The Breakdown - What Ray Dalio Really Thinks of Bitcoin

Starting point is 00:00:04 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 nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, January 31st, and that means it's time for Longreed Sunday. So imagine you're me this week, and you've got this big move planned, and you're just really desperately hoping that nothing big happens in the, Bitcoin markets or the financial news or the economy, so you can keep your head down and make this transition and really stay present with your family. Then all of a sudden we have perhaps the most significant week in markets in the last five years, 10 years maybe. You have Elon Musk tweeting

Starting point is 00:00:54 about Bitcoin, and you have Ray Dalio, one of the biggest historic critics writing a post about what he really thinks of Bitcoin. On the one hand, I shake my fist at the heavens for not letting me move in peace but on the other, what a set of things to talk about. Today we are going to read that post from Ray Dalio what I really think of Bitcoin. Now, the co-chief investment officer and co-chairman of Bridgewater Associates, one of the biggest hedge funds in the world, has historically been skeptical of Bitcoin. The last that we've heard over the last few months were sort of tired, repeated arguments that he had made before. They were about the fact that if it really got big, he thought governments would shut it down. But then he also tweeted that maybe

Starting point is 00:01:36 he hadn't dug in quite enough. So today we have a chance to see his latest thinking in his own words, let's dive in. I am writing this to clarify what I think of Bitcoin. Please pay attention to what I am saying here and not what those in the media are saying, I said, because this is reliable. I am finding those who want to promote Bitcoin, which is most people, are characterizing it one way, while those who are against it, which are a few scared souls cowering in a corner, are characterizing in another way. As with most things I comment, on, the reality has pros and cons, and I'm trying to be as accurate as possible to communicate what I understand these to be. To reiterate, as I am not a Bitcoin or cryptocurrency expert,

Starting point is 00:02:15 I believe my views are not valuable enough to be relied on so I shouldn't put them out. I know how much one needs to know in order to have a valuable opinion in the market, so I wouldn't bet on my own views. Still, people demand my non-expert assessment of Bitcoin and clarification in my own words are better than distortions in the media. So here it goes, presented with the warning not to rely on it. The only thing I ask of you is that you read what I wrote here rather than pay attention to the soundbites in the media. 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

Starting point is 00:02:56 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 early very rich, and has the potential to make many more people very rich and to disrupt the existing monetary system. Those who have built it and supported the dream of making this new kind of money a reality have done a fabulous job of sustaining that dream and moving Bitcoin, by which I mean it and its analogous competitors, into being an alternative gold-like asset.

Starting point is 00:03:33 There aren't many alternative gold-like assets at this time of rising need for them, because of all the debt and money creation 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

Starting point is 00:04:04 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 some value in the future. The big questions to me are what can it realistically be used for and what amount of demand will it have? Since the supply is known, one has to estimate the demand to estimate its price. 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.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds

Starting point is 00:04:45 deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. I should clarify what I said about its supply. Although Bitcoin is limited in supply, digital currencies are not limited in supply because new ones have come along and will continue to come along to compete so the supply of Bitcoin-like assets should,

Starting point is 00:05:16 and competition will, play a role in determining Bitcoin and other cryptocurrency prices. In fact, I assume that better ones will come along and displace this one because that is the way the evolution of everything works, i.e., new ways of doing things and new things always have and always will replace old ways of doing things and old things. Since the way Bitcoin works is fixed, it won't be able to evolve, and I presume that a better alternative will be invented and pass it by. I see that as a risk. For those reasons, the limited supply argument isn't as true as it might appear. E.g., if BlackBerrys were in limited supply, they still wouldn't be worth much because they were replaced by competitors that were more advanced. I still don't know the answer to

Starting point is 00:05:53 why that isn't a risk, but I would welcome my naivety being corrected. At the same time, I greatly admire how Bitcoin has stood the test of 10 years of time. Not only in this regard, but also in how its technology has been working so well and has not been hacked. Still, to one holding digital or cyber assets at a time when cyber offense is much more powerful than cyber defense, the cyber risk is a risk that I can't ignore. When the Department of Defense can't protect its systems from being hacked, it would be naive to be totally comfortable that digital assets can't be hacked, which is one of the advantages of gold-like assets and is one of the risks of all financial assets. In fact, I think there is a good chance that someday we will see the financial system,

Starting point is 00:06:32 which consists mostly of digits, be shown to be more vulnerable to disruption and or to cyber blackmail than is now recognized. By the way, these things are now happening at a growing rate and can threaten the value of traditional financial assets. I am pointing out to you this warning to take or leave as you like. While I recognize that Bitcoin can be held offline via cold storage, I understand it is difficult to do and that very few people actually do it. So by and large, my understanding is that by Bitcoin being digital and connected, it is not protected against cyber risks to my satisfaction. I look forward to being corrected. As an extension of Bitcoin being digital are the questions of how private it is and what the government will allow and not allow it to be.

