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Raoul Pal and Vijay Boyapati: Swan Signal Live E30

Posted 9/24/20 by Brady Swenson

Raoul Pal, founder and CEO of Real Vision and the Global Macro Investors, joins Vijay Boyapati, author of “The Bullish Case for Bitcoin”. Most of the conver­sa­tion focuses on building our new finan­cial infra­struc­ture on top of Bitcoin and why Vijay Boyapati doesn’t believe that it will be built via Ethereum. But Raoul and Vijay also discuss the history of fiat, defla­tion, Bitcoin vs Ethereum, risks to Bitcoin, and price manip­u­la­tion. As always Brady Swenson, Swan Head of Educa­tion, hosts the lively discus­sion.

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Summary

0:00 Intro­duc­tion

1:46 What is the history of fiat?

8:17 Defla­tion

11:08 Role Bitcoin in the future

17:09 Thoughts of Micros­trategy news

21:57 DeFi (Bitcoin vs Etheruem)

47:41 What are biggest risks Bitcoin faces

58:01 Bitcoin’s adoption Curve

1:03:57 Bitcoin price manip­u­la­tion and regula­tion

1:06:22 Bitcoin transi­tion to medium of exchange

1:07:52 Raoul’s friends are buying Bitcoin.

1:10:10 Wrap up

Transcript

Brady Swenson:

Hey everyone. Welcome back to Swan Signal live. Of course, this is a produc­tion of Swan Bitcoin at swanbitcoin.com. We have a monster show with you today with Raoul Pal and Vijay Boyapati. Before we dive in, just a quick word about what we’re doing here at Swan, we built the safest way to accumu­late Bitcoin with automatic recur­ring buys. You can be confi­dent when sending your friends and family to Swan. We’re laser-focused on accumu­lating Bitcoin for the longterm. We have no distrac­tions from altcoins. We’re dedicated to Bitcoin educa­tion in our effort to help your family and friends become long term Bitcoin handlers.

Brady Swenson:

Before you start sending them our way though, go ahead and grab a referral link with our referral program called Swan Force. You can sign up for that at swanbitcoin.com/enlist, E‑N-L-I-S‑T. Your friends will get $10 of Bitcoin dropped into their account and you’ll earn 25% of their fees on every Swan purchase for three years. You can start stacking some meaningful sats that way. So get your friends and family signed up, send them over to us. We will take good care of them and move them along that Bitcoin path through the rabbit hole.

Brady Swenson:

All right, today we’re joined by Raoul Pal. He’s the co founder and CEO of Real Vision Group. He’s an econo­mist, an invest­ment strate­gist, and publisher of the Global Macro Investor, a week, a monthly newsletter, right?

Raoul Pal:

Yup.

Brady Swenson:

GMI.

Raoul Pal:

Yeah, yeah. That’s it.

Brady Swenson:

Welcome to Swan.

Brady Swenson:

All right. And joining Raoul today on the show is Vijay Boyapati. He’s a software engineer and author of one of the most recom­mended intro­duc­tions to Bitcoin, The Bullish Case for Bitcoin. Welcome Vijay. How’s it going, man?

Vijay Boyapati:

It’s going well. Good to be with you guys.

Brady Swenson:

Yeah, I appre­ciate it. All right. Let’s dive right in here. So it’s clear obviously to everyone at this point that we’re at an inflec­tion point, a very impor­tant inflec­tion point in modern history. The fiat money exper­i­ments of this era has reached its inevitable crescendo of debts just as the world’s economy is rocked by an economic shutdown as the result of the pandemic. So Raoul, let’s start with you. Can you set the stage for us here by summa­rizing your research on the state of the global economy and how our fiat money standard contributes to the risks it faces now?

Raoul Pal:

Yeah. This is a long story and this story started back in the 1980s. It was the Reagan, Thatcher years where it was decided that … I think it was Thatcher I actually started it. That she wanted to finan­cialize parts of the economy that weren’t finan­cial­ized. In the UK it was giving people the ability to purchase what were known as council houses. So that’s kind of housing projects in the US. What that did was turn a gener­a­tion of credi­tors into debtors, and debt took off. The finan­cial­iza­tion of the global economy took off as Reagan adopted these strate­gies as well and credit became avail­able for every­body. And the realiza­tion was that credit could use growth, nothing wrong with that.

But as things it’s devel­oped over time, credit became a larger part of the economy. And by the time it got to Alan Greenspan, it had become the key driver of the economy. So now the federal reserve had to do something they hadn’t done before, which was trying to manage the business cycle. So before the business cycle just goes up and down, but they realized that if they weren’t careful, they would drive a credit cycle that was much larger than the economy could deal with. And that this fragility was basically baked in the cake because of what had happened with credit. So with that, they started using interest rates as a strategy to manage the business cycle much more actively than they used before.

That created the moral hazard and the ability to take more and more risk and more and more debt. So debt now became every­thing, and debt to GDP measures, whether it’s private sector debt, public sector debt, finance sector debt, all of this stuff exploded. And we’ve been living with that in a rolling format for the last 10 years or so in terms of trying to manage it. So what I’ve looked at and many of us had looked at is, okay, at some point there’s a logical conclu­sion and there are different conclu­sions you can reach, but at some point it gets to a problem. I don’t think the US defaults on its debts or anything like that, but it becomes to a point where it becomes so unman­age­able that something has to change. And my view always was that eventu­ally we’ll get to that time horizon.

So the time horizon seems to be now where the last reces­sion was patched together, the global finan­cial crisis, we avoided a reces­sion in 2016, and then finally, we got a reces­sion that was coming and then the pandemic laid on top of it. And now we’re going to be in something that’s probably going to drag on much longer. If you look at GDP growth, it’s probably kind of globally negative five to negative 7% year on year. And it’s very, very slowly getting better. In some cases, it’s rolling back down again as new lockdowns come. And that leaves a problem that to service all this debt you need cashflow, and cash flows have been impaired. Some people don’t have cashflow at all. So the whole parts of the tourism industry, whole indus­tries have lost their cashflow, others got impaired cashflow, same with house­holds. So the problem is, is that can drive insol­ven­cies.

Now, usually the answer the federal reserve had have been to liquidity crises when there’s not enough money in the system at that short period in time, as we had in March and as we had in the global finan­cial crisis. This time we probably got a solvency crisis and that can’t be dealt with by the central banks and interest rates anyway are at zero. That sure that’s likely to go negative, but there’s an inability to deal with this. So that means that the next way forward is going to be massive fiscal stimulus. There’s no way of absorbing that amount of extra debt really, partic­u­larly at these kind of interest rates. So the most likely outcome is it goes on the central bank balance sheet. That’s been the big change over the last 10 to 15 years, is the central bank balance sheet initi­ated by Japan, and then really blown up by Switzer­land as well, Europe and the US and the UK meant that all across the world at the same time the central banks take all of the strain of the entire system.

What that does is in a fiat money system, you’re essen­tially creating more money. Now, a lot of money got crazy by credit, but this is central banks pure printing of money to try and stimu­late economies. That’s what’s likely to come. Now, I know there’s a big kind of chit fight that goes on that the US dollar is going to collapse or whatever it’s going to be. Don’t think of it in those terms. Think of it as the whole fiat money system is just being devalued over time, because every­body’s doing the same thing. And if you can see that, and that is the rise of golden Bitcoin. So that’s basically what’s going on.

Brady Swenson:

Fantastic. Thanks for setting the stage there. That was a great rundown of a very long history and very complex situa­tion. So Vijay, can you comment further on here? Take it from here and talk about what role Bitcoin has to play on the global stage at this pivotal moment in history.

