The Federal Reserve’s pivot toward higher interest rates in the face of rising inflation has introduced volatility in financial markets, but one crypto investor says blockchain projects — and bitcoin — should remain attractive investment opportunities.
Dan Morehead, CEO and co-chief investment officer of Pantera Capital, says he expects other asset classes to struggle six months from now while crypto investments more than double.
“With rates rising, that is mathematically negative for bonds. It also has a negative impact for anything else with discounted cash flows, like equities or real estate,” Morehead told Yahoo Finance in an interview on Wednesday.
Morehead and his firm Pantera Capital are bulls on cryptocurrency, having started the first cryptocurrency fund in the U.S. in 2013. Today, the firm says it has $4.8 billion in assets under management and is nearing a close on a new venture-style fund targeted at $600 million. The fund will invest in venture equity, early-stage tokens, and liquid tokens.
Although bitcoin will only be a small sliver of the fund, the crypto asset’s price movements (BTC-USD) have nonetheless caught the attention of crypto investors over the last four months.
The price of bitcoin jumped over $67,000 in November last year. Then the Fed signaled that interest rate increases were coming, coinciding with a sharp fall in bitcoin. Since the new year, prices have fluctuated above and below $40,000.
“We did not predict such a savage downturn in crypto,” Pantera’s team wrote in a blog post on Feb. 16.
Morehead said that during periods of stress, bitcoin can have a strong correlation with movement in the S&P 500 Index, which has similarly had a rocky start to 2022. He added that the period of correlation lasts for an average of 72 days.
“Over time, [that correlation] then breaks down. And all those things combined make me actually wildly bullish right now,” Morehead said.
The Fed is in the process of raising short-term borrowing costs to tamp down on 40-year highs in inflation. The central bank lifted overnight borrowing rates by 0.25% on March 16 and signaled a strong likelihood of six more interest rate increases through the remainder of this year.
Higher borrowing costs have taken some steam out of bond markets, where prices have fallen (leading to higher yields). The U.S. 10-year Treasury (^TNX) is up 0.70% since the new year, reflecting market expectations for a more aggressive Fed.
To date, the Fed’s efforts to stabilize the picture on inflation have not translated into an immediate bull case for crypto. But Morehead says investors should turn to blockchain projects as “standard risk assets” (with cash flow returns from dividends or coupons) feel the impact of rising rates. The bitcoin bull pointed to not just bitcoin, but decentralized finance (DeFi), Web3, and other blockchain projects as examples of ventures and projects that can offer returns beyond regular equities and bonds.
“All those different applications are as compelling or even maybe more compelling than bitcoin,” Morehead said. “So to build a portfolio, you want to have quite a number of different assets.”
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.