The Breakdown - How Ray Dalio’s ‘Changing World Order’ Thesis Fits With Bitcoin

Starting point is 00:00:00 This is post-narrative institutionalization, and what I mean by that is that this institutional entry into the market is no longer the narrative driving crypto markets. It's simply a fact of reality. In fact, these new entrants like Bridgewater seem to be more intentionally trying to downplay the narrative hype around this cycle. 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.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, March 22nd, and today we are talking about post-narrative institutionalization of crypto in the context of news that Ray Dalio's Bridgewater might be investing in the space, as well as a Goldman Sachs OTC trade.

Starting point is 00:00:54 If you're wondering what the heck that word salad means, well, you'll just have to wait and find out. First, however, if you are enjoying the breakdown, please go subscribe, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us at the Breakers Discord. You can find a link in the show notes or go to bit.combe, slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor, I also work with FTX. Okay, so today we are bringing together two of the themes and narratives that have driven the last couple years in crypto markets. The first, as you caught from the introduction, was institutionalization, the move of traditional finance into the crypto space. This was something that was long, wanted, rumored, hoped for,

Starting point is 00:01:39 but didn't really start to happen in a big way until 2020. And then, of course, it led the narrative through the end of that year in the beginning of the next. The second theme is geopolitical change and its impact on the macro landscape. COVID-19 opened up fundamental questions about the nature of supply chains, the structure of the global economy, then the fallout of the disruptions in those systems, alongside market supportive policies chosen during them, spurred the inflation, which has and continues to be the dominant market context. And of course, now we add the geopolitical realignment coming out of the Russia-Ukraine crisis, which is, of course, a largely economic story, given not only sanctions and the implications of those sanctions on the global monetary order,

Starting point is 00:02:24 but also in terms of supply chains and the raw materials that were formerly coming out of Russia. One person who has put themselves at the center of these types of conversations is Bridgewater's Ray Dalio. Dahlio published a book last November called Principles for Dealing with the Changing World Order, why nations succeed and fail, which, as you can tell from the title, is very much in this wheelhouse of big picture power shifts. So let's talk for just a minute about Dahlio's overarching phrase. And this is based on reading of his materials, and of course it's continuously evolving and changing, but his basic framing has been that we are at the end of a long-term debt cycle. And at that state, we find the U.S. as a declining power with China as a rising power, with a historic analogy being the shift from focus on the U.K. to the U.S. in the early 1900s. There is a bit of a fourth-turning-esque picture that Dahlio paints in that these changes involve

Starting point is 00:03:23 social upheaval, internal and external conflict, the breakdown of institutions, and the change in financial systems alongside the assumptions that underpin those systems. Now, Dahlio has often been criticized for having an overly generous opinion on China, which I think has often been reasonable. However, the more generous take on his position on China is that if the U.S. is declining, there was always going to be someone coming up to assume that mantle. Dahlio sees things like China's commitment to R&D and AI and energy as indicators of their trajectory. Of course, this ignores a lot from leadership to demography, basically all the reasons that someone like Peter Zihon thinks pretty much exactly the opposite

Starting point is 00:04:03 about China's near-term prospects, but that's not what this podcast is about. The point is that the changing world order is where Dahlio is spending a lot of his time and energy, and it's reasonable then to question what are his thoughts on Bitcoin and crypto, which so many of us, of course, see as central to the discussion of that changing world order. The short answer is that those views have been evolving. For a long time, he really wasn't on the train, but that started to shift the beginning of last year. In January 2021, Dahlio wrote a piece on LinkedIn called What I Really Think of Bitcoin, and it was basically meant to put things in his own words so that it wouldn't be continuously characterized by either the people who hated Bitcoin or the people who loved Bitcoin. Here's a quick excerpt of that piece which got

Starting point is 00:04:47 so many people excited about a year ago. I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is programmed into a computer, and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment. That, like creating the existing credit-based monetary system, is, of course, a type of alchemy, i.e. making money out of little or nothing. It, like the making of credit that made bankers rich, starting with the Medici's around 1350, is making its inventors and those who got in on it very early rich and has the potential to make many more people very rich and to disrupt the existing monetary system. There aren't many alternative gold-like assets at this

