The World’s Biggest Trade

Posted | 27/10/2020 / Views | 1347
Back to News
Next Article

Last week Raoul Pal of Macro Insider released a deep dive further explaining why he is “irresponsibly long” Bitcoin. Pal, an ex Wall St fund manager and respected voice not only in the Bitcoin space, completed the trade of the decade when he called the bond rally before it started on similar macro grounds.   He has more recently been vocal in his rotation from bonds to gold and bitcoin based on this unprecedented macro setup we find ourselves in.

 

In his report he highlights key fundamentals:

 

  • The slow build
  • Immutability 
  • When macro and crypto collide 
  • Priceless reserve asset
  • Bitcoin being pristine 
  • Yield curve

 

Pal also debunks a lot of the primary criticisms of bitcoin and the technology supporting the crypto movement. 

 

Pal has a lot to say about crypto and bitcoin and it’s all well thought out and backed up. Read on to get some insight into why he believes bitcoin to be “The World’s Best Trade”:

 

Slow Build

 

Bitcoin is a slowly-building revolution that has also led to the rise of blockchain, other cryptocurrencies and tokens, and is fast developing into the financial system of the future.

 

You see, in the beginning that was everyone’s mission: to create a new financial system to protect us when the old system blew up and give us a path forwards to something less fragile.

 

I’ve never in my entire lifetime seen this much talent across these many industries, all focused on one space. Bitcoin, crypto, blockchain, tokens, DeFi etc., are like a gigantic black hole, sucking in all the very best talent in the world as it dawns on people how big this technology is going to be.

 

The journey of discovery for everyone is similar. You hear about bitcoin, reject it as never going to be adopted, then notice the forward momentum in price, begin to dig in to develop an understanding, and finally anchor on something that allows you to buy a small bit of it.

 

Usually that first narrative that we all anchor is either wrong or too basic. Many people thought bitcoin was going to be a payments system and others thought it was a libertarian version of money.

 

But over time, we all fall down the famous bitcoin “rabbit hole” and realise that it is indeed much bigger than all that, and bitcoin itself may not be the best solution for every problem with the current system of money but, in its own way, it is so perfect that no instrument of money comes close.

 

After a while, we all settle on the fact that yes, bitcoin offers lots of other incredible potential opportunities, but its core value is that it is the hardest form of money ever invented.

 

And that makes it priceless.

 

Immutable

 

Nothing can change the supply curve of bitcoin. It is fixed forever and is completely forecastable. Also, with over 10,000 bitcoin nodes, the history of all transactions is immutable, meaning that they can never be changed and that it is distributed and therefore not centralised to one authority (a central bank), making it incredibly secure.

 

Something that has a finite fixed supply and is incredibly secure has true value. The fact that it is divisible, portable, transferable and exchangeable makes it have potentially more value than any other store of wealth, or any other form of money.

 

When Two Worlds Collide

 

The path of bitcoin adoption has been angled toward colliding with the path of macro since inception. 

 

In the macro world, we all realised more than a decade ago that the debt-based, re-hypothecated, over-financialised, central banking-ruled world, with its overvalued assets and centralised manipulation, would eventually reach the logical conclusion that the value of fiat money would fall over time and might well be questioned as a store of value at some point in the future

 

Then came the largest recession in history and the path of bitcoin and macro collided. Both need each other for the next stage, and macro and bitcoin are now on the very same path.

 

It is now all about the future of money and its role in the system, and indeed in developing a new system that is more robust than the old.

 

A priceless reserve and collateral asset

 

In my opinion, bitcoin is the best reserve asset and best collateral asset ever seen. It is the hardest asset ever produced, with an impossible-to-change formula for supply that gives it predictability like no other asset ever. Its distributed nature also makes it one of the most anti-fragile systems ever created.

 

Nothing can change the supply of bitcoin that is mined. Nothing.

 

Why is it such a good reserve and collateral asset?

 

Well, outside of the core attributes above, you need to think about the current system’s failings. Government bonds are the current collateral for the world and especially US Treasuries. Our whole system is based on these being the bottom of the pyramid upon which everything is built.

 

That used to work just fine until the central banks became fearful of allowing the business cycle to run unimpeded. Thus, when debt loads became unsustainable, meaning that the weakest borrowers couldn’t get access to enough collateral, instead of the price of collateral rising, thus forcing firms to go bust, central banks began to increase the supply of collateral and reserves (quantitative easing).

 

That has two effects: it devalues the collateral over time (falling fiat money purchasing power) and it abnormally lowers the cost of collateral, allowing the debt cycle to build and build without the forces of creative destruction.

 

 

Pristine

 

Basically, the central banks over time cannot create more of it and that protects its value AND therefore, its value during collateral shortages (recessions) goes up, forcing only the strongest creditors to have access to it and thus allowing the business cycle to work in weeding out the weakest creditors.

