Plenty of people wish they had bought cryptocurrencies early, when it was still little more than a curiosity. Former Goldman Sachs Group bond trader Dan Morehead was among the few who did, launching his first crypto fund when a Bitcoin cost less than a bag of groceries.
“I was captivated,” Mr Morehead, 56, said, calling it “the first macro trade that is truly global across all borders".
As a result, the Pantera Bitcoin Fund has returned more than 65,000 per cent since 2013, and his Pantera Capital Management, once a traditional hedge fund that wagered on macroeconomic trends, oversaw $5.6 billion of crypto assets at year-end. That’s on top of the $6bn the firm has returned to investors.
There’s always a chance it will crash and burn. Bitcoin has tumbled more than 20 per cent to start the year, trading below $37,000 on Friday, well below its November peak of roughly $68,000 – a drop fuelled by expectations of rising global interest rates and aggressive moves by central banks to tame soaring inflation.
This is where Mr Morehead’s worlds collide.
He stood out during crypto’s adolescence because he immersed himself in it after a storied career in finance. He started trading bonds at Goldman in the 1980s, and later worked for hedge fund legend Julian Robertson before launching Menlo Park, California-based Pantera in 2003.
Rising inflation – and how central banks respond to it – will be a big theme of 2022, said Mr Morehead, who previously had wagered on the long-term decline in inflation and yields.
That trade “basically made my career”, he said. “I think it’s come all the way to the end of that story.”
Mr Morehead expects a reversal of that dynamic to drag on cryptocurrency prices, but it hasn’t dampened his enthusiasm for the underlying technology.
Pantera doesn’t just bet on Bitcoin. It’s venture-capital funds invest in firms supporting the crypto ecosystem, including exchanges such as FTX, Coinbase and Gemini, while the firm’s token funds are putting money to work in blockchain developers. Recently, Pantera has focused on decentralised finance, or DeFi, a movement seeking to supplant the old Wall Street ways of doing business.
“Bitcoin and blockchain are upending the financial world,” said Fortress Investment Group co-chief executive Pete Briger, who worked with Mr Morehead at Goldman. “Dan is at the epicentre of all that.”
Mr Morehead could have got into cryptocurrencies even earlier, in 2011, when his brother introduced him to Bitcoin. He read about it some, thought it was a cool idea and then pretty much forgot about it.
Then, two years later, Mr Briger summoned him to Fortress’s San Francisco offices to discuss Bitcoin, along with early crypto evangelist Mike Novogratz. Mr Briger, 58, a distressed debt specialist who describes himself as a “garbage collector” of the financial system, saw Bitcoin as having the potential to disrupt traditional banking.
“Blockchain is a game-changer in financial services,” Mr Briger said. “It pressures the banking and payments industry to rethink their reliance on legacy barriers to protect competitive advantages.”
After the meeting, Mr Morehead pledged to do additional research, and a month later he told Mr Briger that crypto was the most exciting thing he’d seen in his career. He set up shop in Fortress’s office and got to work on standing up a cryptocurrency investment fund.
In addition to the gains for the Pantera Bitcoin Fund, a venture fund that also debuted in 2013 has generated an internal rate of return of 51 per cent, and Pantera’s Liquid Token Fund surged 385 per cent in 2021 alone.
Fortress became one of Mr Morehead’s biggest backers. Finding such an institutional investor during Bitcoin’s earlier days was an exception.
Most investors were “high-net-worth individuals, particularly tech entrepreneurs and Wall Street executives that were investing their own money”, Mr Morehead said.
Bypassing more traditional funding allowed Pantera to move quickly.
“One CEO of a tech company wired $2 million to the fund, and then a couple of weeks later called and said, ‘Hey, what are the terms?” Mr Morehead recalled.
Mr Morehead organised an annual Bitcoin conference at his Lake Tahoe home that he called Bitcoin Pacifica, attracting cryptophiles from around the world.
“They weren’t the kind of people I was used to meeting through Fortress,” Mr Briger said of one meeting he attended. “A lot of fringe players, cypherpunks, cryptographers and probably some who’d call themselves anarchists.”
It was a big change for Mr Morehead, too. He had started Pantera as a traditional macro hedge fund – his specialty during four years as chief macro strategist and chief financial officer at Mr Robertson’s legendary hedge fund, Tiger Management.
That first version of Pantera grew to about $1bn of assets before the 2008 financial crisis. Now, as a pure crypto investor, it’s several times larger. The firm managed about $5.6bn at the start of this year, including a fourth fund that raised $600m in November.
That’s down from $6.4bn Pantera was managing at the end of November. In a December 23 interview, Mr Morehead predicted that expectations for more aggressive Federal Reserve tightening would continue to drag on cryptocurrency prices.
The Bloomberg Galaxy Crypto Index, which tracks the value of a variety of cryptocurrencies, has dropped almost 20 per cent since the start of the year, while the yield on 10-year Treasuries has climbed about 25 basis points.
“Blockchain is now being driven by all the excessive money-printing going on in the world,” said Mr Morehead, whose firm recently opened an outpost in Puerto Rico, which has become a haven for crypto investors.
In a letter to investors last month, Mr Morehead called the US government and mortgage bond market “the biggest Ponzi scheme in history".
As for whether the technology has fulfilled Mr Briger’s vision for disrupting the banking system, he said the process has begun, but that there’s still a long way to go.
“It’s like email in the early 1990s, when it was very clunky,” Mr Briger said. “No one could envision at that point what instant communication would mean for commerce and the world.”
Mr Morehead said he is no longer interested in betting on the traditional assets that defined his early career and that he hasn’t invested in anything other than crypto since 2013.
“Crypto is so much more compelling than any other trade out there.”