Blockchain’s 2003 Moment: Is the Crypto Era Finally Here?

Investors and fund managers are saying, after the latest Pantera Capital newsletter issue, that the blockchain era has arrived.

Investors and fund managers are saying, after the latest Pantera Capital newsletter issue, that the blockchain era has arrived.

The rise in interest rates by many central banks has dragged down the prices of many risky assets this year. The same goes for cryptocurrencies—the all-time high for Bitcoin is nearly a year behind us. For many, it’s just a pause.

Dan Morehead, the head of the world’s biggest crypto hedge fund Pantera Capital, sees the brutal correction as a major investment opportunity, similar to how tech stocks recovered after the dot-com bubble burst in 2003. In his monthly investor newsletter, he explains why this isn’t just a story.

End of the Commitment

Morehead sees commodities, including precious metals like gold and silver, as an asset class that isn’t directly tied to policy rates. In times of big policy mistakes, he sees value in holding certain assets. And along with commodities, cryptocurrencies are also for him one of the few escapes from the crumbling traditional financial world.

“During 10 years of crypto life, it traded with a 0.08 commitment to the S&P. This time it was very different. Namely, the last eight months showed a strong linkage to the Nasdaq. If you look closer, you’ll see it starting to crack. There’s also the big trade—risky assets continue to struggle. But I also see a world where blockchain does well, even as other risk assets get hit hard.”

Dan Morehead / Source: panteracapital.com

This is because Bitcoin, in Morehead’s eyes, is "digital gold" and technically shouldn’t be tied to the traditional financial world governed by baseline rates. He also regards the existing linkage as only temporary.

Recently gold started to break its linkage with the rest of the market. Could Bitcoin soon follow? The early signs are there. The S&P 500 has dipped about 0.7% from its June low, US Treasuries down as much as 18.6%. Bitcoin has not yet dropped to the June low a second time. Even the past few days of the tech index Nasdaq with disappointing quarterly reports have left Bitcoin relatively unfazed.

Strong Altcoin Sector

Morehead also points to the recently strengthened altcoin sector. Some coins and tokens have clearly moved past their June lows. Ethereum and Binance Coin are up a bit more than 40%. Tokens like Polygon and Optimism are up more than 100%. The Ethereum Layer 2 space (including Polygon and Optimism) has generally performed the best, up 138% since the June low.

Is this a sign that investors have confidence despite the bear market? And that they see real value in infrastructure coins for the digital economy of the coming years?

Blockchain Technologies and the Year 2003

A similar kind of “creative destruction” to 2003 seems to be coming to the crypto and blockchain sector, just like we saw when the dot-com bubble burst. Only this time the effects might unfold faster.

The new tech reshaped the reality around the turn of the millennium, which then led markets to a new state. Followed by a period of overinvestment and ultimately price collapses. This story has lingered in the crypto sector for a while. And now it’s starting to develop further.

In 2003 internet stocks were essentially dead for most investors. The Nasdaq tech index had fallen nearly 78 percent. Web 2.0 looked like a hollow promise, too risky as an investment, too volatile. For Pantera Capital, this marked the dawn of the internet economy. After the dot-com crash, big platform players emerged: Facebook in 2004, followed by YouTube, Twitter, and Netflix—all by 2010. And how did those companies perform in the market? Historically high.

The big infrastructure upgrades also fueled the internet economy’s massive growth. While people in 2000 were online with a 56K modem, by 2006 many had faster DSL connections that enabled streaming and uploading larger media files.

Broad Adoption

Blockchain technology has faced the challenge of hype running ahead of the technology itself in recent years. It’s not surprising that Ethereum founder Vitalik Buterin recently admitted the sector isn’t mature yet.

In 2022 the crypto space recovered from a big drop and the speculative Web3, NFT, and Metaverse visions. The call for a revolution is still ahead of the actual changes needed. But the infrastructure and hack-preparation work is slowly progressing.

Last week Matter Labs launched its zkSync mainnet, one of the first Layer-2 blockchains built on zero-knowledge proofs that could theoretically scale Ethereum indefinitely. With infinite scaling comes a future of infinite solutions and preparations.

That the decentralized blockchain economy is already working today is evident in the collapses of the Terra chain, the Celsius service, or hedge fund 3AC. The old players, plagued by poor maintenance and empty promises, were simply taken out.

And decentralized protocols like MakerDAO, Aave, Compound, and Uniswap survived. They did exactly what they were meant to do, with no failures or central rescues. Dan Morehead and Pantera Capital are bullish about this resilience, tied to the broad accessibility of the DeFi sector. DeFi represents another buildup that could reach a wider user base in the coming years as the tech evolves.

Crypto has fallen this year but is settling on a solid foundation. A foundation on which the sector can build in the years ahead. And that’s why Web3 platforms could soon become the norm, just as Facebook and YouTube once did. And blockchain users may wonder how they ever got by without them.