Vijay Boyapati:

Well, firstly, I think I would agree with most of what Raoul said, but I would sort of stop the timeline a little earlier. I think the fiscal anchor, the respon­si­bility anchor, was sort of cut loose in the early ’70s when the US detached itself completely from the gold standard in 1971, partially detached itself in 1933, you couldn’t redeem your dollars for gold anymore. Where I think I agree with Raoul is this is in my opinion, the most defla­tionary periods since the great depres­sion. Income streams to service debt have been oblit­er­ated across the entire economy.

There’s a very popular meme right now, money printed go bur, and I think it’s kind of misleading in a way, because money that’s printed is only infla­tionary if it makes its way into the economy. It has to be lent into the economy. The problem is lending is impaired because income streams are impaired. So I think there’s a greater risk of a defla­tionary period right now than an infla­tionary one, but typically defla­tionary periods are accom­pa­nied by monetary chaos. They’re very chaotic. And govern­ments try to prevent defla­tions from running their full cost. Raoul mentioned that this is an insol­vency crisis. I completely agree because of the impair­ment of income streams. But 2008 was also a crisis of insol­vency. The federal reserve tried to make it seem as if it was a liquidity crisis, but it was an insol­vency crisis.

Banks had lent to projects that ultimately the debt could never be serviced. They’ll be lending to people who had no income stream, people on minimum wage buying houses for like half a million dollars. It’s never going work. So I’m not neces­sarily worried about hyper­in­fla­tion or a Weimar-type situa­tion, but I am worried about monetary chaos. What Bitcoin buys you as an escape hatch, an ability to get out of the finan­cial system and into a new finan­cial system where there is no debt. The finan­cial system will be built on a solid base, which is a limited supply on sensible monetary base, much as gold was in the 19th century under the classical gold standard. So what Bitcoin provides us is an escape hatch out of monetary chaos, which I think we’ll see over the next decade into something much more stable.

Brady Swenson:

Raoul, how about you? Vijay obviously made some good points there. Do you have anything to add in terms of how Bitcoin will play a role here in this crisis?

Raoul Pal:

I 100% agree with every­thing he said. I mean, the defla­tionary environ­ment is exactly that. The question there is … because it depends how you define a lot of stuff here, but the increase in money, I under­stand there’s no money supply. And I don’t believe in infla­tion. I’m a defla­tionist by nature, but the overall purchasing power of fiat currency overall, I think, falls against other things. Bitcoin is two things. I think it’s the world’s best, most pristine reserve assets. And in a moment where there’s a lot of oblig­a­tions owed on other forms of money, it becomes incred­ibly attrac­tive as does gold, but what it offers over gold is it offers as a call option on the future. I think that’s the powerful combi­na­tion that this has, that I think is truly extra­or­di­nary.

It is a tangible under­stand­able … Well under­stand­able in some respects, asset, that is a perfect reserve asset, but it has the upside of being the call option of a future finan­cial system that is so desper­ately needed. And yes, at this point in time, it works as an opt out. You can ask anybody in Turkey. I mean, there was no surprise that the Turkish National Football side is sponsored by a Bitcoin brokerage house because people under­stand that they need to get money out. And that’s a perfect example of how right here, right now, it works for exactly the points which I raised.

Brady Swenson:

Yeah. In the last a GMI monthly newsletter you talked more about Bitcoin as a pristine collat­eral. How do you compare Bitcoin as collat­eral to bonds, which have typically been collat­eral in this fiat system? And what are the imped­i­ments? You talked about a yield curve needed for Bitcoin and needed to be estab­lished for Bitcoin to really take it to the next level in terms of a collat­eral. So what imped­i­ments to Bitcoin do you see? And can you talk a little bit about the yield curve in terms of becoming a preferred collat­eral?

Raoul Pal:

Yeah. So if you think about what collat­eral is, it’s something that you pledge or you lend out for somebody else to borrow. And the reason you pledge it is it’s a stable asset of which you can borrow against. So it needs to be something that has provable value. So the world runs on US treasuries as the bottom of the collat­eral pile. It’s not gold, it’s US treasuries. That’s what every central bank, every single person will accept. Now, the problem is with that collat­eral is when I lend it, I actually get virtu­ally no money to lend it out. So the risk of lending it into the system is much higher than the yield that I get for lending it.

In addition, the problem is that collat­eral is over time the value of that money gets devalued by the increase. So in the old world of the business cycle, when there was a collat­eral shortage, which is the classic sign of a credit cycle, which is normal, it self regulates because the cost of collat­eral goes up and there­fore the weakest borrowers default. But we’ve created a system where that’s not allowed to happen any longer. So the federal reserve forces collat­eral into the market and basically gives it away for free. So those lending collat­eral get no return on it and there’s never a shortage of collat­eral per se. Now there can be because if the banks don’t lend money, there’s a whole bunch of other systems around it, but really speaking, they’re trying to stop the business cycle i.e. the credit cycle happening.

Now, what’s inter­esting about Bitcoin is I think it offers an alter­na­tive because A, there’s no credit attached to it. Nobody can issue more of it. So you can’t kind of devalue the collat­eral and you can’t manage the business cycle. So you get back to what the gold standard used to do, which was allow the business cycle to operate normally and that gets rid of some of the larger excesses, not always, but mainly. So that’s a really inter­esting situa­tion for Bitcoin and why it’s superior to gold for people who want to go back to the gold standard is every­thing of it’s divis­i­bility, its trans­porta­bility, and all of those other functions of it being digital. And also it’s stored on the blockchain that allows every­body to know where the collat­eral chains end up and who owns what, and even gold has problems with that. So you under­stand who owns it. It’s easily trans­portable. It is unique in the fact that it never differs. It doesn’t have to be a Sade like gold because it comes on the blockchain and you know exactly what’s what.

So as a collat­eral asset, it’s really good. So could that be accepted? Well, right now it’s pretty volatile. So it’s not a great collat­eral because it can go up and down. It’s what? 60 volt, and a treasury bond is nothing like that. But I’m thinking about the future. One of the reasons volatility is so high is as yet it’s not insti­tu­tion­al­ized so the markets aren’t deep. But also, there’s no lending market. So DeFi is the start of the money markets, but we haven’t got a yield curve further out. So I can’t lend my Bitcoin that I’m storing for, let’s say, 10 years. There is no market to do that and I’m not being rewarded for that yet. But eventu­ally there will be a market which will create a yield curve. And once you create a yield curve, you can create all the other functions of finan­cial markets off the back of it. And in terms of collat­eral, you can price it correctly.

Now, what becomes really inter­esting about Bitcoin is in a credit cycle, there’ll be a shortage of it because it’ll be expen­sive, and the price goes up, and that’s how you adjust the expen­sive­ness plus the cost of borrowing that collat­eral should be pretty high because it’s pristine collat­eral. So because there’s no new supply, the cost of collat­eral goes up a lot in a credit cycle. That forces the weakest credi­tors into bankruptcy or restruc­turing, which means that we end up with less massive macro economic imbal­ances. So I really do think that there is a very big future for Bitcoin itself as the world’s reserve asset. I don’t think it’s ready yet, but it’s somewhere where we can go in the future.

