Pantera Capital: It’s riskier to NOT invest in cryptocurrency

Posted: 19 March 2018 6:50 pm
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Asymmetric returns mean a diverse cryptocurrency portfolio is a rational investment, Dan Morehead argues.

In a letter to investors, Dan Morehead, CEO and co-chief investment officer of Pantera Capital argued the benefits of blockchain and cryptocurrency holdings for institutional investors. "Soon the risk of NOT being involved will out-weigh the risk of having a small allocation," he wrote. "A rational investor should have one or two percent of their portfolio invested in the blockchain disruption."

Morehead's argument compared bitcoin to, the notoriously ill-fated dotcom venture that raised a fortune in venture capital before blowing up in a spectacular fashion. As long as you have a properly diversified portfolio, he argues, it doesn't matter if some of them burn down.

"If you had a portfolio of IPOs – one was and one was – it doesn’t matter what the rest were. You made a great return," he said.

And much like early dotcom investments, the potential returns on a well chosen cryptocurrency or blockchain investment can be enormous, and more than enough to offset the losses of the ones which flop, Morehead points out.

"Blockchain is an astonishingly asymmetric trade. If you’re wrong, the portfolio is out 100 basis points. If you are right, you may change your financial standing materially... the expected value is the most asymmetric trade I’ve ever seen."

Time for institutional money

The inevitable outcome is a surge of interest from institutional investors, Morehead suggests. These investors are dedicated to delivering safe and reliable returns on large amounts of money, with the objective of exceeding certain benchmarks. Understandably few have previously gotten involved in the hyper-volatile world of cryptocurrencies. But now, Morehead argues, it's almost time.

"Although I have spoken about bitcoin since 2013, in hindsight it was premature to discuss this topic with institutional investors," Morehead wrote. He points out that there wasn't enough diversity in the market to allow one to diversify appropriately, and the risk to reward ratio simply wasn't good enough for portfolio managers to justify putting client money into cryptocurrency.

But now it's changing, he says.

"We expect forward-thinking institutional investors to begin investing in blockchain equity and tokens soon. In fact, we have been having third and fourth conversations with some large institutional investors on topics ranging from where we do see value to operational due diligence matters. Soon the risk of NOT being involved will out-weigh the risk of having a small allocation."

This, he says, is because investors can now diversify appropriately across the cryptocurrency asset class as a whole, and cover their losses with the asymmetric returns of picking right. In the letter, Morehead doesn't hazard any guesses as to the future of individual cryptocurrencies, but he does suggest that bitcoin might be one of the must-haves, for similar reasons.

Despite its staggering downsides, there's also a non-zero chance of it having a future as digital gold, and someday being worth more than $100,000 a coin. With such a diverse cryptocurrency market it might not be a good idea to have a crypto portfolio of nothing but bitcoin, but having no bitcoin at all is also a risk.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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