How to Find 1,000x Returns in Crypto with Dan Morehead

Hey Ryan, thanks. It's great to be back.

No, it's great fun. In March of that year, my friends Pete Briger and Mike Novogratz, who I went to college with and we worked at Goldman together, and they founded Fortress Investment Group, called to ask if I want to talk about Bitcoin. My brother had mentioned it to me a year or two before, and I'm libertarian, so I was thinking it'd be great if it happened, but I didn't actually do anything. And so when Pete and Mike called, it was great because it was something that was cool, and I thought it'd be wonderful for the world if it really happened, but I hadn't actually lifted a finger to help. And I went in for a coffee in their office in San Francisco, and it lasted for like four hours. I was just so mesmerized with all the stuff we were talking about, and I actually stayed in the office for years. Pete offered me space in their offices, and we ultimately they became part of our GP for a while, and I think we probably stayed like six years or something like that. So I went in for a coffee and stayed for six years because it was so compelling. And so as we thought about it, it just seemed like an incredibly asymmetric trade, and that's what I had done in my career. I'd previously been the head of macro trading at Tiger Management when Julian Robertson was a very fantastic investor, looking around the world for trades that had way more upside than downside. Risk and reward go together. You're never going to find arbitrage or anything that's risk-free. You always have to take risk. And what I'd been trained at Tiger, and Pantera actually was founded in 2003, we started the crypto part of it in 2013. So what I've been doing for all those years before is looking for things where obviously there's a lot of ways you could lose your money, but if it worked, it could go up more than that. And I had been working our previous trade at Pantera actually was Tesla Motors. I had met one of the founders at a dinner in our little community of Woodside, California. His kids went to the same local public elementary school with my kids, and he told me about an electric car, and I was like, 'Wow, that sounds dicey.' And I had actually one of our partners at Pantera, a guy named Ryan Glance, used to be the number one institutional investor auto analyst for a long time. He was a partner with me at Tiger and then moved to California, and we worked together at Pantera. He still edits our investor letter and is still a fantastic partner for us. He was an auto expert, and so I called him as soon as I got the idea to invest in Tesla, and he told me, in fact, prior to Tesla Motors, the last auto company to go public was Ford Motor Company. Everybody else failed, John DeLorean and whatever. It was just a zero chance anybody could ever make a car company work. So ultimately we did a bunch of work, and I had that view on Tesla that it was a couple billion market cap at the time, great idea, really cool, if it worked it could go way up. And the fun fact is there was a period in 2013 that Tesla Motors and Bitcoin traded the same price per share. And so we were very big in Tesla, and then we decided to swap that in, and we literally sold all of our Tesla Motors and went all into Bitcoin at the time. So it was a very paired trade, but it's very similar. So the punchline of that very long thing is looking for trades like that, they're very asymmetric. The upside is way more than the downside. And although Bitcoin has gone up a ton, I still think it's true. I still think, yeah, could it definitely go down? We've lived through three down 85% bear markets. I don't think you could do that anymore, but it could go down a lot, but it really still could go up an order of magnitude. And there's so few investments out there that actually could do that. And so when Mike and Pete and I sat around and thought about it, I got sucked in. People say you go down the rabbit hole. I just couldn't think of anything else, and I essentially haven't traded anything but crypto since 2013 because it's so captivated. I still think we're in the early days of this huge thing. And the reason I love it is there's so many things that crypto can do. When you have a new technology, everyone always wants an analog to the old school world. SMTP became electronic mail, even though it really does things totally different than snail mail. And so everyone's always trying to come up with a new word for things. And so Bitcoin and other blockchains have been called crypto currencies. A lot of people call them commodities. The CFTC calls them commodities. But they're a wholly new thing that has hundreds and hundreds of use cases, and that's why I'm so excited as an investor. It really is going to rip through so many different use cases. And I guess one other analog would be, when you have a technology that's incredibly disruptive, they call it a category killer. Bitcoin's a serial killer. It is going to rip through so many different industries. But the only important part of that line is it will do it serially. And I think that's the hard thing in our space is that it's not going to do it all overnight. Bitcoin and other blockchains are really good at some things right now, but it's probably going to take 10 years to compete with Visa, Mastercard, or some of these other applications that they ultimately get to. Definitely. But there are some things that they're not good at yet. And so I still have that view. We're really early. It feels like the internet turned 50 last year. Bitcoin's still a teenager. It's very young, still got a long way to go. And I think it is still one of those trades where although it's definitely risky, and you should only invest as much as you could afford to lose 80% of, it's probably going to go up a lot more than it goes down.