Brady Swenson:

Yeah. Vijay, of course, you know about the micro strategy news. Twitter has been a buzz about it since the initial announce­ment in August from Michael Saylor that they’re moving the micro strate­gies corpo­rate treasury over to a Bitcoin standard. Since then, they’ve also announced an additional purchase. And Michael Saylor’s been making the rounds including on Real Vision, Raoul’s show. Raoul inter­viewed him last week and I highly suggest watching that inter­view. So Vijay this move obviously adds to the Bullish Case for Bitcoin. I’d love to hear your thoughts on this news, what it means for Bitcoin and for corpo­rate treasuries, maybe even sover­eign treasuries moving forward.

Vijay Boyapati:

Well, what I take from a micro strate­gies invest­ment is mostly that’s a prece­dent for compa­nies. Again, removes the stigma associ­ated with … I’ve been inter­ested in Bitcoin since 2011. And in the new days, there’s this huge stigma around Bitcoin as this tool for allowing people to trade drugs online and other illegal activ­i­ties. That stigma lost it for a number of years. I think that stigma is mostly gone and I think this is going to be an extra step to moving towards insti­tu­tion­al­iza­tion of Bitcoin and making it so that other public compa­nies can feel confi­dent that they can invest without that stigma attached to it.

I wouldn’t take too much from … Michael Saylor is a guy who has a history of very odd bets. I say that in a good way. He made $30 million selling the domain name. And what I also take from that is he had a past history that gave him a good mental model to under­stand Bitcoin. He under­stood digital scarcity. He under­stood that you could have something which is scarce and it has value. So he was already primed to under­stand the value propo­si­tion of Bitcoin. I don’t think that’s the case for the CEOs of most public compa­nies. I think this process is going to take a little more time than people might antic­i­pate, but it’s a good first step.

Brady Swenson:

So Raoul, I know you’re thinking about the impact or the meaning of this move from micro strategy has probably evolved since your initial announce­ment in August. Have you been bullish on this move from the begin­ning or have you become increas­ingly bullish because of this move or maybe it doesn’t really matter as much?

Raoul Pal:

I think it’s possible now since we know what to expect. I’ve called it the world’s biggest front running oppor­tu­nity. And essen­tially we know that out of $200 billion market cap, it’s not even an asset class. It’s noise. If you think that FX trades 4 trillion a day, I mean, this is nothing. But we also know that it’s attracting a lot of atten­tion as many people have the light bulb moment and that eventu­ally leads to the price rise. As the price rise, the market cap is going to rise and more and more people will come in. We’ll see as soon as the Bitcoin ETF comes out, the RIA commu­nity will come in. As soon as the market cap goes up further, the pension plans will come in. So we know that this is a process. So this is just a marker stone.

I think Michael, brilliant though he is, I don’t think he’s going to persuade many corpo­rate treasurers to do it because he comes from a very far away under­standing of what this is. He comes from the rabbit hole. When really, if you’re going to get Apple’s corpo­rate treasury to do this, it’s all about diver­si­fi­ca­tion of the portfolio as an asset. I think that’s going to come. I don’t think we’ve done enough work on that as a commu­nity yet to show how good it is as a diver­si­fier of returns. I think that is where the real value adds for treasury. Sure, could Jack Dorsey try and do something and the few people who love Bitcoin? Yes. But until the invest­ment banks probably go out and tell people how this diver­si­fies their return stream, it’s not going to be copied in great strength yet, but that’s all coming. These are just marker stones on the way of where we know it’s going.

Brady Swenson:

Yeah, it’s still a relatively early. As we say, it’s early until it’s not. And at some point that inflic­tion will hit on the asymp­totes and the race will be on. So I want to also talk about, or go back to the DeFi, which you mentioned earlier Raoul. And in last months, GMI, you also talked about a revolu­tion in DeFi. You said that it’s even possible that the Ethereum ecosystem in due course could be worth more than the Bitcoin ecosystem, just due to the scala­bility of its appli­ca­tion. Again, you say it doesn’t compete with Bitcoin. It compli­ments it. So you can talk more-

Raoul Pal:

Yeah, people-

Brady Swenson:

Yeah, go for it.

Raoul Pal:

Yeah. People get in such a stew about this in their tribalism. I don’t think of Ethereum as a currency, and I know the Ethereum 2.0 guys will say, “Well, it’s going to be and it’s going to be in scarcer supply.” I just don’t think that’s its value propo­si­tion. I don’t think yet that Bitcoin’s value propo­si­tion is the ecosystem. I think it’s too valuable a collat­eral to do that with. I think its place will become as that pristine kind of founda­tional stone of this whole new finan­cial system.

Ethereum, to me, feels like a platform, a system, a layer. So could that be worth more than the under­lying? Of course, it will. Because if you think the deriv­a­tive market is worth a lot more than the under­lying treasury market, so they are different things. But it’s all past this world, much like central bank digital curren­cies are part of this world, much like even private block chains are part of this world. Everyone needs to get over this. They are all parts of the same world. That doesn’t take away from Bitcoin. They are not in compe­ti­tion. So if we look at in market cap terms, we’re looking at the wrong thing. So that’s how I kind of think about it.

Brady Swenson:

So Vijay, I would like to get your thoughts on DeFi and the role Ethereum might play as it relates to Bitcoin in the future. Are they playing a zero sum game here or not?

Vijay Boyapati:

Well, this is the one area I think I probably differ with Raoul, and you can count me in the tribe for sure. I am deeply, deeply skeptical of Ethereum. I work in the industry and I am exposed to hundreds of these altcoins. Most of them honestly are complete garbage. They are copycats. Ethereum is not that. It’s not a copycat. It is trying to do something inter­esting. But I also think Ethereum is funda­men­tally flawed in that it’s trying to bite off more than it can chew. It’s trying to solve a problem in computer science that is an open question. To me, this is an exper­i­ment.

Can you have a distrib­uted database, a Turing complete computer that can scale? I think the answer is no. I think this is essen­tially impos­sible. They’re running the exper­i­ment right now and trying to see where this is possible, but I think ultimately they’ve been trying to do this for the last five years, figure out a way to scale Ethereum. I have not seen any meaningful progress on this front. And as soon as you get any meaningful number of trans­ac­tions on Ethereum, the whole thing is going to fall apart.

Now, Bitcoin doesn’t suffer from this problem because Bitcoin, I completely agree with Raoul, it’s a collat­eral system. It’s a monetary base. And ultimately, it’s going to be used for settle­ment between large finan­cial insti­tu­tions. I mean, that’s not what it is now. It’s mostly owned by retail, but zoom ahead 10, 20, 50 years into the future, it’s going to be a means of settle­ment. You don’t need Bitcoin to scale in the same way that Ethereum needs to scale. The number of settle­ments that happened between finan­cial insti­tu­tions every day can easily handle by the Bitcoin blockchain.

Of course, you can’t get every coffee payment on the Bitcoin blockchain. That’s not what it’s for, but settle­ment can happen. And if you need greater settle­ment than is a avail­able with the block space on Bitcoin then you can always go to the light­ning network and insti­tu­tions can create payment channels between each other. I also think Ethereum is not a system that is going to attract major insti­tu­tional invest­ment because it really is too much of an exper­i­ment. I mean, Bitcoin’s value propo­si­tion from my point of view is that it has a credible monetary policy. And again, unlike Ethereum Bitcoin has faced a real test about whether it’s monetary policy can be sustained with the 2017 network split. Would the market follow the legacy chain or not? If it didn’t, if the market went with the new chain, the chain which said, “We’re going to increase the block size.” To me, that completely blows out the value propo­si­tion of Bitcoin, which is that it’s immutable and that you can trust the monetary policy.