 

We fear the business cycle these days because the imbalances are so big and therefore the tail risks of really bad outcomes are much fatter than we are comfortable with. A system that prices collateral correctly doesn’t build up the same imbalances and is self-regulating.

 

Bitcoin is pristine collateral. The greatest form of collateral. Its blockchain ownership structure reduces the huge black swan risk of who owns what. It is all recorded and more importantly, provable.

 

 

Yield and Yield Curve

 

All that is needed to get it from where it is today to the collateral of the future is one thing – a yield curve. The revolution in DeFi is doing just that, establishing a forward curve of future value. It is only at the money market phase right now (short-term yield curve) but over time we will establish the time preference for bitcoin over thirty years or more, just like bonds.

 

My guess is that bitcoin will trade at rates higher than bonds, not because of credit risk or 

inflation – bitcoin suffers from neither – but because the value of that collateral is worth more due to its “pristineness”. Owners of bitcoin collateral will get rewarded for owning the best collateral. In the current system, owners of quality collateral get penalised with lower rates.

 

This to me is the killer application.

 

Maybe in the future, bitcoin can become money itself, or at least a form of it but, with its expected future value so high, there is no incentive to spend it, only hoard it as a reserve asset that appreciates over time.”

 

Pal goes on to explain why the primary concerns for the future of bitcoin and the crypto movement are easily dismissed:

 

Power outages

 

One of the arguments is that bitcoin is only as good as the electricity supply.

 

But really, power outages aren’t a risk to bitcoin because the entire blockchain is stored on over 10,000 nodes, all unconnected, spread all over the world. The risk of destroying or changing the ledger is only that of total thermonuclear global war or a complete destruction of the planet i.e. the risk is super low, and we’d have bigger problems on our hands. Also, you can exchange private keys without electricity, and you can then put them onto the blockchain when power is restored.

 

The current financial system is equally reliant on electricity for the banking system to work. And the world invented back-up generators and solar power a long time ago!

 

This is not an argument that holds up.

 

Quantum computing

 

Others talk about the risk of quantum computing breaking the cryptographic security of bitcoin.

 

Well, that is at least a decade away and maybe many decades, if at all. It is also a ‘known’ risk, and many are working on anti-quantum protection. The cryptographic arms race is in play and there is too much money at stake to assume this risk is super high – the incentives are as high to solve this, as they are to break it. 

 

Governments won’t allow it

 

The other key pushback on bitcoin is that governments will ban it. Globally, this is impossible due to the distributed nature of the blockchain and because regulatory arbitrage will allow others to go against any ban for their gain.

 

And let’s face it, no one is going to ban a $240bn asset. Talk to me when it’s a $10tn asset class and maybe we have to do some jurisdictional planning...

 

Also, watch the actions of the banks, asset managers and central banks. All of these are getting involved in digital assets, digital currencies, cryptocurrencies, tokens and blockchain. Their actions suggest that they understand that it is not going away and the best way to counteract it is to build digital central bank currencies that integrate into the new system, allowing for the digital collection of taxes or distribution of fiscal stimulus.

 

In a world where gold can operate as a $10tn asset, bitcoin can too. I see a time where central banks, starting with smaller, more unstable ones, will use bitcoin as reserve assets for the reasons mentioned before.

 

What bitcoin offers is the ability to opt out of a fiat regime when we see it as a risk to our store of wealth, just as gold does now but in a much easier, more powerful format.”

 

Raoul is echoing a lot of what he has been saying from a report he released back in August. Since then bitcoin has been on the move and is increasingly looking like it is coiling for the next leg higher in price. Its recent break of $12,000 US was achieved as PayPal announced it was including Bitcoin within its payments network and is an important staging post, but only that.

 

What is more important than watching price action is to understand that crypto developments are moving rapidly behind the scenes and that an alternative financial architecture is heading our way fast. To a casually interested observer, crypto can seem bafflingly complex, peripheral and highly speculative. More than anything, Raoul encourages us to think of it as a paradigm shift in finance and that it is creating an anti-fragile environment at a time when Covid has thrown so many of our preconceptions of continuity under a bus.

 

As the fiat money system creaks under the weight of its over indebtedness and the exit has MMT written all over it, the attractiveness of a system built on collateral that is immutable will rise. It is early days and bitcoin’s market capitalisation is a drop in the ocean next to global bond and equity markets, but the tide is rising. Gold at ~$10 trillion is too small to act as a significant diversifier, so why should we bother with bitcoin at 1/40th of that valuation? The answer is that a rising price will attract capital which will attract further adoption at both an institutional and retail level. This virtuous circle is in its infancy. This explains why Raoul believes we should be positioning for a price increase of many multiples of the current valuation.

 

The risk/reward profile is exceptional. Raoul believes we should seize it with both hands, as indeed he has done himself.