🎙 “The Biggest, Clearest Bet of All is Ethereum:" Raoul Pal
In this week’s episode I interview Raoul Pal, who retired from the hedge fund world at 36 years old and has run financial media company Real Vision for the seven years since. He predicted the housing bubble, he was early to call the devastating effect the ...
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In this week’s episode I interview Raoul Pal, who retired from the hedge fund world at 36 years old and has run financial media company Real Vision for the seven years since. He predicted the housing bubble, he was early to call the devastating effect the pandemic would have on the economy, and now he gives us his thoughts on what he sees is coming up in the next few months.
Raoul believes the second half of 2021 will be worse than expected, but that the decline will be short-lived thanks to even more stimulus to be added to the global economy. This will cause risk assets to continue their climb, including crypto. And for that he’s well-positioned: he says 100% of his liquid net worth is in cryptocurrencies.
He plans to continue increasing his ETH exposure as all the most meaningful innovation in the blockchain space is happening on that network. In fact, he says the clearest bet of all for the next 12 months is Ethereum. Raoul is most bullish on social tokens. He believes that while DeFi’s potential is big , as it promises to replace the plumbing of the financial system, community tokens and NFTs are even bigger, as they can disrupt every business.
As for traditional assets such as equities and bonds, Raoul doesn’t believe they’re in a bubble. He says it seems that way but what’s actually happening is the relative value of fiat currencies is depreciating. Raoul believes an increasing number of people are starting to realize this. Fortunately, there’s a life raft waiting for them. The parallel financial system that's being built with crypto.
The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Owen Fernau.
🎙Listen to the interview in this week’s podcast episode here:
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Raoul Pal: This is the whole story of crypto, of me and my whole macro thing. So I had been noticing and commenting and writing about the global debt bubble since about 1998 when Asia fell apart on a debt bubble. And that was the Asian crisis. And I started noticing the same trends were happening in the West and Japan was also quite far ahead. So I was getting very worried about the financial system. Then 2008 came along, and we blurred the financial system, and the answer was to print money. And then 2012, we almost lost Europe as well based on the same issue, debt.
Over that period, I started looking around for an answer. How can we avoid this? People had looked at gold. But that was only part of an answer. How do you actually build the financial system? So I started thinking about could I create the world's safest bank, one that held treasuries directly with the Federal Reserve, let's say or whatever it may be. So I spent about a year on that journey. And during that journey, one of my friends came to me and said, have you looked at Bitcoin? So that was 2013, early 2013.
So I very quickly understood, you know what its promise had, particularly blockchain and the scarcity value. And I probably wrote the first ever stock-to-flow paper from a macro perspective in 2013 about how I valued Bitcoin versus gold, for example, using stock-to-flow analysis. And I first started investing in it back in 2013. And so I had followed the journey of crypto and learned about some of the other protocols and started getting interested in the whole space.
And by about 2015, I'd started realizing that everything in the world was going to get tokenized in the end, and that this was going to be a predominant business model. But the Bitcoin price after the bull run in 2017 was coming down. And so I got out during that bull run too early. The forking wars had freaked me out a bit. So I got out, but I made a lot of money in it. Or made some good returns in it.
And then I was following the space briefly. But my hypothesis was that when the next recession comes, we’re going to have to test all of this all over again: the financial system, debt, central bank printing, all of it. And so I was waiting for that. And my work and analysis suggested it was coming in 2020, and had started in 2019. So I was then starting to get much more focused on crypto. There were a lot of other macro things going on, the pandemic hit, which obviously accelerated the process and now made it the biggest economic event of all of our lifetimes.
So the answer was going to be, if my hypothesis was right, the biggest monetary experiment in recorded history that had to be the offset to this. I was then looking at the chart of Bitcoin and it was forming this perfect big triangle pattern, which is a nice consolidation pattern that usually precedes a breakout, and it backed into the middle of this triangle in March 2020 as everybody panicked, and all risk assets sold. And that was the time I said, this is the opportunity. There's only one way for this to go: it's either going to zero which was almost no chance, or this was the start of the move. So I started buying Bitcoin then. Then I really went very long when it broke 10,000 which was the triangle.
