‘And I wrote a paper, which is probably the first paper, that suggested that the scarcity of bitcoin could be compared to the scarcity of gold, and if we compare them on a like-for-like basis, when gold was at $30,000, bitcoin should be a million dollars’– Raoul Pal
If it’s valued in the same way amidst all the high volatility, market sell-off, and corrections, Raoul Pal, the founder of Global Macro Investor and Real Vision, has recently spoken about his rabbit hole moment with crypto. The former fund hedge manager explains that he became involved in bitcoin in 2012 while seeking lasting solutions that could help investors avoid a repetition of the 2008 financial crisis. Raoul takes us back to the good old days of 10x’s while also examining the great qualities of bitcoin. He describes bitcoin as one of the greatest assets ever, not just because it is a great store of value but also because of the mathematics behind it. This is an asset with a fixed supply designed to be gradually released to ensure scarcity and keep its value up. In addition, it also solves many of the challenges we had with traditional payment systems and stores of value like gold. Well, let’s begin with Pal’s nostalgic recollection. It is the first and second bitcoin investment.
‘Then the other thing I thought about “Was maybe I’m going to set up the world’s safest bank?”. So naively, I got a few well-heeled friends together and well-connected people. We went to Singapore, we went to Switzerland, we went to the US and we tried to set up this bank, and it was hard to do because the banking system doesn’t want to allow entrants. They certainly don’t want to allow people who don’t operate in the same way. So I was kind of giving up and a friend, one of my subscribers to global macro investor, tapped me on the shoulder and said “You know what, you should look at bitcoin”. This was 2012.
I’d seen it because my job is as a macro guy. I look at all the investments around the world and figure out what’s the most interesting to invest in. So I looked at it and I wrote a paper, which is probably the first paper that suggested that the scarcity of bitcoin could be compared to the scarcity of gold. If we compare them on a like-for-like basis, when gold was at $1,300, bitcoin should be a million dollars, if it’s valued in the same way. That became a very widely circulated piece of research because that was the first macro research on bitcoin, and then I started investing in 2013. I bought it for the first time and it went up 100% in a month. I’m like, “What’s this?This is not normal”. I sold it again. I thought I needed to think about this. I then re-bought it and held it all the way through until 2017. I sold it like a genius. I’d made 10x. I was like a hero. I was punching the air. Then it went up another 100 after that, and I felt like an idiot.
So it is life, and then eventually my, i think of things in these kind of big macro trends, how the world interacts and particularly around business cycles, when the economy goes up, economy goes down. We know that when the economy goes down, it’s weakening and bad things happen. It was already weakening in 2019. We were headed towards recession anyway, and then a pandemic comes. So my macro training teaches me to join the dots. So with this pandemic coming, we’re seeing that it’s going to probably shut down the world. I saw that really early. I was really lucky and made some other investments around that, but what I knew was that the outcome was that the central banks and the governments were going to print so much money that we couldn’t believe it because we’d just shut down the entire world for three months. So I thought now was the time for bitcoin. Bitcoin is this store of value, and it’s also a call option on the future financial system. So then I became quite well known in this space because I was very vocal because I didn’t want to let it happen again.
That happened in 2008 and 2012. I could see what was happening and I couldn’t tell enough people. So it became my absolute mission to educate as many people as possible about, not only the opportunity here, but also the risks in the system itself ’.
One common maxim that has been shared and reshared in the financial markets is that of bitcoin as digital gold. At the just concluded World Economic Forum conference, billionaire investor and fund hedge manager, Ray Dalio, made this exact statement when asked to speak about bitcoin and other cryptocurrencies. It is without debate that these assets share some similar characteristics. For example, both cannot be debased or diluted and have great advantages over fiat currencies. However, they are also completely different and unique assets.
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Please listen to Raul Powell’s critical examination of the many differences between bitcoin and gold:
‘So we see this conversation around storing value as gold and the comparison then to bitcoin. Can you explain how that comparison exists?’
