Raoul Pal of Real Vision rejoins me on the show to talk about how Bitcoin and Macro are colliding. We talk about the incredible risk:reward opportunity of bitcoin, DCA long term, Bitcoin as better collateral, and more. 

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Podcast Transcript:

Stephan Livera:

Welcome back to the show.

Raoul Pal:

It’s good to be here.

Stephan Livera:

Raoul. You’ve been commenting a lot on Bitcoin and the last time we chat and we had a chat was about almost a year, about a year ago. So I’d love to get your thoughts. Where are you? What’s updated in your thinking around Bitcoin over that time?

Raoul Pal:

Well, quite a lot’s happened, maybe. You look, we’ve now gotten to the paradigm again, for most of your listeners there’s nothing new here, we’ve now gotten to the period where the Halving happened exactly at the time when the central banks turned to the largest ever amount of easing we’ve ever seen. So quantitative easing meets quantitative tightening in Bitcoin meets a fabulous chart pattern, which was this massive wedge pattern that eventually broke and around a period of massive global uncertainty. So basically Bitcoin, and the kind of macro world were on two separate paths that were converging and they’ve just met. So Bitcoin has become for me the most dominant trade potentially in the world right now. You know, last time when we were speaking, I was probably very interested in the bond market. Now I think that on a risk adjusted basis, Bitcoin probably has the best opportunity on earth at this point, going forwards, whether that’s over the time horizon of the next six months or whether it’s a time horizon over the next 18 months.

Raoul Pal:

What’s really interesting to me is, is now we’ve just had the macro and Bitcoin colliding at the same point with everything that’s going on. We’ve also had a couple of key developments. The key development in the United States was the ability for US banks to custody Bitcoin assets. What does that mean? That really basically means that banks can prime broker hedge funds for Bitcoin. And that’s a massive thing. So custody for them and custody it for other institutions makes it very powerful. I mean, people like Fidelity already started that process, but now the banks are involved and that means they’re allowed to offer leverage on the positions, et cetera, which is what the prime broking world doesn’t offset it against other positions. So that’s telling us that basically we’re getting a chance to front run the hedge fund world, Paul Tudor Jones.

Raoul Pal:

That was another development since we last spoke, you know, Paul publicly stating he had Bitcoin and his fund allowed others to follow suit and the prime brokers are now going to make that easier. So we’re basically getting the ability to front run the institutional capital, particularly the hedge fund capital. We know the family office space has been moving in here over time. And as people like Fidelity, build out these custody solutions that they know and trust, then that allows them to start moving into the space as well. Meanwhile, we’re getting much closer to the Bitcoin ETF. I think, you know, whether it’s bitwise or whether it’s a few others, somebody is going to get it launched at some point soon, that’s going to bring in the RIA or the registered investment advisor market into this. So that’s advising on the pools of capital of, you know, average or average, middle income and wealthy individuals.

Raoul Pal:

So that’s another wall of capital to come. The other thing that Bitcoin now is a what, a $240 billion market cap, it’s still small as an asset, but let’s say it does double by the end of the year. Well at about 500 billion, you know, getting to be a real asset in terms of size for institutions to get involved. And the more it goes up, the more that they have to get involved, because it’s a larger part of the asset market. So you’ve got this kind of weird convexity where it’s like the market is short calls where the more it goes up, the more it’s going to drag people in. And obviously that’s going to drag in retail as well. So you’ve got this kind of reflexive loop building where the chances of a really powerful move going forward are extremely high. Additionally, I look at Bitcoin versus other asset prices.

Raoul Pal:

So, you know, just graphing, let’s say gold versus Bitcoin, basically gold is breaking down or Bitcoin breaking up versus gold. So then I looked at the NASDAQ, you know, that’s been a pretty good market. Surely that’s looking like it’s going to outperform. Well, it’s not, there’s like a head and shoulders, top pattern on that ratio of the NASDAQ in Bitcoin terms, again, looks like Bitcoin is going to outperform the NASDAQ. Well, then when I looked at emerging markets, because often they can produce good returns, same thing. Emerging markets are breaking down versus Bitcoin. I’ve looked at the TLT, the bond market breaking down versus Bitcoin. So I’ve gone through pretty much every asset class, even stocks like Amazon are starting to underperform Bitcoin. So we’ve got this perfect storm where it looks like everybody’s about to come into the space. Bitcoin looks like on the chart patterns. It’s about to outperform everything. It broke an enormous chart pattern, in its own, right. We’ve had the regulatory changes to its advantage. The macros turned completely to its advantage. And I don’t see many scenarios in which Bitcoin doesn’t do extremely well. So a long answer, but hopefully covered a lot of ground there.

Stephan Livera:

Yeah, you certainly did. And I think it’s interesting as well that the image, the perception of Bitcoin has changed also, would you, I’m wondering what your view is on this idea that obviously in the earlier days, Bitcoin had more of a dark web image, and I think that obviously it still exists, but perhaps the image has changed regardless. What’s your view on that?

