The Breakdown - Hedge Fund Billionaire Ray Dalio Has Officially Bought Bitcoin

Episode Date: May 25, 2021

Today’s episode of “The Breakdown” is split into two parts. In part one, NLW recaps the latest out of China, including: Interpretations of Friday’s surprise targeting in a speech by the Vice Premier A weekend market crash, the second of the week  Miner selling and the motivations behind it What to watch for in the coming days  In part two, he puts in context the news that Bridgewater’s Ray Dalio owns bitcoin, looking at the larger institutional pattern that has driven the bitcoin bull and Dalio’s specific concerns about currency devaluation. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

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 nexus.com and bitstamp and produced and distributed by CoinDess. What's going on, guys? It is Monday, May 24th, and today we are talking about why hedge fund billionaire Ray Dalio has officially bought Bitcoin. However, I have to say that without a doubt, the most important news I could be exploring right now is digging into everything that happened over the weekend. It feels to me like we could be on the verge of one of the more significant shifts that Bitcoin has ever seen, at least from a network standpoint. I'm referring, of course, to what could be a massive redistribution of hash power out of China. The reason I'm not going to do that show in full right now is that there is still a ton of rumor in Uendo.

speculation and not a lot of information flying thick and fast. I think a day or so more and will have a lot more clarity. That said, I do want to give a bit of a debrief from the weekend, so we're at least prepared to have that conversation when we do it. First of all, the banner headline was another significant crash. The first crash was Wednesday, and that one was driven by a combination of FUD, Elon's Environmental FUD, China Banning Fudd, and a number of others, and leverage. I discussed this quite a bit last week, the positive feedback loop between FUD driving small moves that got exacerbated by liquidations that made those small moves look bigger, which made the FUD seem scarier, and so on and so forth all the way down. I also spent a fair bit of time breaking down what

the FUD actually was, specifically around China. Remember, the first China FUD of the week was a reiteration of policy on the book since 2017, that financial institutions really couldn't interact in any meaningful way with crypto or crypto-related companies. What wasn't interesting about this was the big Huffy MSM headlines about it being a new ban, which was just not true. What was interesting was about how it fit into a larger pattern. China has been very public about their plans for a central bank digital currency, obviously a recurring theme on this show.

And there seems to be two big elements of the motivation, first a domestic and then an international. The international piece has to do with the globalization of the RMB, the role of China as a global resource. serve currency, et cetera, et cetera. Domestically, it's very clear that China has wanted to break the power of fintech payment platforms that had not only been scooping up more and more users, but had also been moving into more bank-like services, of course, without being regulated like banks. There was a ton of action over the last six months that was directly about bringing these

companies more under the control of the CCP. Perhaps most notably, or at least most visibly, was the strange disappearance of Jack Ma for a couple months, after which the ant group was restructured in fundamental ways to get back in line with what the Chinese government wanted. So one way to look at why now for this reaffirmation of old policy about financial players not dealing with crypto is that once the key players in FinTech had been brought to heal, now it was crypto's turn. As an aside, this is precisely the reason that I get angry at silly headlines. They crowd out the space for important discussions. To put it bluntly, it wasn't that the midweek China announcement about financial institutions

not being able to work with crypto was insignificant. It's just that it wasn't some crazy ban that was new as Reuters and other headlines made it seem. But fast forward to Friday. The CCP has a pattern of announcing big policy shifts, particularly those around financial markets on Friday night, so that markets and institutions in those markets don't really have time to react. This weekend, we got one of those, and it was a big one.

The Chinese vice premier announced a Bitcoin mining ban, or at least something that seemed to suggest that. More on that in a minute. It was part of a larger overall speech on financial stability, and it really only had one line about Bitcoin, but that was enough to get people moving. I did Friday show about why Bitcoiners were actually hoping this China mining ban was real. Why? Let's call it two fuds one stone. In short, two of the biggest fudds that that serve as a persistent albatross around Bitcoin's neck are, one, energy use and the environmental impact of mining, and two, concerns around Chinese control. This year has obviously seen a huge amount of discussion around environmental issues, most recently supercharged by Elon Musk and

Tesla's decision to stop accepting Bitcoin for Tesla's. However, the China control issue has also come up recently. Peter Thiel mentioned it in a speech a couple of months ago, and it's been a favorite canner of a new crop of Bitcoin critics like Mike Green. A true mining ban and a redistribution of hash power out of China could put a pretty serious knock on those narratives. First of all, China mining has a higher relative percentage of its energy sources coming from coal, which is one of the dirtiest sources of fuel. So mining coming out of China could theoretically increase the overall percentage of mining that happens with cleaner sources, renewables, or just at least not coal. Second, with hash power actually leaving the country, it cuts down on the possibility of the threat of China nationalizing mining and using that hash power to launch an attack on Bitcoin.