I have no trust whatso­ever in Ethereum’s monetary policy. I have no idea what they’re going to do. They can decide that it’s better to set the infla­tion rate to 10% a year, because that makes it easier to do smart contracts. You have enough gas or whatever it is. I mean, I have a lot of problems with Ethereum. I think another one fairly signif­i­cant is Vitalik Buterin is a systemic risk to Ethereum. I would never invest money in something where something bad happening to him, and I do not wish anything bad to happen to him. He’s a smart kid and I wish him all the success in the world, but he is a systemic risk. If something happens to him, that’s going to be a huge blow to a theory. He has this founding Sage role Ethereum and he also helps direct devel­op­ment.

The other thing I would say is that I think when Ethereum was put to the test it failed. The DAO hack is an example where they said, “We’re going to roll back a payment that happened on Ethereum, because we think it’s harmful.” That just completely shows that this system is not immutable. And if it’s not immutable, then just use a database. Block chains are inher­ently ineffi­cient. You only use them when you’re solving a problem with social scala­bility. If you’re not solving a problem with social scala­bility like rewriting the monetary system, it’s just much more efficient to use the database. I person­ally have not seen a good example where something built on Ethereum could not be done better with a database. You look at the history of Ethereum, you go back to when it was origi­nally sort of marketed as a world computer, and then it was DAPS, and then it was ICOs, and now it’s DeFi.

I see this as a narra­tive chasing vehicle and as good at narra­tive chasing because it’s turing complete. You can do any kind of compu­ta­tion on it, which some people think is a good thing. It certainly makes it good for narra­tive tracing, but I look at the history of Ethereum and I think this is something that has been respon­sible for massive capital destruc­tion. You look at the devel­op­ment time and invest­ment in DAPS, not a single one of them would have been in the top hundred on any app store. Look at ICOs, how much capital is completely blown up by ICOs. And now you look at DeFi. And my last comment about DeFi is that the central­ized finance makes refer­ence to something in the real world, whether it’s a mortgage or a commodity market or something like that, the decen­tral­iza­tion loses its value because states can come in and regulate those things very easily. I don’t think there is any value to decen­tral­iza­tion before.

So I have a lot of problems. I’m summa­rizing all of these in one. In any one of these things, I could spend some time writing or talking about it in greater length, but I am very skeptical of Ethereum. I think it’s an exper­i­ment. From my perspec­tive as a computer science, I think it’s an exper­i­ment that will fail. It’s an exper­i­ment, which I didn’t think any of the brilliant computer scien­tists have managed to solve over the last 50 years, how do you scale a distrib­uted database that needs consis­tency? It needs consis­tency because other­wise you’d lose capital. So I’m skeptical. This is honestly with all respect Raoul because he’s a brilliant thinker. I think I agree with him on every­thing except for this. I just don’t see this working. I think DeFi is going to fall apart again just like the ICO craze did. I think a lot of capital is going to be lost in this next world market with the menu that comes with it.

Brady Swenson:

Raoul, I know that you are really kind of just diving down this rabbit hole and trying to under­stand what’s going on with Ethereum and DeFi. There’s a lot there, a lot of history. I wonder, given what Vijay said here, if you think that these kinds of finan­cial appli­ca­tions could be devel­oped on top of Bitcoin and Bitcoin is the preferred money. Do you think that the future of DeFi is on Bitcoin instead of Ethereum maybe?

Raoul Pal:

No. I actually don’t. Look, you can via the light­ning network other things create other less solutions, but I kind of disagree about the whole Ethereum thing and I’m not a weeds guy. I’m a proba­bility guy. I’m a macro guy. Is there a proba­bility after all this relent­less testing that goes on on Ethereum and it’s not gone away with all the businesses that fail and all the businesses that succeed, is there a proba­bility that it adapts into an ecosystem that has true value? Well, if there is, it’s probably under­valued. What is that value? I have no idea, but I deal in future proba­bil­i­ties. I think there’s a future proba­bility that things work on it because when we talk about the failure rate of tokens, of course, because they’re all new. Nobody has got a bloody clue how this stuff works. It’s much like VCs who have mentored the internet who invested in the internet in the ’90s. Most of them lost money and that’s okay because out of failure builds success.

So I don’t know any answers to any of this and none of us do, but I think there’s a proba­bility and I think that proba­bility is real because there is an adapt­ability to the ecosystem. Now, could that happen on Bitcoin? Sure. I’m much longer Bitcoin than I am Ethereum. So I’d be delighted. It makes no differ­ence to me, but I’m inter­ested in the overall thing. The DeFi space, I think most of this fails first time around. I think people are asking the right questions. I don’t think they have found the right solutions yet. I don’t know. I do know that we haven’t gone through a risk cycle, so nobody actually knows what the yield is.

You don’t know what the yield is once you’ve been through the up and the down cycle, and then you can have a yield look back because it’s certainly is not the yields people think it is. It’ll end up being somewhere closer to market rates. And over time, those yields will get arbitraged back down to where money market rates, banks, and traders enter the market and arbitrage the two lending rates. So I don’t know where it’s going. Can Bitcoin do all of this? Yeah, it’d be a bloody shame if it did. It’s like building a full deriv­a­tive market on Bitcoin. It would be a terrible shame, because then you’re just recre­ating the mess of another finan­cial system all over again. Yes, it’s on blockchain, which helps. So I hope not, is my answer. I’d rather have two systems.

Brady Swenson:

What do you think is the proba­bility of a deriv­a­tives market being built on top of Bitcoin given the different monetary proper­ties it has in the fiat system, which obviously I think it’s much easier to build deriv­a­tives market on top of? What do you think about the chances of deriv­a­tives being built on top of Bitcoin? Do you think it’s any less than it would in fiat system?

Raoul Pal:

Sadly, no. We’re going to do it. Look, deriv­a­tives are good. They will lower volatility. They’ll bring more entrance into the market. They’ll give us new products, better trade. Look, I’ve been in deriv­a­tive market my entire life. The only thing that I’ve ever seen that is nearly as big as what Bitcoin is, is what the deriv­a­tive market was. I mean, it has changed every­thing and it became the monster by the end of it, but incred­ible. I mean, the world can exists. We’re humans. We’ll create the same thing. They did it in gold in the past. It’s not going to go away. Humans love credit and we will create it any way we can. I mean, every­body thinks the gold standard didn’t have booms and busts, and depres­sions and reces­sions, and defla­tions and infla­tions. It’s a lie. It’s a false narra­tive. They had all of those things and they had massive credit cycles too. So there is no panacea, nothing is going to solve human’s issue with greed.

Brady Swenson:

Fair, fair. Vijay, any reaction to that?

Vijay Boyapati:

No, I agree with that. There were certainly credit cycles under the gold standard and I sort of view these things as orthog­onal via the deriv­a­tives market and the monetary base. I think it’s totally possible and much more likely that Bitcoin will be the monetary base and deriv­a­tive market will be built on top of that monetary base. I don’t view crypto as an asset class or view it as an asset race. I think Bitcoin is like Hussein Bolt for the 50 mile headstart. The network effect is much stronger, the amount of resources devoted, the mining energy that’s put into Bitcoin, the brand. You’ll never hear Ethereum mentioned in a mainstream publi­ca­tion without Bitcoin also being mentioned. I just think Bitcoin is way too far ahead. It’s a race and I think Bitcoin is going to win.

I mean, if you think about the Bush case for Ethereum is that you’d have some sort of finan­cial system built on it that’s valuable enough that you would need Eth to invest in that finan­cial system. I just don’t see that happening. I think these things that are being built are kind of cute, the DeFi stuff that’s being built is cute as an exper­i­ment. I just think it can’t taught scale.

