Top venture capital firm Pantera: Bitcoin just entering its prime years as a scarce asset with inflation in view.

Reflecting the value of limited supply commodities from an inflation perspective

(This article is authorized to be reprinted from BlockBeats, the original title is "The Peak Year of Bitcoin", original article here)

On March 16, 2021, top investment institution Pantera Capital released a monthly report titled "Bitcoin Coming Of Age," analyzing the future expectations of Bitcoin and Ethereum, including the valuation of Bitcoin and why Ethereum is undervalued.

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Pantera Capital, as a top capital focusing on investing in the blockchain technology field, from public chains to protocols, from Layer2 to applications, Pantera Capital's presence can be seen in various tracks. Every month, Pantera releases a monthly report that delves deep into market environment, trends, and industry development.

In the March report, Pantera provided a deeper understanding of the valuation and scarcity of Bitcoin. BlockBeats translated the views on Bitcoin in the report in the hope of assisting investors.

Below is the Bitcoin section of "Bitcoin Coming Of Age":

Respected investors:

Last year, when the virus began to affect all of us, in my March 2020 investor letter, I wrote:

"Bitcoin was born in a financial crisis. Now is just coming to its peak."

When I was a bond trader, I realized that some things are upside down. The "best" time for bonds is the "worst" time for everyone. Economic downturns are the "best times" for bonds.

Unfortunately, I believe this is happening in our cryptocurrency market.

As governments continue to increase the amount of paper money, people need more paper money to buy a fixed amount of goods, such as stocks and real estate, but the government will ignore the money entering these areas, at least I think they will. However, the result will be the inflation of other things, such as gold, Bitcoin, and other cryptocurrencies.

The United States entered this crisis with an unprecedented structural deficit. Spending is 31% more than income. Before the appearance of the SARS-CoV-2 (COVID-19) virus, the Congressional Budget Office expected the deficit to exceed $1 trillion. It could now be three times the expectation.

"A billion here, a billion there, and pretty soon you're talking about real money." - U.S. Senator Everett McKinley Dirksen

Now we are in the trillions, needless to say, the deficit will positively affect the prices of things that cannot be incrementally increased, such as stocks, real estate, cryptocurrencies. In other words, the BTC/USD trading pair rate will rise.

The price of Bitcoin may set new records in the next twelve months. This won't happen overnight. My guess is that institutional investors need 2 to 3 months to deal with their current portfolios. It will also take 3 to 6 months to study new opportunities, such as distressed debt, special situations, cryptocurrencies, etc. Then, when they begin to allocate assets, these markets will truly take off.

All of this has happened, stabilizing for months and then regaining strength for months. Now it's in full swing.

During these 35 years, I have experienced multiple cycles, and my trading instinct tells me that cryptocurrency prices are entering a period of rapid increase.

We will see higher prices before this cycle ends.

Price Prediction through Halving and S2F Model

In our April 2020 letter, we announced the analysis of the impact of the Bitcoin halving event on the price of Bitcoin through the S2F (Stock to Flow ratio) model.

We predict that if the impact of the Bitcoin halving event is similar to historical patterns, it will follow the monthly path as shown below:

Bitcoin has now surpassed our prediction for April 2020 - reaching $115,000 by this summer.

Currency Inflation

"In a way, inflation is an omnipresent monetary phenomenon that occurs when the volume of money exceeds output in production." - Milton Friedman, 1970, "The Counter-Revolution in Monetary Theory"

Inflation is an omnipresent monetary phenomenon, but not all inflation is the same.

Investors often ask why we don't see inflation? The answer is: it depends entirely on where you focus.

The CPI (Consumer Price Index) does not show inflation. The Fed's CPI target mainly includes things with infinite supply - flat-screen TVs, flip-flops, etc. With the global economy severely weakened, it's difficult to see inflation in these items. That's why I firmly believe the Fed and other central banks will continue their operations.

The lockdowns and stimulus policies have led consumers in wealthy countries to save a lot of money and created pent-up demand. In the U.S., the savings rate surged from 7.6% in 2019 to 16.0% in the third quarter of 2020 and 13.4% in the fourth quarter.

Things with limited supply will experience significant inflation: gold, real estate, Bitcoin, etc. The best proof of this argument is seen in stocks on the S&P 500 index. Revenue in the second quarter of 2020 dropped by 32.3% compared to the same period last year. However, the S&P 500 index hit an all-time high. This is entirely a monetary phenomenon.

The quantity of stocks is limited. However, Federal Reserve Chairman Powell clearly stated that quantitative easing will be infinite. He then said:

"When it comes to lending, the ammunition will not run out." - Jerome Powell, March 26, 2020

The U.S. budget deficit for the 2020 fiscal year was $14,500 per adult. From one perspective, this is 1,000 times the cost of a vaccine ($14.50).

Endless Dollars

What happens when you flood the market with a large quantity of goods? The prices of goods decrease. Just like the value of the dollar:

This is the inflation-adjusted and trade-weighted value of the dollar by the Fed. It reminds us of the supply-demand curve from Econ 101.

Bitcoin's monetary policy is designed from a mathematical perspective - no central authority can engage in "quantitative easing." Some may adapt the old saying, replacing "land" with "Bitcoin":

"Buy land; they're not making it anymore." - Mark Twain

Morgan Stanley on Cryptocurrency

"I've been preaching Bitcoin for a decade. In the early days, it was like preaching in the desert. But in recent years, it's become more like preaching to a choir, which has made preaching more interesting, and the choir is growing. Now the choir's songs are becoming more and more beautiful - I just let them sing." - Ruchir Sharma, Morgan Stanley's Chief Global Strategist and Head of Emerging Markets, February 9, 2021

Why Cryptocurrency Is Emerging from the Shadows

"Governments are slowly realizing this revolution. When the pandemic hit, the U.S. dollar ruled the world and was the most favored medium of international trade, with other countries' currencies pegged to the dollar, and most central banks holding it as a 'reserve currency.' Before the U.S., only five major nations enjoyed coveted 'reserve currency' status, dating back to the mid-1400s: Portugal, followed by Spain, the Netherlands, France, and the U.K. These reigns lasted an average of 94 years. At the beginning of 2020, the dollar's dominance reached 100 years, giving us reason to question how much longer the dollar can dominate..."

"Moreover, under the guidance of the Fed, major central banks are crazily printing money to keep the economy running during the pandemic, which has also eroded people's confidence in all sovereign currencies. 20% of circulating dollars were printed in 2020, greatly increasing the attractiveness of Bitcoin, which is designed to gradually 'mine' new coins with a limited total supply. In fact, central banks are inadvertently driving the development of cryptocurrencies together. For a long time, cryptocurrencies have been seen as decentralized, democratic alternatives to the dollar..."

"Bitcoin is not only the hottest investment choice of 2020 - looking back over the past decade, it has been one of the hottest investment assets, growing by over 200% on average annually. Bitcoin has surpassed a trillion-dollar market cap. But compared to traditional inflation hedge assets like gold, it is still relatively small; the global gold market is worth $12 trillion. This leaves a lot of room for growth for Bitcoin."

"The most irresistible and practical application of cryptocurrencies is seen in the $470 billion remittance market - bomb disposal workers can send money back to low- and middle-income countries. These transfers usually take 1 to 5 days and cost 5% to 9% of the remittance amount. Now, payment systems using cryptocurrencies can complete transfers in seconds and cost only a few cents."