Raoul Pal:

Definitely Real Vision played an important in that because of the kind of people who watch real vision and we’ve been featuring for a long time. So we’ve got a lot of, you know, a lot of people who look at traditional asset markets have started to understand how this fits in and how the macro and Bitcoin have all collided into the same spot. I think that’s really helped drive and that’s not, you know blowing our own trumpet, but it’s a reality of the situation. I think also the sheer quality of the people who are involved in this space has gone from being people at the fringes of finance and the fringes of technology and the libertarian element to Fidelity, you know, that says it all. So the quality of people in the space, both from the finance space, particularly where it’s sucked in more and more and more intellectual capital has meant that the kind of renegade developers who were developing it now have the guys who understand and speak the language of wall street.

Raoul Pal:

And that’s really helped. But what’s fascinating is while, you know, you’ve been promoting and doing your job in broadening the net here, as we have at Real Vision, if you think about it, when’s the last time you saw a proper article in the economist or the FT? Yes. In the web section of the FT, you’ll see some Bitcoin bashing and a bit of Bitcoin stories, but there’s not a lot there. So it’s really not covered by the mainstream, except when something happens. Like somebody wants to scam Bitcoins on Twitter by stealing a bunch of addresses. So underneath the narrative has definitely changed because of who’s involved. The media hasn’t yet caught on the media is more neutral than it was, but it’s not got to the point where it realizes the role, that Bitcoin is going to play in the future.

Stephan Livera:

Excellent. And I definitely think you, your voice in speaking on Bitcoin has helped shift the conversation a little bit. And it’s probably an interesting trend that in, within a company or within a fund, it’s often an individual who first comes to understand more about Bitcoin and they get become fascinated by it. And then they turn that company to try and purchase Bitcoin or to invest in Bitcoin. Have you seen that story play out in any of your experience or with your contacts?

Raoul Pal:

Relentlessly, since I started writing about it in 2011 I’ve seen that process all the way through. So friends of mine who were hedge fund managers first looked at it first, bought it for themselves and eventually got it into their fund. And even to this day, you know, almost every month when I write global macro investor, I will write about Bitcoin and I will get an email back saying, Hey, listen, how’d you do this? You know, what exchange should I use? What wallet should I use? And then you hear that they’ve got involved. Then they start looking at it for the funds. So that process is ongoing. It goes on, on a daily basis and more and more and more people get sucked into the space. People are really understanding it particularly now, you know, the simple level of quantitative easing meets quantitative tightening is a very powerful message. And anybody right now who understands gold can understand the value proposition of Bitcoin. And I basically send anybody the way of Saifedean’s book and say, let’s just read The Bitcoin Standard and you’ll understand where the role is a Bitcoin. If you understand the role of gold.

Stephan Livera:

That’s phenomenal. Yeah. That’s excellent. And I’m also wondering, it may be a similar story with the MicroStrategy news, where they essentially went and purchased a large amount of Bitcoin, I believe 21,400 and so, Bitcoins do you see that, that is another similar story that we will see playing out over the next couple of years?

Raoul Pal:

Yeah. Interesting. Michael’s another Real Vision subscriber, another real vision fan, but yes. I mean he did something which I think is incredibly forward-looking. And what this basically says to other treasurers is you have no other option. And again, that’s a function of the macro meeting Bitcoin because as yields have gone to zero and excessive largesse by central banks have made the people nervous about what the value of money is, whether that’s inflation or devaluation of currency, purchasing power, et cetera, or just a lack of returns and an increase in correlation amongst all assets, Bitcoin offers a solution for people. So I think it’s very big news. I think more and more people will do it. I mean, we also know, obviously that all the big Bitcoin exchanges that are hugely profitable have huge stores in their treasury of Bitcoin as well. You know, whether it’s block one and probably got about a billion or two, or whether it’s, you know, Binance or any of these guys, BitMex, they all have massive treasury operations with Bitcoin. And I think, you know, once Coinbase goes public, which I think, you know, it seems like that’s the rumour that it’s going to happen. If that’s the case, the market will understand the power of Bitcoin in treasury and the multiplier effect it can have on the valuation of a company. So, yes, I think it’s another massive watershed moment.

Stephan Livera:

Excellent. And in terms of the, there might also be an angle there around acquisition. So because MicroStrategy saw a, quite a large price rise in their stock price. I wonder as well, whether companies that now accumulate a Bitcoin holding become acquisition targets in their own, right.