Well, I do like you using the word pattern because I think it is pattern recognition. If you've seen these things happen time and time again, and I've actually been doing this for about 40 years. I started on Wall Street in 1987, so 36 years. And I went through the SNL crisis, went through the financial crisis, investing in commodities in the 80s, emerging markets in the 90s. And so that is one of the reasons I've had probably a better position than some of the younger people investing in the space, in that I think I've seen this movie before. I was at Goldman when they did the GSCI, and now everybody considers commodities to be an asset class. I was doing emerging markets investing in the 90s, and now EM is an asset class. In 2006 or 2007, Pantera launched the first fund to invest in the GCC countries, the UAE and Saudi Arabia, from the West. The first Western fund to do that. Everybody thought that was super crazy because it seemed really exotic and different. Now everyone thinks of the MENA region as a completely normal place to invest. So that's been the pattern. Oh, and I went to Russia when Gorbachev was still the premier and invested with some partners in Gazprom in their privatization. So always looking for these kind of frontier asset classes. In 2000, we did a fund to invest in Argentine farmland after their penultimate crisis. They have one often. So it's just looking at things that are kind of off the run or not normal. And again, if we want to come all the way back to present and blockchain, I think it's still true for blockchain that very few institutions really have a real size position. It is still frontier. It's a $3 trillion asset that's still frontier, which is really weird. I've never seen one like that. And so it really is this pattern, having seen this cycle a bunch of times, thinking about how disruptive blockchain could be. And in a couple of the subsequent memos that I wrote over the next few months, I listed out all the use cases and how it's going to compete with gold, and it's just starting to do that right now. That's a super exciting thing to talk about today. But ultimately, it's going to compete with Visa, Mastercard. It's going to compete with all the big remittance companies that charge migrants an entire month's wages to move money across the border, which Bitcoin can do super easily and super cheaply. And so when you add up all those different use cases, the ultimate value of crypto is just so much higher than it is today. And that's why in our business, there's a huge race of pundits that come up with the craziest forecast for the price of Bitcoin. I don't know where it's going, but it's gone so much higher that we don't really have to think about it.