Raoul Pal:

Why could it not be like a share price? Let’s assume it’s Google, right? Let’s call Bitcoin treasury bonds and Ethereum Google, right? To compare the two is not the same thing. Why could it not be the share price? I.e. what you’re buying is a share of a future expected returns of that platform. They’ll be saying it’s money. They’ll be saying it’s a reserve asset. Two entirely different things. Could it not be that?

Vijay Boyapati:

I don’t believe so. I mean, I think they’re both competing for the same reser­va­tion demand. That’s how money gets its value from reser­va­tion demand.

Raoul Pal:

I think it’s suggesting Ethereum’s money. Who’s saying it’s money? Why is it just not-

Vijay Boyapati:

It’s acting as a monetary base on its own system. It’s the way that you can do anything on Ethereum. You need to get hold of it. That’s how it gets …

Raoul Pal:

I don’t think that’s money. I think that’s a slot on the blockchain and you pay for your right. That’s okay. I buy theater ticket and it gives me a seat. I mean, I don’t see why we have to think of Ethereum as money. I don’t think it’s money in any way, shape, or form and should never be compared to Bitcoin. I just think it’s like Google verses treasury bonds. They’re just part of the same universe of securi­ties.

Vijay Boyapati:

No, I didn’t think so. I think they’re both forms of money competing against each other. All monies get their value from reser­va­tion demand, which is the desire to hold it. Ethereum gets its value, its price level from people holding it, not doing anything with it. I think people are convinced that there is value in holding Ethereum because someone else might use that Ethereum in the future for some appli­ca­tion. I don’t buy that at all because as I have said, I don’t think Ethereum can scale. Once you get to doing finance at any kind of scale, Ethereum falls over. It’s already falling over. If you look at the fees on Ethereum right now at the very most nascent part of this DeFi revolu­tion, it’s falling apart. You’re going to need to scale this thing if it becomes like a global system for finance. You’re going to have to scale it a thousand X. I don’t think it can scale 10X. I don’t think they’ve solved these problems in computer science to make this work at anything more than an exper­i­mental scale.

Brady Swenson:

So Vijay the purpose, do you think that there is any other purpose for a blockchain aside from money or an ultimate purpose? Let me put it that way.

Vijay Boyapati:

I do not. No. I do not, because block chains are massively ineffi­cient. They’re a broad­cast system, so they are already a hundred times less efficient than doing it on a database. And you do something that ineffi­cient if you’re solving something that makes society as a whole much more efficient if you get social scala­bility out of it. And if you’re replacing money, that’s an example of that. You are making society much, much more efficient if you have a better monetary base. Yeah, the problem of scala­bility is also impor­tant as well. I think Bitcoin, when you’re dealing with a reserve asset, you don’t need it to scale in terms of trans­ac­tion. So it doesn’t matter if Bitcoin has a fixed block size because it’s going to be used as a reserve asset in the future. I think that’s something that Raoul and I agree on.

It was very impor­tant to me in 2017 that this huge debate happened and that it was ultimately resolved. The market resulted in favor of Bitcoin as a reserve asset, not Bitcoin as a payment system. I don’t think any other cryptocur­rency has faced a test anywhere close to as impor­tant as that for Bitcoin where all the most powerful compa­nies in the space tried to change Bitcoin in their favor to make it so that trans­ac­tion fees were low, which was good for their business. It was completely rejected by the market. That was a very, very powerful sign. I think that is the thing that makes me more bullish about Bitcoin than I’ve ever been since the begin­ning of 2011. I think it’s no longer an exper­i­ment. I think this is a real reserve asset, and I think that’s going to be recog­nized by the market slowly and surely over the next 10, 20 years.

Brady Swenson:

Raoul, do you have anything to close up? We’ll wrap up this conver­sa­tion. Just any closing thoughts on I guess the proba­bility again, that Ethereum will find a use case, and ultimately it’s not money.

Raoul Pal:

Yeah. Again, just to state my place clearly because most people misun­der­stand this. I do not think of Ethereum as money. I don’t think of anything like Bitcoin. When it comes to reserve asset and the purity, I’m a Bitcoin maximalist saying there is only one. As Vijay said, it passed that test. I sold out. So I was long from, I don’t know, 200 bucks and I sold out into that huge rally seeing what was going on and like, “I don’t trust this. I don’t know what’s going to be the outcome.” The outcome was the fork and it all went to the existing blockchain. And that was brilliant. And as Vijay said, I think that was the big test. So I don’t have any doubts in my mind what Bitcoin is. I’m really inter­ested in the whole digital asset space. I am involved with all sorts of people where I’m talking about the future of music industry, the future of supply chains, all sorts of things.

I don’t think that’s a good use of the Bitcoin blockchain, but I do think it’s a good use of blockchain. Yes, blockchain absolutely is a database, but it happens to be pretty good for certain reasons. It doesn’t have to be efficient because it doesn’t have to be a social one. There can be other varia­tions and uses for it that I’m already seeing every­where. Just the ability to have the recorded owner­ship, even amongst a group of trusted parties in blockchain form, is actually quite useful. So I’m not worried about that. I’m incred­ibly bullish on the digital asset space.

I don’t buy any tokens. I don’t do any of that stuff. I’m inter­ested in a macro level. But I do see a huge oppor­tu­nity for future invest­ment in long, short strate­gies in tokens, because I think there’s some really inter­esting businesses out there. But most of them get written down because it’s a very behav­ioral wash in, wash out strategy. I think that’s very inter­esting. I think there’s going to be a lot there. Again, it’s nothing to do with Bitcoin. It’s nothing to do with the compe­ti­tion. It has nothing to do with the currency. They’re just different things. They just both happen to be digital and they both happened to use blockchain. That’s all I think.

Brady Swenson:

Vijay, it looks like you want to have one more response here.

Vijay Boyapati:

No, no, no, no.

Brady Swenson:

I think this is a great conver­sa­tion. It’s very useful. I know Bitcoiners and Ethereums want to hear it from the two of you. I think it’s a fantastic conver­sa­tion. So if you want to keep going, please do.

Vijay Boyapati:

Honestly, I’m just listening and honest, Raoul is a brilliant thinker and he’s entitled to his opinion. I disagree and I’m sure we both have our money where our mouth is. I’ve had the oppor­tu­nity to invest in the Ethereum since the very begin­ning. I’ve not taken it because I’ve given the reasons I have no convic­tion in it. I see it as an exper­i­ment. I can’t put my money in something that I think is an exper­i­ment that I think is going to fail.

Raoul Pal:

Yeah. And just so I’m clear again, just because every­body in the Bitcoin space gets all wild about this stuff. The biggest bet I’ve ever taken in my entire life in putting into one thing is of which I have about 20% of my entire alloca­tion to the entire space to Ethereum. Every­thing else is Bitcoin. Because again, I am not thinking of them as competing assets. Bitcoin is my bet. That’s the big bet. I’m inter­ested in digital assets for different reasons. So again, before anybody … I could see the comment section, it was like, “Oh my God.” There is no dissing about Bitcoin. It is my single largest bet. I’m incred­ibly, wildly, ridicu­lously bulletin that GMI piece, the article actually was called the world’s best trade.

Brady Swenson:

That’s true.

Raoul Pal:

That’s the point I’m trying to get across here. I’m not conflating the two. I’m not an Ethereum guy over Bitcoin. I just think they’re totally different things.

Brady Swenson:

Yeah. You’re inter­ested in the proba­bility that there may be a proba­bility of future value of the project.