Raoul Pal:

Well look at Mike Novogratz’s firm, Galaxy. So Galaxy, you know, is really an asset management company, doesn’t trading, et cetera. But what it does hold is a ton of crypto. So it’s outperformed massively, I think it’s up a hundred percent in the last month. And I think that doesn’t go and what it can do for your share price. I’m not sure it’s necessarily an acquisition because if you want to go and buy that many Bitcoin, you can figure a way of buying it. So it doesn’t make an acquisition, but it makes it very attractive for people who want to drive up the value of their shares, particularly if we’re going into a fully fledged crypto bull market.

Stephan Livera:

Yeah. And I also believe that we are seeing demographic trends that are playing in favor of more people getting into Bitcoin. We could see potentially young people or productive people who don’t want to be part of say the government social contract. Right? And they may say, well fine. I’ll just leave the country with 12 seed words in my head. You know? So that’s just one example. And there may be people who.

Raoul Pal:

I don’t think that that’s the predominant driver here. So, you know, if you look at the millennial population in general, they’re more biased towards government than against government. It just depends what kind of government. So I don’t think it’s the rebellious nature of that generation. What it is is very simple is if you are a 32 year old now, which is the average millennial and you’re trying to decide, now you’re in your peak earnings career earnings points. And he will be for the next 20 years is where do you invest? So you’ve got the equity market at all time record high valuations. You’ve got the bond market at all time record, low yields. You’ve got the corporate bond market at all time record low yields. So, and property markets are too expensive. So you don’t have any choices. How are you supposed to build wealth?

Raoul Pal:

When the forward expected returns of most asset prices are negative over the next 10 or 20 years, it becomes extremely difficult. And then you’ve got the risk of, okay, maybe the way to solve the debt situation is create inflation. So maybe you have to deal with inflation as well. So that’s a terrifying set of circumstances for an investor at a young age to deal with, but Bitcoin is the opposite. It’s the complete opposite. It’s kind of the same opportunity set that the baby boomers were given in 1982 with the bond market at 18% yields and the stock market at a P/E of 7, they had almost nothing but potential upside in both those assets. And they built wealth from the back of it. So the younger generation has an opportunity to build wealth in a new financial system. If they’ve got the vision to agree. And what’s interesting is this was driven by a retail revolution to start with.

Raoul Pal:

They’re also much more savvy in digital assets. And by the time you get to Gen Z, that’s younger, they grew up with the value of digital assets. You know, they’ve grown up on Minecraft and they know the value of skins and they know the value that you trade tokens. And so for them, it’s obvious. Bitcoin is nothing unusual to them. It’s kind of what money should be. So I do think that this generation almost has no choice cause I can’t find another asset. Yes, you might be able to buy emerging market equities because some of those, they’ve underperformed developed markets for the last 15 years. And they’re pretty cheap, not ridiculously cheap, but pretty cheap, but there’s nothing that offers the 20x, 50x opportunity with call it, you know, 70% downside or 50% downside that Bitcoin has. I mean, nothing is close to that risk reward opportunity. And so, you know, you’ve seen it in the narrative of Bitcoin there, the dollar cost average, the DCA, you see in everybody’s tweets because people have started to understand that’s the way to build wealth in this. It’s just, dollar cost average, put some money away and understand that this is a long term investment opportunity and you’re investing in a whole new future.

Stephan Livera:

Phenomenal. And it’s been said that in Bitcoin, it sort of operates on these four yearly cycles, right. As people talk about the Halving and Stock-to-flow. And so on, what’s your view around that? Do you believe that it’s just going to continue going in these four year cycles or does it just become, let’s say a decade of people all dollar cost averaging?

Raoul Pal:

It depends how fast it goes. I mean, the boom bust cycle is real and because Bitcoin is not manipulated by government markets, it will have a boom bust cycle and that’s fine. I mean, don’t forget the US economy had a boom bust cycle a kind of four year boom bust cycle for several hundred years and the UK did too. In fact, every industrialized economy has a boom bust cycle. It’s only in recent years with central bank manipulation that the boom bust cycle has been drawn out. So the bust are bigger and the booms and less good, but they go on for longer. So I think it’s normal to have a boom bust cycle. I think the predictability around the halvings mean that it’s unlikely to have another having cycle. I think it will be slightly different next time around because obviously as people learn how this works, it’s less likely to happen because it kind of gets front run or it gets accentuated because people know that, you know, 18 months after halving we should peak and then we all leave it for a while and buy it back later or just hold on. So I’m not sure, but that cycle is around for a while I think. It depends on the institutional adoption as well, but you know, the commodity markets are cyclical. I think it’s normal for assets to be cyclical. Yeah. I think it makes sense cause it also washes out speculative accesses.

Stephan Livera:

Right. And you mentioned also just around the dollar cost averaging, I’m also curious your thoughts around this perception of whether people view Bitcoin as a risk on sort of asset? And how does that influence their decision to keep dollar cost averaging or to speculate?