Starting point is 00:05:27 time of rising need for them, because of all the debt and money creations that are underway and will happen in the future. Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren't many of these gold-like storehold of wealth assets that can be held in privacy, and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need. It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in short order, to probably being around and probably having

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Starting point is 00:07:21 with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Back to NLW now, and to be clear, this was not a full-throated embrace of Bitcoin like some of the other hedge fundies that had come before him. He went on to say that, quote, I assume new ones will come along and displace this one, referring to Bitcoin, just as a for example.

Starting point is 00:08:02 However, at the end of it, he came out and said that he had asked Bridgewater to do calculations on what it would mean if many private gold holders, something he thought was the best proxy for Bitcoin holders, shifted to Bitcoin to diversify. He concluded, that is why to me Bitcoin looks like a long-durate. option on a highly unknown future that I could put an amount of money in that I wouldn't mind losing about 80% of. So that was January 2021. Then in May of that year, Dahlia was the keynote for CoinDesk's consensus. And in that interview, he famously said that, quote, I have some Bitcoin, and that he prefers Bitcoin to bonds. This got all of the crypto industry flapping with their Dalio owns Bitcoin pieces. This podcast definitely not accepted. What was really interesting was more the substantive part of the interviews. He said, for example, that the U.S. continued to devalue the dollar.

Starting point is 00:08:52 Quote, you need to borrow money, you have to go 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 we're in. However, in that same interview, he also reiterated his biggest and most oft-repeated concern that if Bitcoin and crypto got too big, governments would inevitably crack down. To be specific, he meant that if sovereign bondholders started to abandon sovereign debt en masse in favor of Bitcoin or crypto stores of value, that would be what triggered governments to crack down,

Starting point is 00:09:33 that they simply would not abide people leaving their wealth-storing asset in the form of sovereign debt for this non-sovereign alternative. I think in many ways, given his absolute fascination with the changing world order, it would be sort of insane for Dalio not to be invested. Remember, he's an investor first. That means he assigns likely outcomes different probabilities and then makes bets against those probabilities. It's hard to look at the last year and not think that those probabilities have risen as it relates to the role that Bitcoin and crypto might play in a changing world order. And even if you think there was only a small possibility of that as an investor who's invested in the idea of changing monetary systems, you'd think there would be an allocation there.

Starting point is 00:10:14 Well, now CoinDesk is reporting that two sources are suggesting that Bridgewater Associates, Dahlio's hedge fund, is preparing to back its first crypto fund. Bridgewater is the world's largest hedge fund with about $150 billion of assets under management. And given that, this is definitely a toe-dipping move according to these sources. They'll be backing a fund run by someone else, but there's also speculation that 2022 will see some direct crypto investments. In February, one of these sources said Bridgewater is is in a first half plan this year. They're planning on having a small slug of their fund deployed directly into digital assets. Bridgewater, for their part, has not yet confirmed this.

Starting point is 00:10:54 Now, anything that Dahlio does is going to get a lot of chatter. Even before this news, Ryan Shot Adams last week tweeted, I think Ray Dahlio is basically right on the changing world order and the decline of USD. He's assuming the next world order is a nation state, likely China. But what if it's crypto? A new player has entered the game, the crypto network. Antonio the Builder summed up the institutions are coming sort of takes. Shift change coming, in my opinion. The big money about to create the new crypto market. Remember, end of day, money moves markets.

