The correlation between traditional macro assets and digital assets that has been seen in recent months could soon break, with what assets in the decentralized finance (DeFi) space possibly leading the way higher, executives at the crypto hedge fund Pantera Capital said in a recent call with investors.
In the call, which took place on February 1, Pantera Capital CEO Dan Morehead and the firm’s co-chief investment officer Joey Krug both said they believe the crypto market is ready to “decouple” from traditional macro assets, even in the face of higher interest rates.
The details from the call were shared in Pantera’s latest Blockchain Letter from Wednesday this week.
According to Krug, history has shown that when traditional macro assets go down, crypto tends to be correlated for a period of about 70 days before the correlation starts to break. “And so we think over the next number of weeks, crypto is basically going to decouple from traditional markets and begin to trade on its own again,” Krug said, before adding a word of caution:
“It doesn’t guarantee that it won’t go down a lot more next month, or whenever, but it just means the odds are really high that the markets are at an extreme and will bounce back relatively quickly.”
In February 2021, when BTC traded at around USD 47,000 after correcting around 20% in a week, Krug predicted that a BTC rally might be back “by April, if not sooner.” Since then, the price rallied to over USD 63,000 in mid-April before starting a strong downturn that brought BTC below USD 30,000 in July.
This time, Krug further explained that he does not believe digital asset are trading at overly high valuations at the moment, with for instance many DeFi assets trading at P/E multiples from 10 to 40. “They’re not crazy high-valued; tech stocks are trading at multiples of 400 to 500x,” Krug said.
The price-to-earnings (P/E) ratio is a metric often used to value stocks, and can be found by dividing the market price per share (or token) of a company (or protocol) by its earnings per share.
“It’s my personal view that USD 2,200 ETH was likely the bottom,” Krug added.
Pantera’s CEO Dan Morehead also concurred, saying that other assets such as stocks and real estate have cash flows that need to be discounted. “[…] this implies lower prices if yields are higher,” he explained.
For crypto, however, Morehead said that it is “like gold,” and that it must be valued differently.
“It can behave in a very different way from interest-rate-oriented products. I think when all’s said and done, investors will be given a choice: they have to invest in something, and if rates are rising, blockchain is going to be the most relatively attractive,” the Pantera CEO said.
Meanwhile, a possible divergence between traditional assets like stocks and crypto was also pointed to by Bloomberg Intelligence‘s Senior Commodity Analyst Mike McGlone. Commenting on Twitter today, McGlone said that elevated inflation, as well as tensions around Ukraine and Russia, could offer “a firm foundation” for bitcoin (BTC), ethereum, and other digital assets in 2022.
Somewhat more pessimistic, however, was Marcus Sotiriou, an analyst at the digital asset broker GlobalBlock, who said in emailed comments yesterday that bitcoin “remains hesitant,” and that the recent rally “was driven mostly by futures, whilst spot has been selling.”
“This suggests that this price rise was driven by speculation or hedging rather than genuine demand,” the analyst added.
At 15:45 UTC, BTC traded at USD 42,017, down 4% over the past 24 hours and 5% for the week. At the same time, ETH traded at USD 2,988, down 3% in a day and 8% in a week. BTC was almost unchanged in a month, while ETH was down 7%.
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