Raoul Pal:

Look, Bitcoin is not correlated with anything in the longer term. The closest correlation is central bank balance sheets, but it’s really not. So I don’t think it’s particularly a risk on asset in short term. Yes, but in longer term. No. So I think it can get caught out with liquidations and that’s normal because it’s a quality collateral. So if you have to liquidate an asset to pay for losses elsewhere, you might liquidate your Bitcoin as you do your gold. So yes, there’s a bit of that, but overall, I just don’t see those correlations playing out. So I don’t think it’s risk on risk off. I think it’s a different cycle and that’s why it’s so valuable in a portfolio is because it, it doesn’t play the same way as other asset prices right now, pretty much everything is the same. You know, the stock markets go up, oil goes up, you know, the dollar goes down, et cetera, et cetera. The trade is all the same trade, but Bitcoin’s not. So it’s super valuable in a portfolio.

Stephan Livera:

Also if people start buying Bitcoin I guess one concern that’s been voiced by people is that, you know, Bitcoin becomes captured by the government or perhaps the government tries to act against it. But at the same time, we’ve seen this recent news from the OCC and so on. So how do you think about that, that question of whether the government future actions around the world may negatively impact Bitcoin?

Raoul Pal:

My answer to that is who cares right now? Cause it’s not going to happen at $240 billion asset and who cares. It’s just not big enough. You know, come back to me when it’s a $5 trillion asset, and then we can worry about that and talk about jurisdictional risk. But you know, in a globalized world we have jurisdictional arbitrage. So with a digital asset, it’s very hard to get around jurisdictional arbitrage because let’s say the Cayman islands will say, well, we’re not banning it. So in which case people hold it in the Cayman islands or change residency. So I think it’s very difficult to deal with and I think gold has proven that over millennia that is very difficult to jurisdictionally ban it because there’s always a jurisdiction that allows it. So I’m not worried about that. And I’m certainly not worried about it at this price.

Raoul Pal:

You know, again, maybe when Bitcoin’s trading $250,000 somebody’s going to say, well, I’m not sure about this and we’ll see it in emerging markets where people use it as a way out. So we’re seeing in Turkey right now, the money’s flowing out of Turkey and into Bitcoin. You know, there’ll be governments, who’ll try and ban it for that. But again, it’s pretty difficult to ban just by the nature. And you know, by the time you put you know, VPNs and just various various protections, it’s really difficult now, it doesn’t mean that they can’t track you and everything else, but it’s just highly unlikely. And also the other thing is, you know, everybody’s building a digital currency as well. So, you know, every central bank is building out digital currency right now. And if that’s the case, then what they’re saying is they’re all going to be digital on ramps and off ramps, for Bitcoin. And I don’t see a problem. I don’t see Bitcoin as a currency. I don’t think it’s ever going to compete with, with currencies of States. I think what it is is a reserve pristine reserve collateral asset, and that’s fantastic. And gold has played that role and it’s, you know, sure. Periodically people try and ban it in various places to stop capital flight. But other than that, no.

Stephan Livera:

Did you have any thoughts around which countries you might be, you might see Bitcoin be adopted more quickly or do you just see this as just, this is just like a global thing?

Raoul Pal:

Well, it depends what you mean by adopted. Again, some people have a vision that it’s going to be a currency and somebody’s going to convert their currency into Bitcoin. That’s not going to happen I don’t think it’s too volatile asset to do that with right now. Again, once it’s, you know, once you’re closer to the 21 million coins and we’ve got deeper markets with lending markets across you know, an extended yield curve, et cetera, et cetera, then you might be able to have a more stable currency, but right now it doesn’t work for that. So are countries going to put it within their reserves? For sure. I think that will be another big milestone that we’ll probably see over the next three years. There are countries who want to move digital. I mean, I live in the Cayman islands and the Cayman islands is very driven by the idea of, much of the legal regulation was drawn up here in the Cayman islands is a lot of it’s off shore.

Raoul Pal:

A lot of the tokenization came here in the Cayman islands. And I think, you know, eventually we’re also seeing Switzerland allowing the build out of this. So I think there’s countries that are going to embrace it, countries that will ignore it. And countries where it becomes the option of choice as you say, for people like Brazilians or, or Turks or people who have weaker currencies or bad governments. So it has its different purposes for different people. But my guess is we’re going to start to see a few countries here and there, as I said, add it to their reserves. And I think that’s a really big deal.

Stephan Livera:

And so that may even be a similar story. Like we were saying a few individuals within certain government departments who first hold Bitcoin in their own right. And then decide to try and agitate within that department as well.

