[Investor Talk] Crypto as a new asset class with Paul Veradittakit from Pantera Capital

04/08/20 • 50 min

BEYOND UNICORN: Private Investors' Knowledge Base

Today’s guest is Paul, Partner at Pantera Capital – one of the earliest institutional Blockchain investment firms. Paul began by sharing his personal journey from learning about Blockchain to eventually joining Pantera Capital to drive its VC funds. We then went on to discuss its investment thesis and how it evolved from the first fund to third fund now, and then broadened our discussion to evaluate popular industry narratives namely cryptocurrency will become a new asset class and Bitcoin’s role as a safe haven asset. And lastly, we explored how blockchain will impact the VC industry.

Pls note that this episode was recorded before the March 12th market crash across cryptocurrencies. For listeners who are interested to read more about what happened and the impact of Covid-19 on crypto, I have shortlisted some articles, do refer to the episode links for more information.

Key Takeaways

Fiat to crypto on-ramps are very key for people to get access to cryptocurrencies; so, exchanges and wallets that can provide fiat to crypto abilities remain as Pantera’s key investment focus
Liquidity and scalability remain as the key challenges to be solved before large scale decentralised use cases can emerge; for now, speculation remains as the key usage for crypto
Besides having institutional grade infrastructures in place, further development in derivatives and regulatory clarity will be needed before institutions invest directly into crypto or token as an asset class; currently their exposure to the industry is via indirect investments into private equity funds
It is still early to determine the investment success of cryptocurrencies as a new asset class; but the chances of diversified crypto investment going to zero in value are low while the chances of it generating exorbitant returns are present; so it is about limiting one’s exposure to hedge the downside risk with a potential to benefit from its upside

Episode links

Pantera Capital

https://www.panteracapital.com/

What happened on March 12th

https://multicoin.capital/2020/03/17/march-12-the-day-crypto-market-structure-broke/ https://multicoin.capital/2020/03/20/march-12-the-day-crypto-market-structure-broke-part-2/

Crypto in this crisis: Pantera Blockchain Letter March 2020

https://medium.com/@PanteraCapital/crypto-in-this-crisis-pantera-blockchain-letter-march-2020-4c73af3aaaf7

Key Takeaways

Fiat to crypto on-ramps are very key for people to get access to cryptocurrencies; so, exchanges and wallets that can provide fiat to crypto abilities remain as Pantera’s key investment focus
Liquidity and scalability remain as the key challenges to be solved before large scale decentralised use cases can emerge; for now, speculation remains as the key usage for crypto
Besides having institutional grade infrastructures in place, further development in derivatives and regulatory clarity will be needed before institutions invest directly into crypto or token as an asset class; currently their exposure to the industry is via indirect investments into private equity funds
It is still early to determine the investment success of cryptocurrencies as a new asset class; but the chances of diversified crypto investment going to zero in value are low while the chances of it generating exorbitant returns are present; so it is about limiting one’s exposure to hedge the downside risk with a potential to benefit from its upside

Episode links

Pantera Capital

https://www.panteracapital.com/

What happened on March 12th

https://multicoin.capital/2020/03/17/march-12-the-day-crypto-market-structure-broke/ https://multicoin.capital/2020/03/20/march-12-the-day-crypto-market-structure-broke-part-2/

Crypto in this crisis: Pantera Blockchain Letter March 2020

https://medium.com/@PanteraCapital/crypto-in-this-crisis-pantera-blockchain-letter-march-2020-4c73af3aaaf7

Previous Episode

[Expert Talk] Investing through crisis: Covid-19 Macro market update with Tian Yang from Variant Perception

Today’s guest is Tian Yang, Head of Research at Variant Perception – an independent research company on financial markets. Against the backdrop of global financial market sell-off triggered by Covid-19, we analysed the market reactions by segmenting genuine causes of concern vs panic reaction; we discussed lessons learnt from historical black swan events and how these lessons can be applied to the current situation; and how government policies can work together to avoid recessionary pressures created by Covid-19 and lastly, what should private investors do to seize opportunities in these uncertain times.