Well, yeah, it's so different than it is today. And if you remember LocalBitcoins.com, where you meet somebody, that was too sketchy for me. I never did that. I mean, it's literally that was one of the best ways to get crypto back then, meeting some random person in some random area and trying to hand cash and get Bitcoin. So it was really hard. And that's the thing people don't really appreciate, how much the world's changed. We were potentially going to do this fund as a part of a bigger public company's brand, and so we tested out all the systems, had all the funds set up, made sure everything really worked. But that company ultimately decided not to do it, so we had to do it as a Pantera branded product with not much notice because the price of Bitcoin had fallen 50%, which it often does, and we really wanted to get it launched. And so we had accounts at a couple exchanges, but we frankly hadn't tested any of them. And so when the price of Bitcoin at $65, I was like, 'Man, this is it. We've got to go.' And having done this so many times, I was like, 'This has to be it. Got to go.' So we decided to launch and buy. It was over Fourth of July weekend, and we'd sent money, we'd totally tried to prepare, and we'd sent money to a couple exchanges. We had everything dialed. We had our funds. We really had it all tested, we thought. I guess we hadn't really done that one last thing to try and buy a few Bitcoins. So we go in, and I was using this little startup nobody ever heard of, and try and buy some Bitcoins, and there was a popup on the screen that said our limit was $300. And you're trying to deploy what? Millions. A couple million. Yeah. And so in Wall Street, sometimes people just say 'bucks' to say millions. I mean, this was like $300 US. We couldn't buy anything. And so then I said, and it was a trendy little startup, so they didn't have an address, a phone number. They just had like a little help email address. So I hit that, and I wrote in uncharacteristically all caps, 'I'm trying to buy $2 million of Bitcoins,' and hit send. You think you get a reply, right? Nothing was happening at their little company at the time. Four days later, their only employee, a guy named Olaf, wrote me back and he said, 'Okay, oh no, that was it. Sorry, our limit was $50, one user's grant per day, and they upped it to $300.' I'm like, 'Dude, I'm trying to buy $2 million of Bitcoin.' It would have taken 6,000 days or something like that. It would have taken forever. So luckily, we'd already sent money to Ljubljana, Slovenia, to Bitstamp. And I totally hear you. Slovenia, the country Slovenia. Spell that out on a wire transfer, right? Feels super sketchy. And the manager of the branch came over and was totally hassling me, like, 'What's this for? Who are you? What are you doing? And what's Bitcoin?' And it just sounded so sketchy. And even that was like an hour to send a wire. I had to sit there and talk to all the managers and all that stuff. And the funny thing is, I've since spent a lot of time in Slovenia, and it's a very lovely country to the right of Venice and below Austria, right? But at the time, I was like, 'Wow, this money could be gone.' And so we sent a bunch of money there, and luckily that worked, and we did a bunch of trades with Bitstamp. We ultimately became their only shareholder for a long time, and I was a chairman of Bitstamp for six or eight years. They were super nice people and a great group of people. But it was really hard. Really hard because the startup you were talking about couldn't fulfill the order. They blocked it. They were all small. Coinbase had one employee. That was the startup, right? Coinbase. You're talking about Coinbase. Sorry, I forgot the punchline. It was Coinbase. They had one employee. I went and visited them. They were in a split-level condo over by the ballpark in San Francisco that looked sketchy too. I bet. Honestly, yeah. You're trying to meet a company, you're going up to somebody's apartment. It's all so funny. And honestly, I thought it was great. I love that whole era. That was a super fun era. All these very creative people. I went over to Slovenia with Pete Briger and we met the team at Bitstamp, and ultimately we became investors. It was super fun meeting people. For example, I flew all the way to Tokyo to meet the two guys that were running Mt. Gox.

Yeah, Mt. Gox was massive. And a little fact that's not well known is a person who was a venture partner with us for a while, Jed McCaleb, who's one of the founders of Ripple Labs and Stellar, he created Mt. Gox. He's a genius. He's created so many massively cool projects. But then he sold it to Mark Karpelès and had nothing to do with the blowup. But this is a great example of you just got to do the work. Before I sent all the money, I was going to fly over and see who we were talking about. And so I went all the way to Japan and I met Mark and one of his lieutenant guys. I spent two days there because we're going to send millions of dollars to these people. And none of it made sense. The stuff they were saying, I was like, 'Man, this just doesn't feel right.' They're either incompetent or fraudulent. I haven't followed it since then, but I think it seems like they were both. But I was just like, 'I can't send any money here. These guys are super sketchy.' Even though they were dominant, it was so everybody was trading it there. So we did decide to send money to a little startup that's now called Coinbase and to Bitstamp, which is the oldest exchange in the world. It's been around since 2011. And Nejc and Damijan, the two guys that founded it, were way ahead of their time. So it was all mega sketch. And as you know, Mt. Gox, they couldn't do wires in the US because the Department of Justice had shut them down. It's just all kinds of Wild West type stuff happening. And it was fun. And so we flew around and actually met people in person because it's so easy to sense what's going on.