Raoul Pal:

Well, if you think about it, so let’s say you’re a Latin American country with weak trade balance and the vagaries of the business cycle always hurt you. And you can’t build a sovereign wealth fund to protect yourself cause you don’t have oil. So how do you stop your currency from keep getting trashed and inflation coming. And then, you know, then your currency gets too strong and you know, the problems of those kinds of emerging markets. Well, if they put Bitcoin in their reserves, the chances of their reserves going up faster is better. They get diversified reserves and they could offset the flow. So you will probably get first mover advantage in that. So my guess is we’re going to see some small countries try it. And I think that’s super interesting. I’m hearing stories all over the place of countries looking at this right now. And I think that’s that would be clever. Now it would start at a small allocation, you know, 2%, something like that. But again, even 2% allocation to Bitcoin can make dramatic portfolio effects in your, in the reserves of a country. So, you know, I think there’s a real validity to that.

Stephan Livera:

Also. We’ve got all this, you know, Corona stuff going on. We’ve got countries that are, you know, going through some phase of lockdown or easing or in some yo-yo position. Do you have any thoughts around what what some likely government responses are over the next few years and whether that impacts, you know, the economy and people’s ability to save for example?

Raoul Pal:

Yeah. I mean, look for sure. The government response and the central banks response is not over. My core thesis is that we are slowly moving into an insolvency event because GDP growth looks like it’s stalled globally at like negative five to negative 7%. So it’s stalling at negative 5%, negative 7% coming up from the low, this would still be the largest recession outside of the great depression. And my fear is normally things reverts back to normal gradually, and this one reverts slower. The slower it goes, the more impinged the cash flows are. The more chances are that these indebted companies, households and small businesses go bust. And if that’s the case, central banks will firstly try and do anything they can to solve that, but they can’t resolve the solvency event, adding more debt or lower cost of funding to a solvency event. When somebody hasn’t got the capital to pay it means that it becomes a government problem.

Raoul Pal:

So you’re seeing the central banks, begging governments with fiscal stimulus and that’s direct handouts to businesses and households through to, you know, eventually we’ll have much bigger stimulus in terms of infrastructure build, trying to generate demand to plug that gap from the minus 5% and get it back to 2% GDP growth. You need to generate and hell of a lot of GDP growth to do that. So you’re going to need a hell of a lot of stimulus and all that basically means once you translate it is it’s all going to end up on the central bank balance sheet and there’s just going to be more monetary printing. It’s the only way. So if that’s the case, then the value of fiat currency overall declines. Now whether it’s the value of the dollar or a basket of global currencies, I think overall they’ll decline and that’s incredibly bullish for Bitcoin.

Raoul Pal:

The other thing I think is coming still is negative interest rates. I think they’ll selectively use negative interest rates. And I think one of the reasons digital currencies are being pushed through is you can therefore allocate different interest rates to different people. So you don’t penalize households or the pension system, but you penalize savers, larger savers, corporate savers and so they don’t keep money stored in the money market, stuff like that. There’s a number of things that will happen, but negative rates again. So I think we’ve still got a future of negative rates, then massive monetary printing, which all of which is incredibly bullish for Bitcoin. And then you’re going to have the perceptions of the risk of an inflationary event at the end of it. I don’t necessarily think that’s coming, but the market is going to want to price it at some point. And that’s also good for Bitcoin. So, you know, again, as I’ve said, the macro has met the micro here and it is like a perfect storm for Bitcoin,

Stephan Livera:

Right? And so some people have characterized this view as something, well their view is something like we’ll have deflation first, then inflation in terms of Fiat currency inflation. Would you say your view is something aligned with that? Or how would you differ from that?

Raoul Pal:

I don’t think we’re going to get inflation. We didn’t get inflation off the new deal back in the 1930s. We never managed to generate it. I think with the aging population of 76 million baby boomers in the US alone, retiring over the next, retiring and coming out of the workforce and then dying over the next 20, 25 years. It’s really, really difficult to offset that deflationary pressure. So I don’t see it happening. I can see the value of money itself falling, but the inflation of higher wages and larger demand. I just do not see that. We’ll have inflationary episodes for sure. But I think the trend remains level.

Stephan Livera:

I see. And just as well with the, you know, many businesses struggling and so on. So, you know, a comment someone might be thinking, well, hang on. How are people gonna save into Bitcoin if they’ve lost their jobs? What are they going to do now?

Raoul Pal:

Yes, but I don’t think, as I said, I don’t think the re retail is going to be the big driver this time around, I think retail will adopt and continue to do so. I think people will lose their jobs. And that will also stop a lot of the speculation going on in the stock market. But unlike the stock market where there are actually no natural buyers, you know, corporate buy backs were the big buyers and index funds from the millennials. Well, I think the index fund flow starts slowing down as stimulus wears off and buybacks stopped a while ago. So we have no real natural buyers for equities at the moment on a structural basis, but crypto is entirely different we’re at the opposite end of the spectrum where we’re getting adoption. So I don’t think it’s driven by retail this time around. I think it’s driven by institutional and so that’s to come. So it doesn’t worry me, I guess.

