The Breakdown - Dalio Says Governments Will Kill Bitcoin. Is He Right?

Episode Date: November 14, 2020

On this edition of the weekly recap, NLW looks at bitcoin’s surge past $16,000. Additionally, he explores some recent FUD from Ray Dalio, which NLW argues seems strangely locked in years-old narratives. 

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDes. What's going on, guys? It is Saturday, November 14th, and that means it's time for the weekly recap. And oh, man, what a week it has been. bury the lead. Bitcoin is over 16,000, at least at the time of this recording. On Thursday evening, Dan Held tweeted, Bitcoin surges past 16,300. Bitcoin has only been above this price for 12 days in its entire history. The thing about this rally, too, is that it's not based on a whole

bunch of FOMO news stories like December 2017 was. There isn't some massive retail-based surging in. That said, there has been some institutional pressure and opportunity. As we discussed earlier this week, Stanley Drucken Miller came on CNBC again and followed up his September comments about inflation. Now, in that previous appearance, this world-famous, incredibly respected billionaire hedge funder talked about how he really saw a possibility of serious inflation on the horizon, based on the absolute raging mania, that was his phrase, of current monetary policy. He suggested that inflation could be as high as 5 or 10%. The interesting thing was this time he talked about inflation again,

but he also talked about what he was using to hedge against it. And interestingly, it wasn't just gold. He talked about how he came around on Bitcoin and how in some ways Bitcoin might even perform better than gold. He pointed to millennials who view Bitcoin as a store of wealth and to West Coast tech money, and obviously both of those sets of money are significant. The main commentary around this from folks like Raupal and many others was that it was creating safe space for other investors to also get involved. So maybe part of this price pressure is unnamed institutional buyers. Another side may be PayPal. Last month, they announced that PayPal was bringing crypto to all of its users, and they started to roll it out almost immediately

after. However, on a November 2nd earnings call at that point, there was only about 10% of PayPal users that actually had access. This week, that expanded to everyone in the U.S., all qualified U.S. users. What's more, they expanded the amount that people could engage from 10,000 to 20,000. Interestingly, a lot of the discussion on this front had to do with the Bit License of Paxos, which is the custodian that they're using to offer this service. By the letter of the law, they have to have Bitcoin stored for all of the Bitcoin their customers buy, which in the long run could be pretty significant pressure on the supply of Bitcoin as a whole. However, when it comes to the price pop over the last few days, it seems more likely that PayPal from a narrative

perspective was helping versus PayPal as a supply-constraining force. Of course, one other possible interpretation of how we're getting this growth could be institutions and corporations quietly expanding their treasuries. If you go listen to my interview with Robbie Gutman, the co-founder and CEO of Nidig and the co-founder of Stone Ridge Asset Management, a $10 billion asset management firm, it took a while and they were building this 10,000 strong Bitcoin Reserve Treasury over the course of months. Who knows how many other companies like them are quietly doing the same? Still, for all of this excitement, there was one person who kept their bearish tone. Ray Dalio, the founder of Bridgewater, the biggest hedge fund in the world, did an interview with Yahoo Finance, and towards the end he was asked about Bitcoin and digital currencies.

He said that he expects in the future more digitized fiatts, more government-issued currencies for three reasons. One, a lack of venues that will accept cryptocurrencies for purchase, his quote being, I today can't take my Bitcoin yet and buy things easily with it. Two, Bitcoin and other cryptos are too volatile to be considered effective as a store of value. That volatility also hurts Bitcoin's use transactionally because vendors won't know how much they're getting. And three, if Bitcoin or other cryptos become material, Dahlio predicted that governments would then outlaw it and said they'll use whatever teeth they have.

to enforce that. This episode is brought to you by Crypto.com, the Crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the Crypto.com app today.

Looking for the best way to stay on top of your investment game? nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.i-o. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 10% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. Let's take these one by one. And just to start, you are absolutely forgiven for wondering why the hell

2017 Fudd is showing up from someone who's supposed to be an extremely astute observer of the market. I mean, really, these are pretty painfully bad critiques, but we might as well just breeze through them. First, lack of venues for you. So first of all, the narrative that has locked in so many new people this year is Bitcoin as a store of value asset. Bitcoin as an inflation hedge, a digital gold. Gold is also not used for vendors. It's not used in transactions, yet it has a $11 trillion market cap or so. Even if you think your only belief about Bitcoin is that it can be a digital gold, that's still 30x or something like that from here in terms of market cap that could be gained, which creates just a huge amount of upside opportunity.