Starting point is 00:11:24 Hunter Meyer says Bridgewater, the world's biggest hedge fund, intends to diversify with crypto. Let that sink in. Now, along with another piece of news, this has picked up some narrative trend power. CNBC writes Goldman Sachs, Galaxy Digital, announced milestone over-the-counter crypto trade. The street says Goldman Sachs helps Bitcoin take a amazing. major step. The prestigious bank just made a trade that should lead to widespread adoption of Bitcoin among big investors. Basically, Goldman and Galaxy did an over-the-counter Bitcoin trade where

Starting point is 00:11:52 Goldman was actually one of the counterparties. Said Galaxy in a statement, this marks the first OTC crypto transaction by a major bank in the U.S. as Goldman Sachs continues expanding its cryptocurrency offerings, demonstrating the continued maturation and adoption of digital assets by banking institutions. The street writes, this move is an important step in the development of the crypto market for large investors because OTCs means that Goldman Sachs will act as a principle in the transaction. It is therefore a kind of expansion of Goldman Sachs activities into cryptocurrencies. But more importantly, it legitimizes the currencies as stable enough to be vouched for by large institutions. End quote. There was also speculation that part of this is in response to Biden's executive order,

Starting point is 00:12:32 which made it seemingly pretty clear that it is very, very unlikely that the U.S. moves towards any sort of ban of the style that Dahlio had previously been nervous about. So here, he's Here's my take on all this. This is post-narrative institutionalization, and what I mean by that is that this institutional entry into the market, Tradfai coming in, is no longer the narrative driving crypto markets. It's simply a fact of reality. In fact, these new entrants like Bridgewater seem to be more intentionally trying to downplay the narrative hype around this cycle. The Goldman News, although it still had a press release associated with it, is really basic stuff, and the net effect is likely just more sense of the normalcy of crypto exposure for traditional market players.

Starting point is 00:13:17 I think there's a pretty strong argument that this is net better for the industry long term. You have a Lindy-led leak of traditional finance funds into crypto as a diversification, as a hedge, as an expression of market theses and geopolitical feces. Instead of these big hype cycles, it slow, steady moves into the space. It doesn't create narrative driving bursts, but it potentially has a lot more sustainability. Now, of course, that won't stop people from trying to make this a new institutional narrative. And that's pretty understandable right now. I've seen a number of folks comment on how we're in a narrative exhaustion period, and it's not just these macro narratives, but themes within the industry as well.

Starting point is 00:13:55 Defi isn't doing much. In fact, a research report from Morgan Stanley today had a very skeptical take around it, saying that it thought that defy was likely to remain, quote, fairly small, that regulation and overcollateralization were the main hurdles, and that while it's theoretically all about the efficiency of no middlemen, quote, rather defy protocols often seem to us as a way to attract cash flow to enrich the protocol operators. Defy is hack prone and at risk of financial crime given anonymity is a key feature. I'm not making any comment on the veracity or thoughtfulness of those statements. I'm just pointing out that's the state of the institutional narrative around defy, at least in part. Then of course there are NFTs. We've discussed Yuga Labs and their big

Starting point is 00:14:35 moves into the space, but it still feels to me like a lot of exhaustion with All the copy pasta and the endlessly same profile pick type collections. Metaverse and Play to Earn Gaming continue to be big focuses for large parts of the industry, but they're faced with more skepticism. And perhaps skepticism isn't even the right word, but more it's a sense that there needs to be a building phase following this big hype cycle that we've had. To me, the reality is that it's hard for any of these micro-crypto themes

Starting point is 00:15:02 to take hold when there is so much big-picture volatility and unassurateness of what happens next on a macro level on a geopolitical level, et cetera. Indeed, the other big picture story from markets yesterday was Powell making comments that were even more hawkish than before. The point of all of this is that we are right smack in the middle of it, the middle of this in-between, uncomfortably unclear period. Of course, the best thing to do in times like these

Starting point is 00:15:27 is to do everything you can to take a long-term view. So the question is, where do you think Bitcoin, crypto, etc., fit in the changing world order? I want to say thanks again to my sponsors, nexus.io, Arculus and FTX. And thanks again to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners. Come join CoinDesks Consensus 2022, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto-newbies. investors, entrepreneurs, developers, and creators.

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The Breakdown - How Ray Dalio’s ‘Changing World Order’ Thesis Fits With Bitcoin

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