, because it’s easy to make a new cryptocurrency. So, Bitcoin can’t possibly have any value because there are 2,000 copies of Bitcoin out there. My response to him was, “I have a better idea: photo sharing. If you can get 2.5 billion people sharing photos on your site, that’s going to be worth a lot of money.” Basically, if you can get more than 100 million people using your new cryptocurrency, it’s going to be better than Bitcoin, but it’s hard to get 100 million people to switch from one thing to another. And Bitcoin already has 100 million people storing $400 billion in value. It’s going to be really, really hard to compete with that. Like Dan [Boneh] said, there are a lot of other use cases that are very interesting applications, but the digital gold version of crypto, I think it’s been done.”