And then over the course of the year, I got to 100% of my liquid net worth by about August last year, that was all in Bitcoin. And then I broadened that out and increased my Ethereum exposure by about October thinking that Ethereum was actually going to massively outperform for a couple of years. So increased my Ethereum exposure, and then added a basket of other tokens, and then took some macro bets in the future of where this is all going, which I think is communities, social tokens, that use of NFTs outside of just artwork but attaching assets to the blockchain, and also the metaverse.
“And then over the course of the year, I got to 100% of my liquid net worth by about August last year, that was all in Bitcoin. And then I broadened that out and increased my Ethereum exposure by about October thinking that Ethereum was actually going to massively outperform for a couple of years.”
So that's where I am now. And so I'm now mainly, I think about 55% of Ethereum, 25% Bitcoin, and the rest spread amongst a bunch of different tokens.
Camila Russo: Interesting. So you have continued to increase your Ethereum and other tokens’ exposure and reduce your exposure to Bitcoin?
RP: Correct.
CR: And still 100% of your liquid assets?
RP: Literally 100%. Yeah.
CR: Is in crypto?
RP: Yes.
CR: Wow. And it looks like the pandemic really triggered this, because you were waiting for a recession to happen to really go all in on crypto?
RP: Yes, I was waiting for the macro to meet this crypto market, where it became obvious to everybody that crypto offered a big solution, because people didn't get it for a long time. But the moment it happened, everyone suddenly realized, oh, my God, this is going to offer a lot of answers. So I knew that those two narratives had to meet at some point, and the recession was going to be that point.
CR: So why do you think crypto is the answer to the recession?
RP: It's not the answer to the recession. It's the answer to the future of the financial system as a start. Just as a small start is the fact that in a debt-laden society, everybody owes everybody money, and when things go wrong, you don't know who owes what to whom. And that's what happened with Lehman Brothers, and many of these other things, is we don't know who owed what, because there's daisy chains of all of this debt.
Blockchain solves that, you know immediately who's the owner of the asset. It also gets around a lot of other legacy financial problems, ownership is one. There's problems within custody within the deep hearts of the plumbing of the financial system that if somebody defaults, almost everything blows up. And blockchain solves that, again, because of this ownership issue. It makes transfer instantaneous so you don't have two or three day settlement periods. There were a number of things.
But I also understood that that’s blockchain itself. But Bitcoin has these two attributes. One is the store of value, so it's like gold, because it's a scarce asset, like artwork and other things, real estate. But it has this other thing, which is this call option on the future. What could it be? What could it be used for? What could this technology be used for? And that's really the network effect that is Bitcoin. And it's the same for the whole crypto space.
“But Bitcoin has these two attributes. One is the store of value, so it's like gold, because it's a scarce asset, like artwork and other things, real estate. But it has this other thing, which is this call option on the future. What could it be? What could it be used for? What could this technology be used for? And that's really the network effect that is Bitcoin. And it's the same for the whole crypto space.”
So if it really was going to be a store of value, and the central banks were printing an unprecedented amount of money, then like equity prices, real estate prices, gold prices, it should go up in value, but should go up a lot more because it has this call option on a potential future financial system too. So that was really what I saw. And the charts started playing out exactly that way where Bitcoin started outperforming every other asset on earth and there became no point to own any other assets.
Now this year has been less that, Bitcoin has kind of kept pace with other assets but in a weird way. It went up a lot first and then came down a lot, but over time, it's generally outperformed everything.
From Bitcoin to Ethereum
CR: And what about Ethereum, why increase your exposure so much so that it even trumps Bitcoin?