Now, there are very, very few people who actually took seriously this second threat as a meaningful risk, but given that it was still getting play in high policy circles, I would love personally for it to no longer exist. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%, and swap between more than 75 market pairs with the instant nexo exchange. Try the Nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Secure, regulated, and reliable, BitStamp is the cryptocurrency exchange of choice for more than 4 million investors and traders worldwide.

Since 2011, BitStamp has been a trailblazer in Secure. head of the class in personal customer service and dedicated to making buying crypto fast and easy. Whether you are investing on our desktop platform and mobile app or trading on our speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. Now let's talk about the weekend. In short, it was painful.

To me, it was easily the most painful period of this bull market yet. Bitcoin got down to near 30,000, 31,000. Defy coins, alt coins, dog coins were all down much more. And what's more than that, you could feel the deflation in the market. First of all, these downward spikes weren't easily explained away with leverage. It was largely driven by spot selling. Second, in total, many assets were off 50% or more from their highs. Many people, including me, have been a fan of reminding folks that there were six or seven drawdowns of 25 to 40%

during the 2016-2017 Bull Run. Those reminders were, of course, reminders to not react too strongly to short-term phenomenon. But it's impossible to deny 50% just felt different. I saw numerous people comment on social that it felt like an entire bear market was being compressed into a short period. There were discussions about whether this meant the super cycle theory is dead, which is something we might come back to later this week. The super cycle theory, of course, refers to this idea that Bitcoin has broken out of its four-year-having-driven pattern of boom and bust. And the logic to why that might be the case is the presence of a new type of hoddler in the form of institutions who have theoretically more diamond hands than retail newbies who have tended to pump the price in other cycles.

By the end of the weekend, a lot of the discussions were starting to be around who was selling. I saw a lot of anecdotal reports from wee chats and things like that that Chinese retail was evacuating quickly. There was also a big question around minors, specifically how much of the selling was from miners. Nick Carter tweeted, I'm seeing on-chain evidence of unusually high minor selling leading this last leg down. I've effectively been able to confirm this. Minor selling is a huge driver of price action here. Make of that what you will. Everything I'm seeing indicates an absolutely seismic shift of hash power out of China and into the world at large. It won't be elegant or pretty, but obviously it's great for hash rate distribution and likely carbon intensity.

Now, there has been a ton of discussion about this. I'm currently listening to a Twitter Spaces discussion hosted by Dovi Wan and featuring folks that run mining pools. And Dovi's argument is that the miners selling we've been seeing is not new miners panicking, but instead sophisticated experienced miners who are taking this threat seriously and trying to front-run their competitors. by partially getting out of the business, or at least, and probably more accurately, hedging their risk by both selling Bitcoin as well as selling old mining rigs. So here's where we are in this discussion. And I realize that I've now spent 10 minutes when I said I wasn't going to do a full show,

but I think a full show would be a lot longer. Anyways, where we are in the discussion is that people are taking this China ban, quote-unquote, more seriously than previous announcements. And that's largely driven by the source, the vice premier himself being the mouthpiece for this new policy. Second, miners have been selling. We're not clear, however, how much it is a conviction that a big crackdown is coming versus a hedge in case it does, which could have pretty different implications. Third, many of those miners are also exploring moving hash power elsewhere. Three places that I've heard specific mention of are Russia and Kazakhstan because they're basically drivable to take rigs across the Chinese border, and Africa where it sounds like some are looking into wind power.

And obviously there's close economic ties between China and Africa as well through Belt and Road. As another aside, I think it would be fascinating if we saw a move of Bitcoin mining from China into Africa. I mean, talk about a shift that could have unbelievable implications, not just for Bitcoin, but for the economies where these new miners set up. Fourth, many are watching closely mainland China exchanges, specifically Huobi and OkX, closely, as well as OTC desks, to see if China is coming after trading, not just mining. Finally, and most importantly, everyone is waiting to see what the CCP actually. does. Remember, this was a single line in a larger speech. And the way the policy has met it out in China is that guidance is given, that is sent down to other institutions who implement that policy. So that's a process that could take weeks for us to really get an understanding of exactly how