‘You can’t destroy gold. It’s an element that you can’t destroy. So, therefore, it has longevity. Almost all other metals erode in some way, shape, or form. Most other assets, like diamonds, yes, but there weren’t enough of them. Now we can create diamonds synthetically, but gold was expensive to get out of the ground.
So there was kind of a known amount of it and it was hard to get, so there was a restricted supply of gold that came onto the market every year, and every piece of gold that got mined could never be destroyed. It could be lost, but really mostly it would just remain in circulation. So that has what’s known as a “stock” to Flow. So there’s a stock of stuff that’s already mined. There’s a small amount that’s available and then there’s a small amount that comes onto the market every year. What you know is that, therefore, if you want to buy gold, and a lot of people want to buy gold, the price goes up because there’s no new gold. So you have to buy it from you. So if I want to buy your gold spencer, you can say, “Well, at what price?” and that’s why gold became an anchor for pricing. In a world of fiat currency, inflation can happen, debasement of currency, or other things, and gold became a kind of global currency, and the whole system was pegged on gold for hundreds of years. Gold has been used for several thousand years as a system of money, so I could pay you in gold and buy a car for myself. It’s not that complicated to do. It’s doable, but it’s a pretty clunky process.
So, bitcoin comes along and it basically does this but VIA technology. So you now can’t increase the amount of mining because you’ve suddenly found a new mine in Papua New Guinea. There’s like a fixed number produced by mathematics that is impossible to change. So you know exactly the supply and you know exactly the stock. So now you’ve created something with scarcity, and because it’s digital, it can never be destroyed because it’s on the blockchain. The blockchain is basically a system of record. If we record something, if I sell you something, there’s a ledger that says “I bought, you sold,” but the blockchain goes “I bought, you sold, and all of these people will confirm it”. So that cannot be changed, so we don’t go to court over it. It’s just proven on the blockchain. So that solves gold in a way that is more useful for the current age because we’ve now got the internet. You know, we’ve all bought and sold gold, and it’s a pain and you don’t physically own it, and if you do, where’d you store it in your house, and it’s clunky and it’s big and it’s not easy to make a payment for a coffee or a car. I mean, I can do it.
But it’s not easy because we have to agree on the price of gold for all of this stuff. The internet connects everybody around the world; everybody’s got a mobile phone. We need money and a store of value that operates in that system, globally, and along comes bitcoin and solves that. So you know, I just got off the phone with the founder of WazirX , who is the Indian crypto exchange, and like I said, Indians are the third largest adopters of crypto now because they intuitively get it. Their population is now on average 26 years old, so these are millennials ruling India. They’ve grown up with gaming. They’ve grown up with digital stuff, so here they go. They look at their parents with their gold stash, thinking, “Oh my mum’s got this gold vandal, what’s the bloody use?” But if I have bitcoin, I can store it, I can transfer it, I can use it all the time, and it gets around the issue of the Indian rupee devaluing.
It gets around the rising prices. It’s like perfect for that generation, so india is going to be a vast market for this because Indians intuitively understand the store of value and they just understand that this is a digital sort of value. So it’s really an exciting time.’
Bitcoin and the rest of the cryptocurrency market are causing a great reset in the financial markets. This is a huge storm that is going to sweep many sectors and completely change the way we view investments, stores of value, and payment systems. Though there are still some uncertainties surrounding the market, from regulatory uncertainties to little knowledge about how the crypto space will react to specific market conditions, as we go further, we will understand the sector better. But with the little knowledge we already possess, there is no doubt in our minds that this is going to be one of the greatest technological movements of our generation.
What’s your crypto ‘rabbit hole’ moment? At what point did you realize that this was going to be bigger than anything we have ever witnessed? Please state them below and drop your observations about Pal’s interview.
[This article is a transcription of a video made by Savvy Finance]
Original video: https://youtu.be/yeQ3ZwNH_Tg]