Key Takeaways

COVID-19 is currently been interpreted as a one-off black swan event similarly to 9/11 and Gulf Wars; a helpful framework to think about panic-led market crash is an analogy to what happens in a typical bank run
Coming into 2020, underlying leading indicators are quite resilient; they had been declining through most of 2019 and began bottoming out and turning up before Coronavirus hit the markets
What is needed to shift the market sentiment and avoid sustained recessionary pressures is a combination of fiscal, monetary and aggressive healthcare policy; all three at once
The book "Why Stock Markets Crash" by Didier Sornette is mentioned to illustrate the framework used to determine new market equilibrium after a large shock: the new equilibrium usually takes 1-2 months to happen where daily market volatility reduces from 4-5% to 1-2%
During the recovery phase, differentiated impact by sectors is expected with manufacturing, industrial set to rebound the most, exhibiting a V shape recovery; consumer sector is expected to exhibit slower path to recovery as 1) coming into the crisis, credit availability was already not great 2) non-discretionary costs like rent, medical expenses can actually go up
For private investors, it is advised to start identifying interesting investment opportunities but wait to see 1) the virus status level off and 2) the market daily volatility turned down to 1-2% which presents a better entry point
As the old saying in the market goes: it's usually better to buy one day late than to buy one day early

Episode links

Variant Perception: https://www.variantperception.com/ “Why Stock Markets Crash” by Didier Sornette: https://www.amazon.com/Why-Stock-Markets-Crash-Financial/dp/0691175950

Next Episode

[Expert Talk] Achieve long-term investment success through asset allocation with Freddy Lim from StashAway

Today’s guest is Freddy Lim, Chief Investment Officer and Co-founder of StashAway - an online investment management company headquartered in Singapore. We began with a market update focusing on the thought process investors can use to analyse current market conditions and the key reasons behind the decoupling of financial markets from the real economy. We then shifted our discussion to understand StashAway’s proprietary investment strategy, ERAA - namely the Economic Regime-based Asset Allocation and how ERAA can be applied to understand post-crisis recovery.

Top 5 Takeaways

Focus on aggregate numbers to make sense of what's happening in the market

A useful way to think about the combined economic impact of lost output due to Covid-19 and aggressive government stimulus is to look at how A compared to B in aggregate numbers. It is because the aggregate stock market and the aggregate multi-diversified portfolio only focus on the aggregate loss of output versus aggregate stimulus.

Money multiplier effect created through fractional banking explains the decoupling of financial markets from the real economy

A key reason behind the observed decoupling is the introduction of fractional banking which made "money multiplying" possible. When one dollar is deposited into the banking system, the bank is only required to keep a fraction of the dollar and can lend out the remaining, creating a multiplier effect in the real economy.

Asset allocation is the key determinant of differential portfolio returns

The majority of mid-to-long term return or loss is driven by the economic environment so the act of deciding how to allocate assets into a particular sector or industry is responsible for between 80% and 96% of a portfolio’s return profile. The remaining 10–20% of excess return (i.e. alpha) can be attributed to an investor’s superior ability to pick winners and losers but this is very tough to do successfully over a long period of time.

The importance of staying on course

For investors who have clearly defined their investing objectives and designed long-term investment plans, it is important to stick to these plans and not to make changes based on opportunistic movements in the market.

Staying invested is very key for long-term success

Markets are very dynamic and very hard to be predicted accurately. All investors want to buy low and sell high but many end up buying high due to FOMO or selling low due to the fight-or- flight response. Dollar-cost averaging is a great strategy to smooth things out during periods of high market volatility and help you stay invested in the game. Staying invested is very key for your long-term success. Ultimately you got to do everything you can to not get KO’d by the market.

Content at a glance with time-code

(01:27): Freddy’s professional investing background and what led him to co-found StashAway (03:15): Focus on aggregate numbers to make sense of what’s happening in the market (07:20): The decoupling of financial markets from the real economy explained (14:06): Why didn’t we see the much-anticipated inflation happening during the recovery phase post 2008 financial crisis? (15:46): StashAway’s proprietary investment strategy, ERAA — Economic Regime-based Asset Allocation explained (19:54): Do the causes underlying each economic regime matter in asset allocation decisions? (23:00): Asset allocation is the key driver of differential asset returns (25:50): What does StashAway’s asset universe look like? (36:52): Has StashAway’s investment strategy changed due to the crisis? What are the in-built mechanisms to respond to crisis situations? (41:59): Answers to the most asked questions on StashAway 1) do I switch my portfolio from a low risk to the highest risk portfolio to take advantage of the market draw down? 2) should I invest more, accelerate my investing plan now? (49:21): The unicorn discussion — StashAway’s decacorn potential

Episode Links

StashAway: https://www.stashaway.sg/ StashAway’s Asset Allocation Framework: https://www.stashaway.sg/r/stashaways-asset-allocation-framework