it's going to play out and what the specific letter of the law or the new guidance is. Take all these things together and the implications are significant. We could be in the midst of a fundamental shift in where power and activity sits in Bitcoin. We could be truly testing how much control and influence a government can exert over Bitcoin. Nick Carter with characteristic flair sums it up again, quote, we might be entering the most critical period in Bitcoin history, exceeding even the latter half of 2017. Critical doesn't mean good or bad. It just means important. So later this week, I'm going to check back in on what we've learned about. One, what this China policy really means and how it's being implemented and enforced. Two, what the reaction of miners are

and whether hash power is actually being redistributed. Three, whether the places that have power might move to are actually less carbon-intensive, four, how it will impact narrative, and five, how it might impact price. But for now, I think it makes sense to pause here, leave these questions, and come back to them in a few days. So with that, let's shift our story to Mr. Ray Dalio. I don't need to rehash how important the institutional narrative and real institutional buyers have been to this bull market. You can trace the roots of it, frankly, to the resilience Bitcoin showed in the face of the COVID crash, which I believe found voice an expression in Paul Tudor Jones' great monetary inflation paper that outed them as Bitcoin

investors almost exactly a year ago. Fast forward over the course of that next year, and we get just a steady stream of hedge fundies, institutional investors, and a new type of allocator coming into this space. Yet even within that, a few high-profile folks have remained on the sidelines. Those few, however, have been falling in line lately. Jamie Diamond, for example, still says Bitcoin is not his cup of tea, but his firm J.P. Morgan has capitulated and is going to start offering Bitcoin investment products. Still, Bridgewater's Ray Dalio has been perhaps the most interesting. He's been, frankly, a little bit bipolar. On the one hand, he has clearly been flirting with Bitcoin. When he wrote his piece about Bitcoin in January, what I really think of Bitcoin,

it was, to me, clearly setting himself up as to be the thoughtful skeptics choice for Bitcoin allocation. In other words, if you have doubts but feel like you need at least some exposure, Bridgewater and Dalio were the place for you. At the same time, Dalio has been persistently shared FUD, particularly around government control. Still, when CoinDesk announced Dahlio as a keynote in February for this week's Consensus Virtual Conference, I tweeted that I bet dollars to donuts that he announces a position. Well, that conversation went live today, so the question is, was I right? Quote, I have some Bitcoin, said Dahlio in a conversation that was recorded on May 6th for Consensus. He also said notably, and this is the quote that's getting the most

traction that he prefers Bitcoin to bonds. Of course, for Dahlio, this is all about the macro. In his conversation with Michael Casey, he said that the U.S. is on the verge of devaluing the dollar in a way not seen since 1971. Here's a relevant quote. You need to borrow money. You have to print that. You need more money, so taxes go up and that produces a dynamic. Now I can keep going on about what happens in that dynamic. It may be capital controls. I painfully learned in 1971 that it causes stocks to go up. It causes gold, Bitcoin, real estate, everything to go up because it's really going down in dollars. And that's the part of the cycle that we're in. Dahlia also argued that China is threatening the U.S. dollar's role as the world's reserve currency. Quote, in 2015, only 2% of Chinese markets

were open to foreigners. Now it's over 60%. But if you look at the relative pricing and so on, it's a whole different story because they're not doing quantitative easing. They still have an attractive bond market. They have attractive capital markets that are more open. And as they're more open, big investors, institutional investors, central banks, and so on, view themselves as underweighted there. When you buy a Chinese financial asset, like buying an American financial asset, you have to buy their currency. So it's supportive to their currency and also supportive to their assets. Dahlio clearly differs from some other macro thinkers here, many of whom view trust in China's assets and trust in China's economy as too low for their currency to present

a real threat to the U.S. dollar. Still, there's no denying that China is making moves in that direction. Speaking of China, Dahlio's owning Bitcoin hasn't stopped his major previous concern about the asset. Quote, Bitcoin's greatest risk is its success. He basically worries about exactly what he said, that bondholders would start selling their bonds in favor of Bitcoin. That's the point at which he imagines we see a crackdown. It would be fascinating to get Dahlio's updated thoughts after this past weekend or even better as we find out more about how this whole China policy is going to be implemented. But for now, the banner headline is that the world's biggest hedge fund makes.

manager owns Bitcoin. Pair that with the fact that the vice premier of the world's second largest economy is calling out Bitcoin. And what's clear is that we've entered a new phase in this grand game. Be skeptical of those who tell you they know what will happen next. Appreciate you listening, guys. Thanks as always. Until tomorrow, be safe and take care of each other. Peace.