Second, you have to assume that even if still constrained by that digital gold use case, the ease of use as compared to gold, which is, again, remember, a thing with physical bricks that are hard to move around, it's likely that even that store value market is bigger than gold's $11 trillion. But let's also just take the critique on face value. It's just getting less and less true. PayPal in particular basically nullifies this argument. They have been clear that PayPal is going to be accepting crypto through their merchant network of 26 million merchants.

And of course, the way they're making that work is that PayPal is abstracting it away. Merchants don't ever have to interact with crypto to accept crypto, which basically eliminates any barriers to quote-unquote adoption by merchants. Which gets us to the second critique that Bitcoin is somehow too volatile. One, again, the PayPal thing really sort of invalidates this. Part of that abstracting away the crypto complexity is also abstracting away the volatility. Merchants are going to be able to price their goods and services in the US dollar or the euro or whatever they currently do, but we can still pay with crypto. And by the way, can you believe that two of these questions or two of these reasons are

about merchants somehow? It's just so clearly locked on old narratives and old conceptions of digital assets. But then he also said that it's too volatile to be a store of wealth. and I think this is dead wrong as well. First of all, time horizon completely destroys this argument. As legendary value investor Bill Miller said last weekend, take one year, three year, 10-year time horizons, Bitcoin has been the best-performing asset.

If you intend to hold on those sort of time horizons, you don't care about short-term volatility. Second, a store of wealth that also has speculative upside gives it extra panache for a certain category of investor. What I mean by that is that when you buy gold, you do so knowing that while it's not going to ever go down that much, it's also never going to go up that much. There are real limits to its upside potential. Bitcoin at this stage doesn't have that same risk on the upside. It's just got tons and tons of room to run. But then let's bring it back to Dahlio's third argument that if it gets big, they'll ban it. I do think that this question of sovereign-level attacks is more interesting fud than the two pieces before, and certainly,

engaging, but you have to ask how. Mining, it's really difficult to target mining because it's just going to move elsewhere, right? It's just going to create new opportunity for the citizens of some other nation. What governments can do potentially is make it very difficult for their citizens to interact with it, outlawing the on and off ramps, for example. That would seriously hurt the adoption of any particular assets or the category as a whole were a country like the U.S. to do that. However, to me, it seems highly unlikely. To the extent that the U.S. is engaged in a currency war over the next 10 years, it's not going to be with Bitcoin. It's going to be with the European Union's currency and China's currency. Both of these places are looking to take advantage

of digital currencies, central bank digital currencies specifically to give themselves an edge. This is going to be massively more distracting than any perceived battle with something like Bitcoin or these private coins. And if the U.S. does engage, in return in response with its own digital dollar, that's going to create a massively simpler on an off-ramp to other cryptos like Bitcoin. What's more, I don't see how Bitcoin would be competing for the things that the US dollar really wants to own in terms of this global balance of payments. It's just not what Bitcoin is doing right now. Maybe it will in the future, especially as the deleterious side, the negative impacts of CBDCs or the second-order effects

of CBDCs start to become known. I can see many more people opting out of that digital system for a non-sovereign open source money system. But in the short term, and by that I mean two, three, five, even seven years, I just think that the focus of US from a currency perspective is going to be on these other big geopolitical players. And of course, as that's all planning out over that span of years, the business interest in this space is going to do nothing but grow. And what that means is that the larger that legitimate and traditional business interest in Bitcoin and the digital asset space gets, the harder it will be to ban it. Ultimately, Dahlio's argument felt tired and unresearched and kind of uninformed. And I hope that he spends a little time getting to understand

this system, this new way of thinking about money and value, because simply put, it is not going anywhere. Anyways, guys, I hope you're having a great weekend. I appreciate you listening. So until tomorrow, be safe and take care of each other. Peace.