Raoul Pal:

Yeah. If I believe that if Ethereum had a much higher proba­bility chance of success, I would have a higher weighting. I don’t. Because Bitcoin to me has an almost guaran­teed chance of success. I also happen to think that from a number of other reasons, there is a poten­tial that Ethereum could be valued more. Doesn’t make it a better asset.

Brady Swenson:

Yeah. Yeah. So you’re Pareto-long Bitcoin, 80, 20. I think you’ve mentioned this before, but just to get it on the record here, would you share your distri­b­u­tion in your whole portfolio? Long Bitcoin.

Raoul Pal:

Yeah. So all of my liquid avail­able assets, that’s the money I’ve got to be able to either save or invest, I am currently 60 something. That’s 65% in Bitcoin and Ethereum of which the Ethereum is only 20% of that. I am about 5% cash and a bit in gold, and sometimes trading strate­gies. But really over time, once Bitcoin starts getting some price momentum … it’s going to, and I don’t use leverage on stuff like this, because this is your whole lifetime savings kind of stuff that you’ve got avail­able. I will get up to at least 75%, maybe 80% long in this strategy of every­thing that I have and avail­able investing assets. So I can’t tell you how bullish I am.

Brady Swenson:

That’s GigaChad, Michael Saylor level. it’s getting close to it there, Raoul.

Raoul Pal:

Yeah. Yeah. So again, when you try and pick holes and say, “Well, Ethereum … ” Forget all of that. Just look what I’m doing. What will you think I’m saying?

Brady Swenson:

Yeah. Yeah. All right. That was fantastic conver­sa­tion. That’s one of the main topics that we were getting a lot of requests for when we made this pairing. I think that was a very worth­while conver­sa­tion to have on the record. So let’s start with you Vijay. I’ll like to hear from Raoul on this as well. What do you think are the biggest obsta­cles to Bitcoin becoming successful at whatever level you want to say? Maybe you could take it through some different scenarios all the way up through Bitcoin becoming a global reserve asset. What are the obsta­cles that you see that Bitcoin faces?

Vijay Boyapati:

I mean, in terms of risk, I think the first thing needs to be acknowl­edged is there’s always protocol risk. This whole thing is built on cryptog­raphy. It’s not like gold where it’s a physical thing that we know is part of reality and we’ve under­stood it for thousands of years. The protocol risk has dimin­ished substan­tially over time. And that’s partly because of Satoshi’s decisions. He was very, very conser­v­a­tive in the cryptog­raphy Bitcoin on. It’s very old, it’s being tested for a long time, and it’s well estab­lished and under­stood. But in terms of risks to Bitcoin becoming the world’s reserve asset, I think there’s only one risk that matters at all and that’s a state attack. If and when a state attacks, Bitcoin cannot survive. To me, this is a question of whether or not Bitcoin gets enough polit­ical capture in time for a state attack to come because I think it’s going to be inevitable.

Bitcoin becoming the world’s reserve currency is going to disrupt so much of how the world works and append to power struc­tures across the entire world that a lot of entrenched inter­ests are going to want to sort of come down on a Bitcoin. The question is whether they realize this before it’s too late, so you can think about the internet in the same way or another example I actually give is Uber, the car riding app, where Uber would go into markets and there’d be these entrenched inter­ests, the taxi lobby. And they would fight really hard to get their local and state govern­ments to regulate Uber and make it behave in the same way that the taxi cabs behave. Uber had the benefit that they got into these markets and they got enough polit­ical captured very quickly. They had a very strong natural lobby from their drivers and also from their users who didn’t want Uber to be a taxi company. So the local city govern­ment or whatever would start trying to regulate Uber and then they’d have this massive people petitioning their local govern­ment saying, “No, we don’t want that.”

And to me, the question is whether Bitcoin gets that captured in time for a state attack to happen. It really has to be a global coordi­nated nation state attack to harm Bitcoin because we’ve seen China try to ban Bitcoin. It doesn’t really do anything because the network continues to function and people continue to trade Bitcoin. So I look at this and I think how long is it going to be before we have enough people with enough owner­ship of Bitcoin and people in Congress who own Bitcoin. There are already a few people, but it needs to be a much greater number. I think there was a paper written somewhere about how it’s somewhere around 30%, where if you get a minority who’s really in favor of something and that minority grows to somewhere around 30%, it’s very hard to stop them passing something that’s in their benefit.

An example of this was the legal­iza­tion of marijuana in various places in the US. Marijuana was illegal for a long time, but over time, people became more and more comfort­able with the risks involved with their fellow citizens smoking or using marijuana that, that minority was able to overturn these rules. So I didn’t think we’re there yet. I think you can see already from the estab­lish­ment, the faintest inkling that Bitcoin is a threat to the estab­lish­ment … There was a piece in the Wall Street Journal a few years ago saying, “If Bitcoin becomes the world monetary base, it’s going to hamper the central bank’s ability to manip­u­late interest rates.” It’s like, “Yes, that’s the point.” So they’re recog­nizing this as a threat, but they are not acting on it.

The narra­tive that sort of goes around DC right now is that we don’t want to hamper innova­tion. We’re very pro innova­tion and pro Silicon Valley mindset. But I view this as kind of a conflict between the banking system and the people who would lobby in the banking system versus Silicon Valley type people who lobby for innova­tion. I think Bitcoin is going to get to the size in the next cycle, this coming cycle, or the one after where it poses geopo­lit­ical risks to nation states. And they are going to pay much closer atten­tion to it than they are now. When Bitcoin reaches the size of gold, that has very, very powerful geopo­lit­ical impli­ca­tions. Gold is an escape.

Gold has always been in an escape hatch, but it’s a very incon­ve­nient escape hatch. It’s much easier to regulate golden than it is to regulate Bitcoin. It’s much easier to confis­cate gold. Gold has problems because of its inherent physi­cality of central­iza­tion. If you have a substan­tial amount of gold, you don’t keep it on your mattress. You keep it with a central custo­dian because you don’t trust the security of your mattress. And that histor­i­cally allowed nation states to go and confis­cate that gold. They said, “Oh, all the Gold’s in the banks. Let’s just go and confis­cate the gold.” This is what happened in US in 1933, which allowed Franklin Roosevelt to de-link the dollar from gold.

So Bitcoin is much more powerful than gold in that sense. When it gets to the size of gold, I think that’s going to cause a lot of conster­na­tion amongst people in power and nation states. And we’re going to see this cycle perhaps, or the next cycle for sure nation states coming after the point, in my opinion. And the question is whether it will have been distrib­uted amongst the popula­tion enough that we have a vocal and powerful enough lobbying group in the popula­tion who don’t want their savings to be confis­cated, who don’t want Bitcoin to be attacked, and will lobby on its behalf.

Brady Swenson:

Raoul, over to you. Obsta­cles faced by Bitcoin.

Raoul Pal:

I think the obstacle is the same obstacle of that, right? That’s a jewel device. Vaping came around and it kind of changed every­body’s lives because it massively lowered the risk of illnesses driven by smoking. But what happened is it rose so fast in value and it became so big that the immediate threat was regula­tion. But how is that regula­tion going to change anything in the end? I don’t think it will. All it does is it’s the speed bumps. There are speed bumps to go through. Vijay is right, I mean, the battle will happen at geopo­lit­ical level, but there’s an issue there with that too, is some state goes to ban it. Another state will go and use it as a reserve asset. So it’s going to be very diffi­cult because it’s distrib­uted naturist. It’s like a virus, right? It’s very diffi­cult to get rid of.