Stephan Livera:

I see also some people in the Bitcoin world have commented about the possibility of derivatives and whether they would suppress the Bitcoin price. If let’s say the, you know, the proverbial tail wagging the dog, do you see that kind of scenario or do you see it more like that’s not really a likely scenario?

Raoul Pal:

Well, I’ve been involved in derivatives my entire career, and I’ve never seen derivatives dampen the price. I think what they do do is reduce volatility over time, but then produce these bouts of hyper volatility because people use leverage derivatives are just leverage. So are we going to see more leverage coming into the Bitcoin market for sure. As more institutions and hedge funds play it, they will use leverage the derivative market over time because there’s people can sell options and get the yield from selling options, stuff like that will mean that you tend to stabilize the price somewhat because they’re the opposite to market flows generally. So that’s definitely coming. I don’t perceive it to be a huge problem. What’s also very interesting about Bitcoin is if you think of Bitcoin as a collateral, it is amazing collateral compared to treasury bonds because treasury bonds right now as collateral, if there’s ever a collateral shortage, which happens from time to time from excessive leverage, well the central banks just supply more of it.

Raoul Pal:

So you just, you lower the value of your collateral and you keep extending these boom bust cycles into you. You never get the downside the bust cycle, but if you start using Bitcoin as a collateral, it’s super interesting because you can’t change the supply. So you can’t have central bank interference in the natural boom bust cycle of excessive leverage. And that’s one of the things, if you think of the Austrian economic community, that were one of the early adopters of Bitcoin as a kind of philosophy they’re going to be right, because we’re going to have a proper boom bust cycle because as a collateral, there’s no way it could be manipulated unlike current collateral systems. So I think even though we will end up with more leverage, the leverage will be self-regulating, which is what we’ve all been desperate for for a long time.

Stephan Livera:

I love the comments around collateral and it may even be a point that over time, Bitcoin collateral become more preferred than other forms.

Raoul Pal:

For sure, it’s such a pristine collateral and it’s transferable, it’s divisible it’s it’s segregated, you know, cause most collateral is pooled and pooled collateral means that you have problems and who has ownership. The re hypothecation of collateral was one of the big issues in 2008 with blockchain and Bitcoin, that all goes away. So it’s probably the best collateral there is. If it didn’t have the volatility that it’s got, because if your collateral is too volatile, then it keeps forcing you to reduce leverage at the wrong times. So volatile collateral is not super useful, but over time I think as volatility comes down in Bitcoin it’ll become increasingly a preferred source of collateral.

Stephan Livera:

Okay. So given that Bitcoin represents pristine collateral, would it be fair to say that the interest rate charged for a loan where you’re using Bitcoin as the collateral could be lower than for other forms of collateral?

Raoul Pal:

I mean, I think without a question, yes, because it’s non rehypothecated collateral. So it’s incredibly valuable in that term. And in that term, I was talking to somebody about this today. I mean, one thing we haven’t had in Bitcoin yet, and it’s coming, cause you can see it in DeFi and in Ethereum is there will be a yield curve. So there will be a 10 year cost of capital, a Bitcoin and it will probably trade eventually below government bonds. That’s super interesting because you know, some of the things I’ve discovered in my journey through understanding the plumbing of the financial system is that the real issues at clearing level clearing house level. Like the DTCC Euroclear in who owns the bonds in the effect in the event of a default on collateral. Cause don’t forget the collateral of the current system is government bonds.

Raoul Pal:

And let’s say Spain went bust or Italy went bust, there’s huge problems. And the, what gets taken by the lender of last resort, the ECB or the fed would be bonds held within those clearing systems. And the problem is that at that level they’re not unsegregated. So you and I could lose bonds out of our pension system, out of our pension funds. So with Bitcoin that goes away now it does mean that people will end up building blockchain for collateral as well for standard collateral. And that’s another good thing. So I think there’s going to be different pricing of collateral. And I think Bitcoin will probably be, once the volatility goes more pristine, collateral gold is a pretty pristine collateral then there’ll be collateral that’s held on blockchain. So government bonds that are registered on blockchains will be more worth more than government bonds that aren’t. So we’ll get different prices for money for different collateral. But also I’m just really interested to see how the yield curve is in the cryptocurrency markets over time, because there’s going to have to be some format for that.

Stephan Livera:

Yep. And so as the yield curve for a Bitcoin develops, well, I guess how long do you think it would be before we start to realistically see that? Are we talking five years, 10 years or even less?

Raoul Pal:

Well, that’s what DeFi is, right? So if you think about Ethereum, the proof of work is doing some of the things. Cause you’re basically holding you’re being forced to hold the Ethereum for a certain period of time of which you get rewarded for it. So that’s the step of starting a money market. The next part is DeFi. So people are saying, okay, on a monthly rate, you can earn X. So that’s the next part of the money market, which is private lending markets. Once you get enough people doing that, you can form a benchmark, which should be like Libor, which would be like Libor So Libor is essentially a basket of lending of cost of lending from various banks. So then you’ve got benchmark lending rates. So once you’ve got that, you can also go out further in the future. So I think people are working on this and this is probably within five years, we’re going to get pretty close to it. Maybe within three. Now it doesn’t mean its going to be liquid or anything else yet, you know, we’ve got a long way to go, but I think it’s starting to get interesting.