Well, a couple cool threads in there. The first one is, right, if you want to make outsized returns, you can't be investing in things that every Wall Street firm has like 20 analysts covering. By then, most of the alpha is out of the industry. So you really, at least my style, I love these things that nobody's focused on yet and they're still kind of funky or whatever. And we even have a little tagline at the bottom of our investor letter that says, 'Put the alternative back in alts.' And I really think that's true. When I started hedge funds in 1991 or whatever, they were super different. Hedge funds were really edgy alternative. And now there's trillions of dollars of hedge funds and they're all kind of the same. And so that's why I think blockchain should be in somebody's portfolio. It's still alternative. It's different when most hedge funds are the same. But the funny thing is that story you're quoting, that's not 2013. That's three years later. Oh, really? That's the real 2016. This was during kind of the winter of it. We got in, we evangelized, trying to get people to invest in Bitcoin and blockchain and our venture fund and everything. That was three years later. We're still doing it, and nobody wanted to do this because Mt. Gox blew up. There was like a negative 90% drop in Bitcoin price. That was the era of 'it's all about blockchain, not Bitcoin,' these private ledgers. No one believed in a public chain. No one believed in the Bitcoin asset. Yeah. So there have been three of those cycles. So I can't say, 'Oh yeah, that was the one,' because it's happened three times where Bitcoin's gone down 85%. It just happened two years ago or whatever. Bitcoin traded at $16,000 like two years ago. So in the first of those cycles, we started investing at $65. It went to $1,000 and then crashed, and it was down from 2014 to 2017. So in 2016, we came to work every day and did our job, but nobody really cared. And in 2016, we did 170 investor meetings. We raised $1 million. Nobody cared. Everyone's like, 'Oh, isn't that that thing that died? Or Mt. Gox? Or Silk Road guy?' Just all the FUD that people have been saying all the time. The management fees from that entire year's worth of work was $177,300. That's a buck a meeting. And that was hard. So many people said no. And frankly, it's still kind of the same. Obviously, we're raising more money in larger scale these days, but I still have that same feeling that so many people haven't said yes yet. They will. And so there's still just, I feel like we really are still at the beginning of it. Very few institutions out there who are just max long. They really couldn't put any more on. Most have zero or a tiny bit of it.

Yeah, that's funny. Either I don't have any new material or the old stuff's still good. And so it's still the same. And that's why I want to share my original thoughts in our letter that is on our website or Twitter if anybody wants to see it. But because it's still the same. I get this a ton where you tell people about the fixed quantity of Bitcoin and it can't be debased by fiat currency and all the stuff, and then people say, 'It's just like buying gold.' And I'm like, 'No, it's like buying gold in 1000 BC.' Gold's been great for 5,000 years, but it's past its sell-by date. And digital gold is the new version of gold. And so that's why I got so excited originally in 2013. Still is that Bitcoin is going to replace gold. Bitcoin is going to replace remittance companies. It's going to replace Visa, Mastercard. All these huge use cases. And I'll admit it's going to take 20 years. It's not going to happen overnight. And so it's going to take a long time, but it will happen. And that's another reason I'm super convicted. It's inevitable. Blockchain is inevitable. It might take longer than I think, and we might invest in some companies that burn through all their money before it happens or whatever. There's definitely risk. But there's no chance migrants are going to pay a month's wages to send money across the border five years from now. No chance. And you're not going to pay 300 basis points to swipe a credit card. Those things are over. I don't know if it's going to take 10 years to be over or a year or two, but that's why I love staying long in the space. It will happen. Big changes are certainly happening, but over the next 20 years, big change will happen.