The mining issue about, can the Chinese take control of Bitcoin because of the mining? Well, I think that the US has got a lot of plans and we’ve seen that by using, let’s say, excess gas supplies in Texas to run cheap mining. I think sover­eign states will do stuff like this. So I think there are checks and balances within the system, but I do think these were all speed bumps and we have to go through them all. Each one we get through will test its resiliency and prove its resiliency over time. So yeah, there were lots of battles to fight and the war hasn’t been won, but I think the proba­bility of the war being one is extremely high.

Brady Swenson:

Excel­lent, excel­lent. Vijay, I’m mindful that you have to take off here in a few minutes. Do you have any closing words for the audience?

Vijay Boyapati:

I just echo what Raoul said. I assigned a very high proba­bility to this. I view this in sort of longer timescale than some of the people who I would say are in my tribe, Bitcoin maximalist. I’m very, very bullish on Bitcoin over the period of 50 years. I think it’s going to be greatly benefi­cial to the whole Bitcoin for my grand­chil­dren. I am not sure how these cycles are going to play out over the next few years, but I almost have a sense of an inevitability to this. It’s distrib­uted, decen­tral­ized nature makes it just as Raoul said, like a virus. It’s a very, very hard thing to kill and it would take a coordi­nated nation state attack to kill Bitcoin in my opinion. I think it’s a fairly unlikely event. I think you’re going to have a patch­work of nation states trying to attack it at various times and that will improve its resiliency.

So I view Bitcoin as the most impor­tant innova­tion to money in a thousand years and money is the biggest market on earth. So I think it’s imper­a­tive that if you’re paying any atten­tion to this space you have some alloca­tion to Bitcoin. It should not be zero. This is a very, very disrup­tive technology tool, very, very big market.

Brady Swenson:

Excel­lent. Thanks so much Vijay for joining us today. Good luck and have a great day.

Vijay Boyapati:

Thanks guys. It’s great speaking to you, Raoul.

Raoul Pal:

Yeah. Great to speak to you too.

Brady Swenson:

Raoul, we’ll stay on with you for about 10 minutes if you’re willing.

Raoul Pal:

Sure.

Brady Swenson:

All right. Great. Yeah, Vijay is not in the business as you are of actually trying to make those predic­tions of how these cycles will play out. I’m curious what’s your current thinking for this next cycle? The next couple of years.

Raoul Pal:

The problem is now is none of us can approach this without thinking of plan B’s work. We’ve kind of all poisoned ourselves and I wish we hadn’t because we’re all losing objec­tivity, right? We all think it’s now our God given right to see Bitcoin goes to 250,000 in this leg. I believe that I look at the charts and it kind of looks right to me. Somewhere in the back of my mind this worries me a little bit, that we’re all holding onto one person’s work. And much as I love him and I love his work, it does concern me.

So I don’t know how it plays out. My guess is as he predicts and I see that from a number of different levels, but really the level that I look at it from is what is its adoption curve? Forget retail. Retail’s in it. There are more retail that will come in. But the really big part of this is, as we talked about, it’s the increase in market cap sucking in others, and that’s all coming, whether the Bitcoin ETF comes and that brings in the RAA space and that allows the pension funds to buy it. But it’s still too small an asset. But wait until it gets to a trillion dollars and that’s only five X increase. Then at a trillion dollars, it becomes an inter­esting asset. And then it starts attracting the corpo­rate treasurers and then it starts attracting govern­ments.

So I think it’s all here and it’s all coming. I see that reflexive cycle that George Soros talks about building here into something that could be surprising to the upside just by the nature of those people involved and the supply constraints of Bitcoin itself. So I actually think, and this is not because I want to sound crazy bullish and amazing, it’s actually because I see this reflexive cycle setting up, I think the risk that it could be much higher than plan B expects. Maybe it starts slower. Maybe it doesn’t happen in the same way, but it feels like it could be bigger because I just look at the size of the partic­i­pants who can could into this. And that would be the shock.

Brady Swenson:

Yeah. Well, speaking of plan B’s work, do you think that a model that doesn’t take demand explic­itly into account like this can be used to predict the future? It seems to have great corre­la­tion with the past price action, but if we don’t take demand into account.

Raoul Pal:

Maybe inherent within the modelist demand being the thing that drives the price and it matches or it overwhelms the supply at various points. It feels that yes, you don’t model them on, but Christ, I’ve seen a million Wall Street analysts and they’re all shit at that. So forget all of that. There’s just something simply elegant about it that I think it takes the assump­tion of demand within it. It’s like I can show you a price chart and there is no supply or demand in that chart. In fact, no mathe­mat­ical formula at all, except where the price went. But I can get a better odds than tossing a coin by using a chart. So you don’t need all the inputs. And usually it’s overly detailed people who look for these things and then miss the woods through the trees.

You need to see the forest and not the bloody tree you’re in front of and people get in this way. So I’m with plan B on this, is it doesn’t matter. That will drive, I think, the excess move over his model or beneath his model, will be supply and demand, whether there’s a big supply coming for some reason because somebody wants to sell it, Satoshi sells his coins, whatever it is, right? I think that’s just part of the function of where it goes, but it’s value seems to be intrinsic in that and the stocks are flow model and based partic­u­larly, one that was really inter­esting, is when you base it around other assets. So when I first saw this and he said, he’d been easy against gold. I said to him, “Listen, I think you can value gold and you can value silver and you can value all these other assets. And when you all relatively valued them all, it makes sense.”

People don’t under­stand that either, is gold is a fantastic relative value asset. Oil, gold equities, real estate, they all have relative values. That’s what makes them assets. And over periods of time, they get out of whack. And then eventu­ally capital goes into the cheaper asset. So things like farmland is an asset. There’s a problem as technology drives price down of crop drives produc­tivity up and prices down, but farmland’s extremely cheap versus the price of gold, or the price of oil, or the price of equities. So you could see that that would be an attrac­tive propo­si­tion for, let’s say, a pension fund or an endow­ment with a longterm time horizon. That’s what makes these things assets. What he’s basically said is Bitcoin fits within that frame­work. So over time it’ll get overvalued versus property, in which case, great. Sell some Bitcoin, buy yourself a house or it gets under­valued and you sell your house and buy Bitcoin (or whatever it may be), but that’s what assets do. So I’m really inter­ested in that.

Brady Swenson:

Yep. I was talking with Max Keiser the other day about the maturity of the Bitcoin markets that would instill the kind of trust that Michael Saylor has acquired in order to make the move that he did, that level of trust. And you’ve been writing about Bitcoin for a long time since 2011. So you know this, in the past the price action in the markets has been very manip­u­lated. I wonder now what you think, like how in the past has the Bitcoin price been manip­u­lated and with the additional, like the regula­tions that we’re seeing, the the more reputable exchanges that are being built around Bitcoin, do you think that there’s less manip­u­la­tion of the price now and will that price action be a lot more real moving forward?

Raoul Pal:

That’s just a question of time horizon. In my time horizon, it’s not manip­u­lated. If you’re looking at daily, whatever sure there’s big players. Well, there’s big players in every market. Soros moves currency markets around, is he manip­u­lating it? Well, not neces­sarily. I’ve seen all sorts of stuff. You’ve seen program trades from pension funds. You’ve seen stocks being put into indices. All of this stuff, it kind of manip­u­lates markets, but once you zoom out of time horizon, it’s irrel­e­vant. So I don’t see it being a manip­u­lated market. That’s one of the reasons it’s a 60 volatility asset. That’s its biggest problem over time. Good thing is the volatility skew to the upside because the upside tail is so much larger than the downside tail. However, that’s an issue. So that stops anybody who use risk adjusted returns based on volatility of allocating large amounts of capital to it.

