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The Worst Period is Over
The Most Overlooked Asset: Revisiting the Programmability of Bitcoin
Protocols with Fundamental Appeal
The Impact of Halving on Bitcoin Price
On-Chain Government Debt
In the past year, global economic and political events have posed unprecedented challenges to the blockchain industry. Dan Morehead, the founder of Pantera Capital, delves into these challenges and their impact on the cryptocurrency market in his latest public letter, offering an optimistic outlook for the industry’s future.
Dan Morehead points out that 2022-2023 has been a terrible and peculiar period for financial markets, with Santa Clara University Honorary Professor Edward McQuarrie stating, “Looking back 250 years, there has never been a worse year than 2022.”
The blockchain market has experienced similar difficulties, with industry leaders going bankrupt, total market capitalization dropping by 70%, and many rare events occurring in these two years.
However, none of the above events have killed the blockchain and cryptocurrency market. Therefore, Dan Morehead believes that the “negative news” seems to be a huge positive factor for the future to some extent. Additionally, the stock market crash in 2022 led institutions to withdraw from private market investments. But as the stock market returns to historical highs, institutions will return to investing in the private market. Therefore, Dan Morehead believes that the next 18 to 24 months may be a strong bull market for cryptocurrencies.
“This is a critical moment. The pain and terrible events that have occurred in the capital market and the blockchain field in recent years have been eliminated, along with positive events such as halving and clear regulations—all of which are unfolding simultaneously.”
General Partner Franklin Bi states in the public letter that Bitcoin is the most overlooked asset. He believes that Bitcoin will establish its own financial system, which means the Bitcoin system will start to have applications beyond storage and transfer. However, Franklin Bi admits that stability and security are both advantages and drawbacks of Bitcoin as a value storage tool. The system’s resistance to change, simple model structure, and 10-minute block time make it more difficult to build other applications on the Bitcoin network compared to other blockchains.
Nevertheless, Franklin Bi finds that Bitcoin’s development seems to be undergoing a transformation:
“Today, the signs I see indicate that the stagnation in Bitcoin’s development is a temporary, non-structural condition. A decentralized financial system based on Bitcoin may finally be forming. Its potential is similar to or greater than today’s DeFi on Ethereum, although following a different evolutionary path.”
The emergence of Taproot upgrade, Ordinal script, and BRC20 tokens has opened up new design space for the Bitcoin ecosystem. The larger macro trends have ignited a psychological shift within the Bitcoin community and reignited interest in decentralized finance on Bitcoin from Bitcoin investors.
Franklin Bi predicts that if DeFi on Bitcoin reaches the scale of Ethereum, the total value of DeFi applications on Bitcoin will be $225 billion (25% of Bitcoin). Over time, it could fluctuate between $72 billion and $450 billion (8% and 50%), indicating a budding opportunity worth hundreds of billions of dollars.
Currently, many Bitcoin Layer 2 solutions are under development. Franklin Bi believes that the winning solution must have the following elements:
Consistency with Bitcoin’s economy: Any programmable Bitcoin layer should be directly related to Bitcoin’s economic value and security. Otherwise, users may perceive it as hostile or parasitic behavior towards Bitcoin. Consistency can be achieved by using BTC as collateral for the second layer and paying gas fees. It can also involve settlement and data availability using the Bitcoin network.
Feasibility without changes to the base layer: Some proposed solutions require hard or soft forks of Bitcoin, which means a system-wide upgrade is needed. Considering such upgrades are rare, these solutions are unlikely to be strong competitors in the early stages. However, in the long run, some of these solutions are worth pursuing.
Modular architecture: Successful solutions need sufficient scalability to incorporate new technological advancements. We have witnessed the frontiers of technologies such as on-chain custody, consensus design, virtual machine execution, and zero-knowledge proofs changing. Closed systems and proprietary technology stacks will struggle to keep up with these changes.
Trust-minimized cross-chain bridges: Bridging assets from one chain to another is challenging and requires consideration of various potential issues, from timing mismatches to severe vulnerabilities. So far, few decentralized bridging solutions have been battle-tested.
Aggressive go-to-market: Two groups are crucial for growth—existing Bitcoin holders and future Bitcoin developers. These two groups are dispersed in unique ways. Approximately 10-20% of Bitcoin’s total supply is held by exchanges. Around $10 billion worth of Bitcoin exists in various tokenized forms on Ethereum. Developer focus is distributed across a multi-chain, multi-layer technology stack. To attract these two groups, a strategy of “going where they are” is needed.
Lastly, Franklin Bi concludes:
Investment manager Cosmo Jiang and content lead Erik Lowe share two investment cases they believe are worth considering under the trends of “increased Bitcoin network activity” and “decentralized exchange growth.” These cases are Stacks, a Bitcoin Layer 2 network, and decentralized exchange platform dYdX.
Stacks is a general-purpose smart contract network that brings Ethereum-like programmability to Bitcoin (similar to L2 on Ethereum) and is currently the only existing general-purpose smart contract L2 on the Bitcoin ecosystem. Despite the emergence of many new competitors, Erik Lowe and Cosmo Jiang believe that Stacks will retain its first-mover advantage.
An important upcoming event is the Nakamoto upgrade of the Stacks protocol, expected to take place in April. This should significantly improve the user experience of Stacks by increasing network throughput, reducing transaction costs, and enhancing security. Additionally, the two mention the Nakamoto upgrade expected in April, which will increase network throughput, reduce transaction costs, and improve the user experience of Stacks.
Regarding the market trend of “decentralized exchange growth,” Erik Lowe and Cosmo Jiang believe that dYdX is the most promising competitor. They state that dYdX has already started to become profitable with a healthy 40% profit margin. Furthermore, it has implemented a revenue-sharing mechanism after the v4 upgrade, making dYdX more attractive compared to other assets.
“Considering all factors, it is reasonable to predict that the value of the dYdX protocol will exceed $10 billion in the next year, or more than triple its current market value. During this period, token holders will continue to benefit from the dividend yield, in addition to the potential price appreciation of the underlying protocol as it continues to grow.”
Content lead Erik Lowe discusses the impact of the upcoming halving event on Bitcoin price. Although many believe that the impending halving of Bitcoin production is widely known and priced into the market, Erik Lowe quotes Warren Buffett saying, “The market is almost always efficient, but the difference between almost and always is worth $80 billion to me.” This implies that even if we think everyone knows something, it doesn’t mean there isn’t money to be made.
Additionally, Erik Lowe presents Pantera’s analysis chart of the impact of halving on Bitcoin price released in 2022 (when Bitcoin’s price was $17,000).
The model predicts that the price of Bitcoin during the halving in April 2024 will be slightly above $35,000. The peak period after the halving will occur in August 2025, reaching $148,000. However, Bitcoin’s current price already exceeds Pantera’s prediction at that time (which did not consider the impact of a Bitcoin ETF) by 60%.
Pantera Managing Partner Paul Veradittkit shares his views on the RWA track, expressing Pantera’s optimism about asset tokenization-related applications and praising Ondo, a company in their investment portfolio. Ondo Finance is the third-largest digital bond issuer on the blockchain, following Franklin Templeton and Mountain Protocol, with over $850 million worth of digital bonds issued on the blockchain.
Paul Veradittkit states:
Adaptation will be key. With the emergence of new technologies and the gradual maturation of the market, blockchain technology and cryptocurrencies will continue to play an increasingly important role in the global economy.
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