RP: Because in October, I started seeing the chart of Ethereum versus Bitcoin and it looked like it was going to start outperforming, just a chart pattern and a hunch. And then I started digging into, okay, how do you value Bitcoin and Ethereum? So we've had the stock-to-flow model, but really what it was to me was also a network and you use something called Metcalfe's law to value a network, which is basically a network has value proportionate to the number of people on the network and the number of interconnections they have with each other.
So I could see that in Bitcoin, and you could pretty much prove it out, by putting the number of active wallet addresses and the price of Bitcoin on a chart, and you basically get a very highly correlated answer. And I could see people attacking anybody who talked about Ethereum or other tokens online. So I'm like, I need to find out how you price Ethereum because I have a feeling it's exactly the same as Bitcoin.
And what was interesting is I used the same mechanism and it's priced exactly the same way. But what was more surprising is the adoption of Ethereum was much faster than that of Bitcoin at the same stage. So I'm like, wow. And then you start realizing the number of things being built in it, the applications, the number of developers involved, and the speed of the increase of the number of users. So there's a lot of interconnections plus a lot of users - that was going to become very valuable. So then add a chart onto that again, the chart of Ethereum like it was going to break out, and that gave me everything I needed.
CR: And how are those charts looking now?
RP: Well they continue to show that even Ethereum has been having more volume in certain days than Bitcoin has. The wallet address growth is faster than Bitcoin in every way. It's outperforming Bitcoin except in market cap. I think we call it the flippening when Ethereum is larger than the market cap of Bitcoin. That's nothing to say that I don't believe in Bitcoin. Bitcoin is a different thing to Ethereum.
Many hardcore Bitcoin believers think that all applications will be built on the Bitcoin blockchain. But I think that's more a hope than a reality. The reality is many different ecosystems will get traction for different things. And Ethereum, right now, has DeFi, NFTs, social tokens all on it. So it doesn't have to be money.
“Many hardcore Bitcoin believers think that all applications will be built on the Bitcoin blockchain. But I think that's more a hope than a reality. The reality is many different ecosystems will get traction for different things. And Ethereum, right now, has DeFi, NFTs, social tokens all on it.”
The next part of the equation comes with the introduction of EIP-1559 which essentially lowers the supply of Ethereum by burning Ethereum, and then there's the ETH 2.0 where we move to proof-of-stake, which again, A, will lower the gas fees, but also will lower supply even further; so it becomes a super scarce asset with massive use. So, probability is it’s going to do pretty well.
CR: Okay, and I'm really interested in how you're looking at all these applications that you've mentioned that are being built on ETH, DeFi, NFTs, social tokens. Are you investing in these, testing them, playing with them? What's your experience with these applications been like?
RP: So DeFi, I've invested in some of the protocols, but I have not used DeFi. I’m not really a yield guy. I don’t really care about yield. Macro guys tend to be price appreciation people. So I tend to look for those opportunities more than I look for yield. And I don't think we yet understand the full risks in DeFi, which protocol is going to work, which ones are better, which ones aren't. But I've invested in some, an equally weighted basket of a bunch of them, just to have exposure, just so I can get understanding.
And then with social tokens, NFTs, I've invested in some of the NFT platforms, but the social tokens, there's not many of them around, but I've invested in those two more significantly, because I think they are, maybe not even for this cycle, but I think they're going to be a huge part of the global business model going forwards when businesses start coalescing around communitiesand how communities can drive their own value system by using tokens and network effects to increase the size of it. So I'm really excited about where this is all going.
“...I've invested in some of the NFT platforms, but the social tokens, there's not many of them around, but I've invested in those two more significantly, because I think they are, maybe not even for this cycle, but I think they're going to be a huge part of the global business model going forwards when businesses start coalescing around communities and how communities can drive their own value system by using tokens and network effects to increase the size of it.”
Making Culture Investable
CR: It's so interesting to hear you, a global macro investor, with a long track record in traditional finance, being Goldman Sachs now investing in social tokens, which is such a new and fringe part of crypto. So I'd love to just hear more of your thoughts on how, like you have this whole framework to value ETH and Bitcoin, so what do you use to value social tokens?
