- Dan Morehead says money printing gave a boost to anything that was fixed quantity, like bitcoin.
- Ethereum’s Merge parallels the corporate governance structure seen in securities, Morehead added.
- The risk from the upgrade is the confusion a hard fork could cause, said Raoul Pal.
Macro-thinkers Raoul Pal, the co-founder and CEO of Real Vision, and Dan Morehead, the founder and CEO of Pantera Capital, took the stage at SALT NYC on Monday to discuss the inflection point between economic conditions and the digital asset space.
This year’s conference took place against the backdrop of a defeated market. Whether it’s stocks or crypto, hedge fund managers have had a tough year navigating choppy economic conditions.
Indeed, it’s a changed tide from the last two years which saw crypto rally to all-time highs. The huge amount of money printed gave a boost to anything that was fixed quantity, like bitcoin, Morehead said. Since the Federal Reserve stopped its quantitative easing, that push into crypto is subsiding.
While issues on the secular front are dragging down crypto, investors will also realize that if interest rates are rising, it makes investing in bonds and equities difficult, Morehead added.
In an August 5th interview with Real Vision, Morehead, a macro investor of over 25 years, stated that he thinks interest rates will go much higher and run much longer than people may be expecting. The Fed raising rates by 150 basis points is nowhere near tight enough to rein in inflation.
On the upside, blockchain investments aren’t connected to interest rates and can trade on their own, Morehead said. However, in the short term, crypto will continue to have small cyclical correlations with risk assets. But in the next 10 years, Morehead predicts it will decouple and do its own thing based on its fundamentals.
In his previous interview, Morehead also acknowledged that historically, the US has reaped incredible benefits from holding the world’s reserve currency. But even that may have reached its peak, he added. The war in Ukraine was one example of how quickly a country, such as Russia, could cancel reserves. This will send interest back into crypto, but it may take three to four years for the effects to filter into the blockchain industry. Morehead believes governments will consider storing a small percentage of their reserves in bitcoin.
Impact of The Merge
As for the short-term outlook, Morehead said the crypto market hit its low in June. This means it could be a gradual trek upwards. The next leg in the race is Ethereum’s Merge, which is a network update that will switch the blockchain’s consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The move will reduce energy usage by 99%. Once we get through that, it may start a huge rally again, he added.
But what’s good for ether may be bad for bitcoin. Bitcoin’s dominance may be in a long-term secular decline, Morehead said. The original coin may be looked upon less as a proxy to measure the market. Since bitcoin’s June plunge below $19,000, it hasn’t had much price action, he noted. Ethereum on the other end is up by 60% from that period.
The upgrade to proof-of-stake is a bullish narrative because it parallels the corporate governance structure seen in securities, where one share equals one vote, Morehead said. This means institutions will be quick to wrap their heads around the new staking and consensus model.
In a voice memo to Insider, Pal, who was a cohead of hedge fund sales at Goldman Sachs, added that the risk posed by the Merge isn’t the upgrade itself. Instead, it will be the mass confusion it may cause investors and exchanges if a hard fork duplicates everything across another chain.
There are two scenarios that could occur after the update. The first outcome would be a hard fork, which would happen if ETH miners continue to mine the coin, effectively creating two chains. Many exchanges have suspended or will suspend trading of ETH and ERC-20 tokens leading up to the event. Coins will then be transferred to the new chain. However, if miners halt their activity, then there won’t be a hard fork.
They both agreed that this upgrade, if not smooth, may pose the biggest risk to crypto. The second biggest risk is regulation and whether it hurts innovation and pushes it offshore.
The Merge, which is set to happen on Thursday, may have a bumpy road to navigate, but the outcome could lead to more price stability. Miners who sell their ether to cover operating costs will be replaced by stakers, who are encouraged to hold onto their crypto in exchange for yields.
Institutional investors love yields, Pal noted. Once you start establishing ways of valuing yields, it will draw a lot more players into the space, he added.