Starting point is 00:07:12 Regarding privacy, it appears that Bitcoin will unlikely be as private as some people surmise. It is, after all, a public ledger and a material amount of Bitcoin is held in a non-private manner. If the government and perhaps hackers want to see who has it, I doubt that privacy could be protected. Also, it appears to me that if the government wanted to get rid of of its use, most of those who are using it wouldn't be able to use it so the demand for it would plunge. Rather than it being far-fetched that the government would invade the privacy and or prevent the use of Bitcoin and its competitors, it seems to me that the more successful it is, the more likely these possibilities would be. Starting with the formation of the first central

Starting point is 00:07:48 bank, the Bank of England in 1694, for good logical reasons, governments wanted control over money, and they protected their abilities to have the only monies and credits within their borders. When I, A, put myself in the shoes of government officials, B, see their actions, and C, hear what they say, it is hard for me to imagine they would allow Bitcoin or gold to be an obviously better choice than the money and credit that they are producing. I suspect that Bitcoin's biggest risk is being successful, because if it is successful, the government will try to kill it and they have a lot of power to succeed. As far as the supply and demand picture is concerned, while the supply is known the long-term demand over the relevant long-term time horizon,

Starting point is 00:08:25 because this is a long-duration asset, is tough to know, largely for reasons I mentioned. For example, since I view Bitcoin as being a gold-like alternative asset, I asked Rebecca Patterson and others at Bridgewater to calculate the value of private holdings of gold and then take percentages of those holdings and assume they were shifted to Bitcoin to diversify that type of holding. By way of example, what if 10% or 20% or 30% or 40% of private holdings of gold were shifted to Bitcoin to diversify holdings? Or what if 10 to 20% of those who built Bitcoin and got on its wagon wanted to diversify into other assets like gold and stocks? Or what if the government

Starting point is 00:09:00 wanted to prohibit its use? Or what if, et cetera? What would these scenarios look like? They paint a picture that is highly uncertain. That is why to me, Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn't mind losing about 80% of. This is what Bitcoin looks like to a non-expert. I am eager to be corrected and learned more. On the other hand, believe me when I tell you that I and my colleagues at Bridgewater are intently focused on alternative storehold of wealth assets. So I don't want to go point by point and critique or correct Dallio's assumptions. I think that what this is meant to be is a couple things. First, it is a signal that he is now and Bridgewater are now taking this category of assets

Starting point is 00:09:42 with Bitcoin at the lead seriously. I would view this as a recognition that he is at the beginning of his Bitcoin exploration in a serious way. If you want to take home one thing from this, that is the important one. That's the powerful one. I think the second takeaway is that this is an interesting insight into where the next generation of FUD or Walls of Worry might come from. We've discussed extensively this fear of government shutdown. I had an entire show with Ben Hunt and Alex Gladstein, where they debated exactly this. I think there continues to be expressed in this a lingering idea of looking at Bitcoin in terms of its technology properties rather than its network effects, which is the wrong heuristic for understanding it. But that's something that can be corrected.

Starting point is 00:10:28 It's not so much fud. It's a mental realignment. Ultimately, like I said, I think that the take home headline is that Dahlio, someone who has historically not been willing to give this his time, is now paying attention and feels enough pressure, enough questions, enough force from the outside that not only do he and his firm need to dig into this, but he needed to make a starting statement about the point from which he was jumping off from. It'll be interesting to watch and hopefully shape his journey, and so I would encourage you to engage with the Dalios of the world in good faith until they give you reason not to. Anyways, guys, hope you enjoyed this little read. I appreciate you listening. Until tomorrow, be safe and take care of each other.

Starting point is 00:11:12 Peace.

The Breakdown - What Ray Dalio Really Thinks of Bitcoin

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