A boom in decentralized finance (DeFi) has turbo-charged returns for Pantera Capital’s bitcoin and mixed cryptocurrency hedge funds this year.
From Jan. 1 to Aug. 31, Pantera’s bitcoin (BTC) fund gained 61%, its digital asset fund 168%, its initial coin offering (ICO) fund 323% and its long-term ICO fund 270%, thanks in large part to Yearn Finance’s YFI, Terra’s LUNA, Polkadot’s DOT, Flexa’s AMP and Ampleforth’s AMPL DeFi-related tokens, according to an investor letter sent out last week. Year-to-date, the funds have outperformed the S&P 500 stock index, as well as index and hedge funds.
The returns also tipped the ICO funds’ life-to-date returns over 0% again and skyrocketed the bitcoin fund’s life-to-date return further from 10,162% to 16,361%. The tilt shows how bitcoin tends to be correlated with alternative cryptocurrencies, called altcoins, and how some investors are bouncing back from the 2018 and 2019 cryptocurrency market downturn with investments in DeFi.
DeFi is a catch-all term for a variety of advanced financial applications for cryptocurrencies, from lending to derivatives to insurance, that have flourished in 2020. Most of the action takes place on Ethereum, the second-largest blockchain, which unlike Bitcoin was designed from the outset to run complex computations enabled by self-executing financial contracts.
“We’ve been positioning the funds towards decentralized finance,” Joey Krug, co-chief investment officer with Dan Morehead, wrote in Pantera’s September 2020 investor letter. “We started acquiring these types of assets some years back, and it’s exciting to see the DeFi space gaining momentum.”
ICO déjà vu
Centralized cryptocurrency exchanges have now been rushing to list DeFi-related coins, and total value locked into assets on decentralized cryptocurrency exchanges have shot up overnight from next-to-nothing to over $13 billion in September, according to data site DeFi Pulse.
The explosion in DeFi is reminiscent of three years ago when newfangled digital assets issued through ICOs lined investor pockets as they saturated cryptocurrency markets and gripped speculative mania. Some of the DeFi coins popping up today, like Chainlink’s LINK token, were originally promised during those ICOs tailored to bootstrapping projects and startups. Other DeFi coins, like cryptocurrency collateral system MakerDAO’s MKR token (also traded by Pantera funds), were sold in private investor rounds.
“Projects are going to market with live products that actually work (with cash flows or potential for cash flows) and with generally much higher quality teams than in 2017,” Pantera Capital went on to explain in the letter. “There’s finally a resurgence in the ICO market.”
Pantera Capital did not respond officially to requests for comment.
Stronger hedge fund returns
The recovery is remarkable considering the four Pantera Capital funds suffered tremendously in 2018 and 2019 when cryptocurrency markets imploded, with the exception of the bitcoin fund in 2019. In 2018 then in 2019, the bitcoin fund lost 75.6% then made back 87.7%; the digital asset fund lost 87.2% then 1.9%; the regular ICO fund lost 83.1% then 23.5%; and the long-term ICO fund lost 9.6% in both years.
According to cryptocurrency exchange analytics website CoinGecko, peak market capitalizations had deflated between 35% and 100% before 2020 for most tokens, with some facing regulatory enforcement actions.
Trading started in November 2017 in the Pantera digital asset fund, July 2017 in the regular ICO fund, and December 2017 in the long-term ICO fund. By the end of 2017, as cryptocurrency prices surged, the regular Pantera ICO fund was returning 347.6% and the long-term Pantera ICO fund was returning 6%. That year alone, the Pantera bitcoin fund, which began passively buying and holding BTC in July 2013, and later the splinter currency bitcoin cash (BCH), returned 1,565%, yielding the fund’s highest life-to-date return yet of 25,000%.
Now, the life-to-date returns are 144.4% in the regular ICO fund and 216.3% in the long-term ICO fund. The Pantera digital asset fund’s life-to-date return still lags, down 27.1% historically, but marks an improvement from losing almost all its money, having sunk by 72.8% in total value by the end of December. The Pantera ICO funds were also returning negatively by then, having fallen 42.2% in life-to-date value in the regular ICO fund and 14.5% in the long-term ICO fund.
Deep DeFi pockets
The clawback may be due not only to Pantera Capital holding DeFi tokens that happen to be launching in a boom time, but also to the leverage it has in holding large amounts of them, magnifying their returns.
Pantera Capital is one of the largest investors, if not the largest, in Polkadot’s first token sale that raised $144.63 million, earlier investor materials from April 2018 have indicated. The Polkadot blockchain raised $43.3 million in a second token sale in July, and the Polkadot token itself, purchased by investors for less than $2 per new DOT ($200 per old DOT), has been trading below $7 per new DOT ($700 per old DOT) since the blockchain went live in August.
Pantera Capital is confirmed in the April 2018 materials to also have been the largest investor in the Origin decentralized data-sharing protocol’s token sale, until new investors blurred the leading position, along with 17 other token sales for decentralized technologies, including for Kyber, Icon, OmiseGo, 0x and Enigma, in which it had the highest discount. These 18 token sales have raised at least $10 million each, adding up to over $500 million.
The digital asset fund’s holdings also include Ethereum’s native cryptocurrency ether (ETH); XRP, the digital asset closely associated with the startup Ripple; the privacy coin zcash (ZEC); and the Brave web browser’s basic attention token (BAT). Soon, the ICO funds will also trade NEAR decentralized application protocol and Filecoin decentralized file-sharing tokens.
Financial filings say Pantera’s crypto-asset funds manage over $195 million together and let investors cash out on their $100,000-plus bitcoin investments daily and alternative coin investments monthly. Including its venture funds, Pantera Capital manages assets of about $448.3 million.
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