Stephan Livera:

So I’m guess I’m curious why you say that like that would have to be an, Ethereum and thing and it couldn’t just be done as this like companies doing it on Bitcoin. I’m just curious why you believe that?

Raoul Pal:

No, what I’m saying is Ethereum is doing it now, right? So a lot of that kind of work is happening on a Ethereum of now doesn’t mean it’s not gonna happen on the, on the Bitcoin blockchain either, but it’s not, you know, that’s not where most of the development is in this space yet. And will that come for sure, because, you know, I actually think, you know, I know there’s this tribal warfare between all of this stuff and I don’t believe in any of that. I think Bitcoin is the pristine purest collateral and reserve assets. And I think Ethereum is a different system and they will work hand in hand. And so they should. So I think, you know, it’s like having a government bond market. It’s like having a corporate bond markets, all of these things together is all coming.

Stephan Livera:

Alright. And I think the other really interesting topic, and you touched on this earlier is this whole war on cash that we’re seeing. And I think you made a really interesting observation there around this idea with central bank currencies and them potentially being able to distinguish and say, okay, you’re a corporate, we’re going to give you negative rates and okay, you’re a retail person. Okay. We will give you like zero rate or a very low rate. What’s the sort of timeframe you’re looking at there in terms of negative rates?

Raoul Pal:

Well, the G30, I’ve just got an article on my desktop, the G 30 produced a document called risk opportunities and the challenges ahead of digital currencies and stable coins. It sounds like they’re further away than most of us think, but closer than most imagine. So it’s coming. And I don’t know how fast. So I think that’s going to be a really, really interesting development as that comes and cash is taken out of the system because you know, a very interesting thing happened in Switzerland when Switzerland went to negative rates, one of the big regional pension funds said fine. We’re just going to go and take $250 million of cash out, put it in a volt. And the bank said, you can’t, because contractually we have to deliver you cash or cash fungible asset, and we’ll transfer you money, but you can’t take it out of the system.

Raoul Pal:

So it’s interesting cause it’s already there in some respects. So that development is coming now. It’s also a good thing because it means the bloody on row on ramps and off ramps from, you know, the tax systems we live in become much easier to manage. So this clunkiness between the legacy world and the new world that goes away. So in some aspects it’s negative because of how governments will have total control over your money and control over the particular interest rates that you use or even delivering you unemployment benefit directly to your wallet. All of that stuff. Some of it’s good, some of it’s bad, but if you think in Bitcoin terms, it’s only a good thing cause it makes it easier. And it integrates if we think of Bitcoin in terms of not being a money, but being a reserve asset well it makes it very easy for institutions, banks, people, everybody to be in and out of using Bitcoin as a collateral, as a reserve asset, as all of those other things,

Stephan Livera:

Right? So perhaps it’s like a Bitcoin is the escape from the financial repression that people face in the normal financial world.

Raoul Pal:

Absolutely right. People can step out of it. You know, Bitcoin, if you don’t agree with how your government is running your money, you can go into Bitcoin. Now, yes, you will run into regulation issues, but you can make those choices now. And don’t forget right now, you know, Turkish people have difficulty getting money out and Brazilians have difficulty getting money out. Many, many people around the world do so that’s not unusual, but Bitcoin makes it relatively easy to do that, to get money in and out. It’s a little bit easier than gold is. Although gold is not particularly hard. And it’s worked for a few thousand years, so I’m not going to discredit it for that purpose, but it works and the world needs that. And it was always needed that. And Bitcoin solves it really well, particularly for the modern age, particularly in the world of digital assets and digital currencies, digital stable coins, and all the other things that are coming

Stephan Livera:

One other area. I was interested to just get your views on too. As you mentioned earlier, the volatility can make it difficult for people who want to do day to day commerce. But I’m also curious whether you’ve, you know, you’ve played around with, or you’ve looked into Bitcoin’s lightning network, which allows people to do this kind of peer to peer trading in a way that is faster than just Bitcoin on-chain.

Raoul Pal:

I’m super interested in the lightning network, personally, who the hell wants to spend Bitcoin? I mean, that’s the actual problem here is I think Bitcoin is evolving, not as money, but as a reserve asset that has incredible upside. So nobody wants to sell it in exchange for a good. You might do it because you’ve made a lot of money. You want to buy a house because you have utility value, but it’s just not the kind of thing where you want to buy coffee with. So I think that developing it, but I don’t think it’s going to be used for that. I really don’t. You know, I think it’s becoming clearer and clearer that Bitcoin has a massive advantage over everything else in terms, of being the purest and hardest of all assets.