Yeah, so I just end this line on crypto because I love it. In any normal asset class, if something doubles this year, you should not buy it, right? Because that's overvalued. It's totally crazy. And they ask, 'What do you think? Bitcoin's doubled? That's wild and crazy.' I'm like, 'It's not even interesting. Bitcoin doubling this year? We've been doing this for 11 years. It's done that on average every year.' Seriously, our compounded annual growth rate of the Pantera Bitcoin Fund is 89%. It basically doubles on average every year for 11 years. And one pitch is, 'Well, what if it does it one more year? You double your money.' It's just not that hard. And again, you only should invest a small amount of your capital that if it went down 85%, your spouse still loves you. That's the measure. Don't invest your marriage in this asset class. If you can keep your sizing to that level, just hold it. It's doubled on average for 11 years. And obviously the past doesn't necessarily predict the future, but I've been saying this for 11 years and it keeps doing it. So that'd be my logic. So is getting large enough? It can't go 1,000x again because then it would literally consume all of the power of the planet. But if it went up another 10x, it'd be $15 million for Bitcoin from when it hit the fourth or third order of magnitude. All financial assets on Earth are about $500 trillion. So that seems doable. It really does. And again, I'm not going to try and predict where it's going to be 50 years from now or whatever, but in our lifetime of investing, however long each of us can hold a trade, a five to ten year time frame, it really can go up 10x from where it is today and still not be crazy overvalued. And then your question for how far are we? It's a fascinating one. I still think we're pretty early in this. Supposedly 300 million people have crypto globally. It's kind of hard to really know. And probably frankly, a lot of those people aren't really doing as much with it yet as they're going to do in the fullness of time. So my main benchmark on that is the only thing you need to operate Bitcoin is the possession of a smartphone, and there are four billion people that have one of those today. There's some cool projects actually trying to put that kind of stuff on feature phones too, like KaiOS is a cool company we're talking to now that does that. But let's just say four billion growing to five over the next 10 years or whatever. Most of those people are probably going to have digital currency on their phone. Half of those people had photo sharing on Facebook. Photo sharing is really cool and all, but digital money is even cooler. So I really don't think it's hard to imagine three or so billion people using crypto in 10 years or something like that. It really feels highly likely. And then once they start using it, there will be more applications, and they'll start using it for more things in their life. But I guess the punchline would be we can't be more than maybe 15% of the way into this. It really feels like it's not that many people yet, and they're not doing as much as they ultimately will do.

Yeah, so I think you're right to bifurcate things that can be done by the executive branch from things that require Congress to prioritize and pass legislation. It is my understanding that the executive branch controls the US Marshals Service and can decide just to stop selling Bitcoins, and that is very easy to do. We participated in the first Marshals auction in 2013 or 2014, whenever that was. Super cool to see their five-pointed star on a Bitcoin sale poster, which is really cool.

The Marshals Service is the entity that seizes assets from criminals and sells them. They started doing Bitcoin sales in 2013 and 2014, and they have a really cool logo: a five-pointed star, like in the West, a sheriff. So, it's my understanding that the president can just unilaterally decide to stop doing that. And as you say, the United States already owns 1% of the world's Bitcoin, so that's awesome. If they stop selling, that's good. I'm not even going to remotely try and guesstimate what Congress can do, because it's a very wild animal out there. So that might be hard. But just not selling 1% of all the world's Bitcoin is huge, because remember, the float on Bitcoin is pretty small. There are a lot of people, including Satoshi, who never sell; they just have their crypto. So 1% is a big amount.

Yeah, I think that one seems very likely, because as far as I know, it's within the executive branch's purview to do that. So I would say the US, which is currently moving Bitcoins around right now, the US government selling them and moving them to exchanges, I think that'll stop. And that'll be great, because it's a flow that at least neutralizes prices. When you remove a seller, it helps the price go up. But I also think it's a great strategy. When you are the world's reserve currency, you don't have anybody else's currency to save in. Everyone else can save in US dollars, even the Chinese who are at war with us. So it's that reality. The US is that currency, so we don't have somebody else's. You mentioned Fort Knox; it is totally an anachronism that the US stores 11 million years of wages in a stone pyramid in gold, just like the pharaohs 40 centuries ago. It's so out of date. So yeah, I would love to see the US increase its holding of digital gold. And as a citizen, I'd love for them to just sell the old school gold, because it's not really doing anything. So I think that is coming: the US will stop selling, which is really important. The fun bit is to remind people it's not radical. Singapore has owned cryptocurrencies for five, six, seven years. Very well-run countries like Singapore have been doing it. It's not super crazy. They own all kinds of other assets. Why not own what I think is a very compelling asset, Bitcoin? So that's why I think we'll come around to it. There is a petition in Congress to create a strategic Bitcoin reserve. And as you said, everything got really partisan, which is really weird because Ro Khanna, a very intelligent congressman from California and a Democrat, said it's like the cell phone. Why is it partisan? I don't know why. Frankly, if anyone should have made it partisan, it's the Democrats. Bitcoin is the progressives' dream. And there's a great congressman from the Bronx, Ritchie Torres, who's really fun to listen to talking about it. So I hope it isn't partisan. I hope it can get done. But I think we will be storing at least the 1% that the US currently owns in Bitcoin for at least the four years that the current president-elect will be serving.