RP: Networks. It's all the same. Everything's the same trick.
CR: Right.
RP: So let's say you are Disney, how many fans does Disney have? What is their community? If they would bring them together as a community, I would guess a billion people, maybe two, maybe three. Okay, so there's 3 billion people who love Disney, parts of Disney, and they will consume Disney in a number of different ways. So how does Disney access their fans right now? They have to rent them back off Facebook, YouTube, Google, Apple Music, Apple TV, Spotify, they have to rent them back and pay away economics.
CR: By that, do you mean that they advertise through these platforms to get them to go to their parks and watch their movies?
RP: Exactly, because they don't have a direct relationship with their fans. The only point that they ever do is when they walk into the Disney Store, or walk into the theme park. But what tokens do is give them direct access to those fans, because you now have a relationship where that token is the currency of the Disney World. So I can buy things.
And if I happen to be a currency owner, I can get things that are discounts, I can get certain access, I might get to the film a week early, I get so many benefits that I value as a fan. And I might get Disney plus at a discount. And if I renew my Disney Plus every year, maybe I get more tokens. And maybe I can build a business of selling Disney t-shirts, and I charge them in Disney tokens and people start building businesses. So you build a whole economy around Disney, of which there is one already. It’s huge, giant.
But what's the difference here is as a token holder, I now share in the economic benefits of that community. So if the community becomes more valuable, then I make more money, my token goes up, it's an asset. So culture becomes an asset that you can invest in. This is game changing. Think of a world of TikTok, of influencers, of songs that come out now on social media, they're not driven by Spotify, they come out on TikTok. Now what happens if you can invest in the IP rights of that song of your favorite artist, and then make your own TikTok videos to try and drive its virality? You're helping the artists create network effects. Same with a new Disney film.
“...the difference here is as a token holder, I now share in the economic benefits of that community. So if the community becomes more valuable, then I make more money, my token goes up, it's an asset. So culture becomes an asset that you can invest in. This is game-changing.”
So you're creating this new GDP, this new value system out of nowhere, where you are fully aligned with that brand, influencer, musicians, sports star, whoever it is. That's really big. And once you think that through, you realize, okay, well, where are the big tech players in all of this? Do they understand it? Yeah. And it's very simple. It's in front of our eyes. It's Facebook Diem. They've created, not only is it a stablecoin to allow global commerce on their platform of the biggest network on Earth, 3.5 billion people, but it's basically a token for the Facebook economy.
With 3.5 billion people, what is that going to be worth? Who's going to build what on that? This is huge. And if they do it, well, probably YouTube has to do it. And Spotify will do it. And Apple will do it. So it's coming. People just can't see it yet. People only look at today and say, well, NFT’s about art and social token’s for small YouTube influencers. This is just the start of where this is going.
“With 3.5 billion people, what is that going to be worth? Who's going to build what on that? This is huge. And if they do it, well, probably YouTube has to do it. And Spotify will do it. And Apple will do it. So it's coming. People just can't see it yet. People only look at today and say, well, NFT’s about art and social token’s for small YouTube influencers.”
CR: So how do you think social tokens being created by people in the Ethereum community, artists, how will those interact with tokens that you think huge media and tech companies will issue?
RP: We don't know yet. Some will stay within that community and won't trade externally. You know, if you're a small DJ, and you've got your community of 50,000 true fans, well, those tokens are not going to be valued outside of your fans. But to your fans they are, so they'll stay within your community, and maybe they're worth $5 million of extra value that you didn't have before and that's very interesting. But others, once they become big, become tradable assets.
You know, wait till all the football clubs; Chiliz has done some of this, but they've only just started in creating the token economies. Imagine how big that's going to be. Because basically, you can play a part in your club, but you can also bet on one club versus another over long-term time horizons. Because, you can say, well, I think Manchester United is going to be better than Man City over the next five years, and you can be long one short the other. I mean, the use cases become enormous.