Stephan Livera:

I see. Yeah. So I guess, I mean, I can think of examples, but perhaps we would say they’re more on the margins. So someone who is earning Bitcoin you know, somebody who has to earn Bitcoin because they’ve been shut down those kinds of people might have more use for lightning network. But I think to your point, it’s more that the HODLer, you know, the reserve asset story is much larger than that story.

Raoul Pal:

I mean, arguably people would argue that reminiscences is probably something good for the lightning network, but there again, you know, 10 minutes to get a confirmation, it doesn’t really bother remittances right now, Western union’s a nightmare. So I’m not sure even remittances need instant payment systems. You know, we’ve even seen India introduce UPI, which is their universal payments interface, which is kind of 50 times faster than the Bitcoin network. It’s not even a crypto or blockchain based system. So it can be solved. Those payment systems can be sold outside of this, but the, again, the pristine of that asset can’t be solved by anything else. And I, you know, that’s, I think the one thing above all is that.

Stephan Livera:

So that’s really the strongest part of the Bitcoin story.

Raoul Pal:

There’s many parts of it and most, you know, it may evolve over time and let’s say, Bitcoin, we’ve got to the 21 million coins and Bitcoin is now the global reserve asset. And it’s worth whatever it’s worth. You know, it’s volatility then dampens to almost nothing because it becomes like a government bond, a reserve asset. It’s got a yield curve, all of that stuff, then it’s different then maybe there’s a real place for Bitcoin as money, but right now I don’t think it matters.I don’t think it’s the problem to solve.

Stephan Livera:

I see. And Raoul let’s chat a little bit about Real Vision. Tell us the latest with real vision and what you’re doing.

Raoul Pal:

We’ve got some exciting news. When is this coming out? By the way,

Stephan Livera:

I was going to put it out later today.

Raoul Pal:

So we’ve, so without announcing too much, there’s. We’re about to do a lot more in the crypto space. So I think that’s going to be very interesting for many people listening to this, we already do a lot in the crypto space. We’ve also got some interesting stuff going on right now. We’re just launching our festival of learning. We did a massive crypto event in about two months ago, month and a half ago, which was called the crypto gathering. We had nine and a half thousand people join us for that, with all the kind of great and good of the industry. We’re going to do another virtual event, but this one’s all about learning. It’s all about how to become an investor, has to understand what these markets are. You know, how to run portfolios, have to think about risk, have to think about time, horizon, how to research ideas.

Raoul Pal:

So that’s just launching now. And I think a lot of people will find that super interesting because I know a lot of people in this space are also investors overall. So, you know, we’re doing that, but you know, we’re also about to launch, this is hot off the press that nobody yet knows. So here’s a new one for you. We’re about to launch a full community product. So that’s going to allow our audience to deeply interact with each other, share content, interact with the people that they see appearing on the platform. And for also for third parties, maybe you want to have your community on that platform on the real vision community. And you’ll be able to do that and interact either in a private channel or public channel with your audiences where you even post your podcasts there, et cetera. So we’re going to build that huge community because we don’t really have a community in finance, outside of Twitter. And at 280 characters, it’s a bit restrictive in terms of how we all want to talk. You know, we want to publish research papers and videos and long form trade ideas and analysis on how we’re thinking about things and Twitter, doesn’t do a good job of that. So we’re going to do it as part of Real Vision. And so that that’s a that’s hot off the press. Nobody else knows that.

Stephan Livera:

Fantastic. That sounds really cool. So definitely I’ll be interested to take a look once once that is released. So Raoul, I know you’ve got to run so just before we let you go, where can listeners find you online?

Raoul Pal:

The easiest place is find me on Twitter at @RaoulGMI and I’m active on Twitter a lot. And so if you wanna find out about real vision, you’ll find me on there and you’ll find some stuff about real vision and you know, I love interacting with people. So if you’ve got questions, you’ve got any feedback from the podcast, let me know, and I’ll do what I can to reply.

Stephan Livera:

Fantastic. Well, I really enjoyed chatting with you Raoul and thank you for joining me.

Raoul Pal:

Yeah. Thanks so much, really enjoyed it as ever.

Comments (2)
  1. i’m just joe average. what will bitcoin look like in 100 years?. in terms of computing what ram, memory (i thought the memory might look like 3 terabytes) and power will it require?. will a back yarder still be able to mine bitcoin?

  2. will , in terms of energy, despite bitcoins appetite for energy, will bitcoin reduce global energy consumption overall?
    will bitcoin cause the global population (directly proportional to energy consumption) to increase or decrease?
    i imagine that bitcoin could reverse the finalization of the global economy and push manufacturing to the fore and maybe even spread manufacturing more evenly over the world..
    will bitcoin dampen fx volatility?

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