Oh, you said it better than I could. Yeah, I think a strategic Bitcoin race is on. An arms race is on. It's going to take 10 years, but it will happen. The US is going to hopefully retain 1% of the world's Bitcoin. China hopefully will. And again, think of the irony: there are these regimes like China that are in competition with the US, yet they store all their wealth in US dollars and US Treasuries. It doesn't seem smart. The US sanctions regime can control every little check they write. So yeah, I think it seems pretty obvious that countries antagonistic to the United States and the West would want to store their wealth in Bitcoin. Even neutral countries, it just seems smart to have some of your wealth in a different form of reserves. That's why some people use gold, because it has different properties than US dollars, which have to go through US banks. But Bitcoin is another great alternative.

I've been so excited about blockchain for 11 years. I come in every day with this list of super interesting things I could work on. Trying to figure Congress out is not one of them. I say nothing to it because it's just a machine that I don't get. Chancellor Bismarck said some things you don't want to see produced: laws and sausages. I literally spend no time thinking about Congress because I can't influence anything, and it's too hard for me.

I think we all thought they were coming a few years ago. We've had some big institutions invest with us for a decade, so there are some. But when you're talking about a huge stampede, the herd, we all did think it was coming. But FTX happened, BlockFi, Celsius, Terra, Luna, the GBTC crush discount stuff. Then the SEC sued Coinbase and Ripple Labs and all these great companies. It just put a polar ice cap on the whole thing. If you're a public pension plan, what are you going to do? Run that up to your state legislature and go, 'Hey, I'm thinking about Bitcoin today'? There's no chance. The thing I don't think enough people realize is how quickly that can go the other way. If we find ourselves in 2025 with a pro-crypto Congress, a pro-crypto president, and regulatory agencies that are at least neutral, which we will, everything could flip. That's why you're seeing the price surging and massive inflows into the ETF. The ETF is such an important thing. We launched the first crypto fund in the United States, and I thought it might take a few years to get an ETF through. That was 11 years ago.

Yeah. My point is, having waited for 11 years since we started, we were kind of repressing this desire to invest. So it's not surprising that the Bitcoin ETF has been this huge thing. $35 billion has net flowed into Bitcoin ETFs. You also have to include MicroStrategy, which I know is not an ETF but it kind of looks like one, with $18 billion of inflows into it on the NASDAQ. So that's more than $50 billion into ETF or ETF-like products. And this is a really cool stat: the flows into all the gold ETFs on Earth are zero. Really. So no money's flowing into old school gold, the 79th element on the periodic table, and $50 billion flowed into digital gold Bitcoin ETFs. That's the change. That was the thing I was thinking 12 years ago when we started: Bitcoin is going to go up and replace gold. It didn't happen, but the ETF is helping it happen.

I think it's going to happen. Bitcoin does everything gold does, but you can ship it more easily, store it more easily, do fractional sales. So I think it will eat into gold's market share. The US, like you said, why do we store all that gold under Fort Knox? It's crazy. I'm not predicting the US will actually sell gold, but I think it will buy Bitcoin. Over time, countries and people will overemphasize buying Bitcoin and not gold. We've seen that since January when the first ETF was launched: $50 billion into ETFs and MicroStrategy, and zero into all the gold ETFs.