Pantera Capital: FTX Related Updates and Outlook for the 2024 Bitcoin Halving Cycle

Original: 《FTX Underscores The Importance Of DeFi》

Author: Dan Morehead, Joey Krug, Jesus Robles

Compiled by: GaryMa 吴说区块链

FTX Related Updates

We want to provide an update on the situation with FTX and how it affects us. In summary, this month, FTX and Alameda Research over-leveraged themselves using FTT tokens as collateral. As of this morning, both companies have filed for bankruptcy. The total losses are unclear, but online estimates suggest losses could reach tens of billions of dollars. User deposits on the FTX exchange have also been trading at significant discounts. This may mean that those with funds on FTX have lost most of their money.

In general, our approach to these situations focuses first on protecting the portfolio as much as possible. Then, once we have taken all possible measures, we can update our limited partners on what we have done and the status of our fund. But most importantly, our goal is to reduce the risk of permanent capital loss. The market has reacted sharply to this news, which will be reflected in our performance, but we expect it to rebound when the market does. In this situation, what we primarily want to avoid is the permanent loss of assets.

Our practice is to reduce overall exposure to centralized counterparties while maintaining a certain level of trading flexibility. Our main risk/loss from the FTX incident comes from our Blockfolio acquisition gains, which are denominated in FTT and FTX stock. We liquidated FTT as much as possible on Tuesday, November 8. Before the collapse, on Monday night, our positions in FTX stock and FTT tokens totaled less than 3% of our company's total assets under management.

After the news of FTX/Alameda's troubles broke on Tuesday morning, our team immediately set up a virtual war room to assess the impact on our early portfolio and take action. Our goals were 1) to identify potential risks our portfolio teams might face; and 2) to reach out directly to at-risk teams to offer any assistance we could provide.

We have conducted this test in similar pressured environments in our industry (e.g., the 3AC bankruptcy, the 2018 crypto winter). In times of crisis, "we must act quickly." Speed is crucial for distressed companies, and it is vital to survive and emerge stronger on the other side of a crisis.

We identified and contacted portfolio teams from our early token and blockchain venture capital firms that we believed might have significant counterparty or custody exposure to FTX/Alameda. After speaking with investors or receiving updates from them, the vast majority of contacted portfolio teams reported that they had little to no counterparty or custody risk exposure to FTX/Alameda. Our initial impression is that this limited risk exposure is partly due to the positive risk management and custody/financial management practices we emphasize to our founders regularly, but we expect to gain more insights in the coming weeks and months.

In the short term, those who lost money on the FTX exchange will suffer. More broadly, we expect prices across the entire crypto ecosystem to continue to fluctuate as concerns about contagion prompt asset holders to adjust their portfolios. Assets related to FTX (such as Solana and its underlying projects, Aptos, etc.) may be hit the hardest. This event may also be a setback for applications, as some retail users who lost funds choose to exit the space, while others who might have entered earlier are scared to stay on the sidelines. We expect institutions that were previously cautious about this space to deepen their skepticism. This is to be expected, but unfortunately, it has not yet reached a level that warrants alarm. They may take longer, but we believe they will eventually come around, and likely faster than many expect.

Regulators may respond, but we are cautiously optimistic that this will have positive effects in the medium to long term. As this crisis has highlighted, centralized intermediaries in financial transactions are opaque and often untrustworthy. There is a clear demand for decentralized, trustless protocols that allow users to trade, hold, and transfer their assets without relying on entities like FTX, Celsius, or Voyager. Given the presence of centralized intermediaries in the cryptocurrency space, they should and may soon face stricter regulations on reserves, audits, and risk controls, especially if these intermediaries interact with retail users. In contrast, decentralized protocols are open, transparent, and do not require users to trust in the same way. We hope regulators will recognize this and shift their focus from regulating DeFi to regulating the centralized entities operating in this space.

On a personal level, the collapse of FTX reminds us of what we are doing. As a company and an ecosystem, our mission is not to replicate the risks and inefficiencies of traditional finance. Rather, it is to build a more efficient, decentralized, and open financial ecosystem. This vision drives us more than ever and makes us more grateful for the support of our limited partners who share the same vision. This process may not always be easy or smooth, but it is necessary. We thank each of you for being part of this journey with us.

Bitcoin Halving

The monetary supply function of the Bitcoin protocol is the opposite of quantitative easing. The Bitcoin code indicates that a total of 21 million bitcoins will be issued, with the supply of new coins decreasing over time.

Currently, 6.25 bitcoins are issued every ten minutes, unaffected by human will.

Every four years, the "block reward" is halved, hence the term "halving." This process continues until the year 2140.

The rules governing the supply and distribution of Bitcoin are purely based on mathematics, designed to be predictable and transparent.

Halving Approaches

The next halving is expected to occur on April 20, 2024. The mining reward will drop from 6.25 BTC/block to 3.125 BTC/block.

The efficient market theory suggests that if we all know it will happen, then it must be priced in. To paraphrase a saying from Warren Buffett: "The market is almost always efficient, but the gap between almost and always is $80 billion to me." Therefore, even if we think everyone knows something, it does not mean there isn't a lot of money to be made.

If demand for new bitcoins remains constant while the supply of new bitcoins is cut in half, this will force prices to rise. Ahead of the Bitcoin halving event, demand for Bitcoin has also increased due to expectations of rising prices.

For years, we have emphasized that halving is a big deal, but it takes years to play out. The typical bottom occurs 1.3 years before the halving, and on average, the market peaks 1.3 years after the halving. The entire process takes 2.6 years to see the full impact.

Historically, Bitcoin has bottomed 477 days before a halving, then climbed steadily, followed by a rise. The post-halving rebound typically lasts an average of 480 days, from the halving to the peak of the next bull market cycle.

If history repeats itself, Bitcoin's price will bottom on December 30, 2022. Then we would see a rebound lasting until early 2024, followed by a strong rally after the actual halving. The chart below shows what might happen if Bitcoin repeats its previous halving performance.

Stock-To-Flow Model Price Prediction

The framework we use to analyze the impact of halving studies the changes in the stock-to-flow ratio with each halving. The first halving resulted in a 17% reduction in new Bitcoin supply. This had a massive impact on new supply and a significant effect on price.

As the ratio of new Bitcoin supply decreases from the previous two halvings to the next halving, the impact of each subsequent halving on price may gradually weaken. The chart below describes the past halving supply reductions, showing the percentage of Bitcoin held during half the time.

In 2016, the new Bitcoin supply halved, with a reduction only one-third of the first halving. Interestingly, its impact on price was also one-third.

The 2020 halving reduced new Bitcoin supply by 43% compared to the previous halving. Its impact on price was 23%.

The next halving is expected to occur on April 20, 2024. Since most bitcoins are now in circulation, each halving will nearly halve the new supply. If history repeats itself, Bitcoin will rise to $36,000 before the next halving and then to $149,000 afterward.

Conclusion

When people question whether the halving is fully reflected in the price, I am reminded of a quote from Kraken co-founder Jesse Powell. During a conference call with investors during the last halving:

Q: Has the market already priced in the expectation of the halving?

Jesse Powell: Bitcoin itself has not yet been priced reasonably.