That’s why you have a lot in treasuries because they have a 3%, 4% volatility. So you’re going to have huge amounts of money in it. So as all partic­i­pants come in, the volatility of Bitcoin will come down. That’s how all assets work. As it comes down, more money goes into Bitcoin. More money goes into Bitcoin, volatility goes down toward its natural to volatility. And let’s say gold is around 20 to 30 vol. Equities is probably natural volatility, unmanip­u­lated at probably 20 to 40. So kind of similar to gold. And treasury bonds are much less and curren­cies are about eight. So it’s going to find its range and it’s probably going to be in that 20 to 40 range and that will be under­stand­able enough for every­body. That’s actually quite volatile for a reserve asset, which is why equities aren’t reserve assets. I only think until we get to the 21 million coins and we develop into future state, do we get to the volatility where it really is the true reserve asset and its volatility collapses down to below 10%.

Brady Swenson:

Right. And at that point you see Bitcoin adopting the other forms of money, the other roles of money, the medium of exchange, and maybe even unit of account?

Raoul Pal:

Yeah. That makes logical sense at that point, right? Because I liter­ally don’t want to send you money in something that can give you 5% in minutes because I can’t pay you what you’re asking me if you’re anchoring in a different currency than me and Bitcoin’s our medium of exchange. So right now it’s just not very useful for that. We’ve accepted Bitcoin for Real Vision before. It’s a pain in the ass, because your product’s worth more and less in the currency that we have to pay our staff in. Now, I can think of everyone saying, “Yeah, we just think of it in Bitcoin terms.” Yeah, well, my staff don’t get paid in Bitcoin. They get paid in US dollars because that’s to pay tax in dollars. So it doesn’t work yet for that, but that’s all to come.

Brady Swenson:

Yeah. The demand for the money as that goes up. It’s a cycle to move from one currency to another and we’ve done that many times through history, changed reserve curren­cies. So if it plays out that way, we’ll just see another transi­tion.

Raoul Pal:

Yeah. I mean, there may be another transi­tion before Bitcoin, right? I have a feeling that there’s going to be central bank digital curren­cies, and there’s going to be global baskets of digital curren­cies, regional baskets, trade baskets, like a commodity producers basket et cetera, et cetera. I think that’s coming. But I think that all leads to the logical conclu­sion, which is that Bitcoin wins in all of that.

Brady Swenson:

Agreed with that. All right. Last question for you. This is a bit of a fun one. George Gammon was on this show last month and he’s down in St. Barts, and was telling us that the buzz at the fund manager parties is you talk about equities, you talk about the fed and macro for a while, but then as the party sort of winds into the wee hours the topic of choice is always Bitcoin. So I know that you’re down there in the Caribbean, Cayman, I believe. What’s the talk down there with your friends when you’re hanging out?

Raoul Pal:

Well, I’m actually on an Island of 140 people right now. But here’s something: I’m in little Cayman. I’m having some work in Grand Cayman. The audio visual guys are installing some UTV, blah, blah, blah. And he wrote to me, he goes, “I’ve been watching your videos on Real Vision and I’ll accept payment in Bitcoin.” I said, “You’re not having any of my Bitcoin.” But we have audio visual guys who are accepting payment in Bitcoin. And my yoga instructor were saying I could pay her in Bitcoin. It does worry me a bit. Out of my hedge fund friends, I mean, every­body’s inter­ested in this. It’s a matter of time horizon, how much pain people can take. I’m a bit amazed actually that it’s not gone further up yet and it’s the corre­la­tion with the dollar. I don’t under­stand the supply side of the Bitcoin equation. Where’s all the supply coming from right now? Because we don’t hear a two way street. Right? There’s not like a queue short commu­nity, “We’re short in Bitcoin.” So where the hell is this selling coming from? Who did Michael Saylor buy all his stuff from? Even he said that.

Brady Swenson:

Yeah, he was surprised.

Raoul Pal:

I hear some stories about one of the … I can’t remember what it was … a specific situa­tion that gener­ated a huge amount of Bitcoin that needed to be realized that maybe that’s the reason that it’s being sat on, but it looks like it’s sat on. It’s currently corre­lated with the dollar, corre­lated with gold, corre­lated with risk assets. I think that corre­la­tion is passing. It will change. But you have to wash out some of that specu­la­tive stuff first, and maybe you have another stub down in price. We clear it out a bit, break some people’s shorter term faith, the traders commu­nity, and then we go up.

Brady Swenson:

Excel­lent, man. I’ll let you get back to it. Thanks so much Raoul for your time. This was a ton of fun. Great to talk to you.

Raoul Pal:

Yeah. Really enjoyed it. Thanks so much.

Brady Swenson:

All right. Take care.

Raoul Pal:

Cheers.

Other Episodes

Episode 8 –Andy Edstrom and Ansel Linder

Episode 9 –Rockstar Devel­oper and Jeremy Rubin

Episode 10 – Bitcoin TINA and CK Snarks

Episode 11– Gigi and Knut Svanholm

Episode 12 –Adam Back and Preston Pysh

Episode 13 –Alex Gladstein and Matt Odell

Episode 14 –Robert Breedlove and Tuur Demeester

Episode 15 –Isaiah Jackson and Max Keiser

Episode 16 –Gigi and Udi Wertheimer

Episode 17 –Aleks Svetski and Jimmy Song

Episode 18 –Stephan Livera and Marty Bent

Episode 19 –Mark Moss and Ben Prentice

Episode 20 –Samson Mow and Parker Lewis

Episode 21–Lyn Alden and Jeff Booth

Episode 22– Robert Breedlove and Cory Klipp­sten

Episode 23 — Saifedean Ammous and George Gammon

Episode 24 –Jameson Lopp and Eric Martin­dale

Episode 25 –Preston Pysh and Andy Edstrom

Episode 26 –Lyn Alden and Nic Carter

Episode 27 — Erik Townsend and Yan Pritzker

Episode 28 — Max Keiser and Tone Vays

Episode 29 –Preston Pysh and Andy Edstrom

Links

Swan Bitcoin

Swan Bitcoin — the best place to buy and invest in Bitcoin

Swan Bitcoin on Twitter

Swan Signal on YouTube

Swan Signal on Facebook

Swan Signal on Twitch

Swan Signal Podcast

Swan Signal Telegram Chat Room

Raoul Pal

Raoul Pal on Twitter

Raoul Pal on LinkedIn

Real Vision –Raoul’s media company

Global Macro Investors –Raoul’s Invest­ment analysis company

Vijay Boyapati

Vijay on Twitter

Vijay on LinkedIn

Bullish Case for Bitcoin – Vijay’s seminal essay on Bitcoin

This blog offers thoughts and opinions on Bitcoin from the Swan Bitcoin team and friends. Swan Bitcoin is the easiest way to buy Bitcoin using your bank account automatically every week or month, starting with as little as $10. Sign up or learn more here.

Brady Swenson

Brady is the Head of Education at Swan Bitcoin, the best place to buy Bitcoin with easy recurring purchases straight from your bank account. Brady also hosts Citizen Bitcoin, a podcast focused on documenting his journey learning Bitcoin, featuring some of the biggest names in the Bitcoin world.

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Swan Bitcoin does not provide any investment, financial, tax, legal or other professional advice. We recommend that you consult with financial and tax advisors to understand the risks and consequences of buying, selling and holding Bitcoin.