And there will be this transferability amongst different ecosystems over time. But they have to have a certain size or value for different people. Or maybe I don't like Disney, but I can understand the value of a Disney coin, I'm going to own it anyway. Because of course, that's going to go up, of course, that's going to be worth literally tens of if not hundreds of billions of dollars.
Old Guard Catching Up
CR: I wonder if, because so far, it's been people in crypto and artists taking the lead with this innovation, I think, in part because of regulatory uncertainty. Facebook has had to hold off on issuing its own token for this long because of all the concern and regulatory risk. So it's interesting. That dichotomy where you have these tech and media giants who have these really valuable communities who would be ripe for a token but they have to hold back on this innovation and meanwhile, it's the smaller communities that are leading the way. So I'm wondering if maybe these new communities will be the ones that will really create the most valuable token communities in the future and replace the old guard?
RP: Look, I think they are disruptors. So they are coming and things will change, and the old guard will have to adapt. Can they adapt well enough? Do they really have brands that you want to invest in? Do you want to have a community? I don't know. Maybe Apple does. Maybe Google doesn't? We don't know. But yes, it blows things wide open. And, I spend a lot of time in this space. I'm having conversations with all sorts of people. And this is on the radar screen of every media company, every talent management business, every record label, every major brand, particularly fashion brands. They get it.
“I spend a lot of time in this space. I'm having conversations with all sorts of people. And this is on the radar screen of every media company, every talent management business, every record label, every major brand, particularly fashion brands. They get it.”
But different people have different stages. I mean, it's not really been done yet. So you'll find the people who can take the most risk will take the risk first. If not, there'll be the bravest of the bigger brands. And it'll be fascinating to see how this plays out.
Equity Versus Tokens
CR: Can't wait. What does this do to equity?
RP: I think it sits above, equity as a different layer. I think the equity incentives are around cash flows. And this is not based on that. How does the value of the token flow through to the equity holders? That we don't know yet. So it should increase the value of the equity to a certain extent, but maybe it doesn't, maybe they're separate entirely, so you have these two systems of value. So you can have equity debt and token. We don't know. We just don't know.
One of the things I think about for Real Vision is, I really want to tokenize it, it's perfect for our business. It works exactly perfectly, a token that doesn't need to be tradable externally, but it would work ideally. But I'm thinking, well, what if we end up selling to somebody else? How do you value that? I don't know. How does it transfer ownership? It doesn't. So we need to get our heads around it all.
CR: Yeah, it's so new. I mean, I think, maybe it would have to trade in the secondary market at some point, and then the market values it.
RP: That's right. But does it transfer with the ownership of the business? Or does it exist as its own entity? Is the community its own thing? And I think we will see communities worth more than the equity of businesses. So it's fascinating how it's going to play out. But I think communities, the one thing in crypto that most people don't understand and I think it's the one thing that is going to be bigger than all the other applications, sure the plumbing of the financial system is big. But I think what is coming in these communities and NFTs and everything else is far bigger.
“I think we will see communities worth more than the equity of businesses… sure the plumbing of the financial system is big. But I think what is coming in these communities and NFTs and everything else is far bigger. ”
CR: Oh, interesting. So you think community tokens, social tokens will be bigger than DeFi?
RP: Oh, yes.
CR: Wow. You think there's more potential there than replacing banks?
RP: Yes.
CR: Why so?
RP: Banks are one business model. This is every business model.
The Next Business Model
CR:Right, Everything has its own users and the users are communities.
RP: That's right. And if businesses now understand this, they're all going to try and build community which most of them haven't got yet, but they're going to see people who have community are going to make a lot more money than people who don't have community. So everyone's going to stop building community.
And communities, what we're talking about here is complex adaptive societies. Complex adaptive societies are like religions, tribes, villages, municipalities, countries, they're all basically the same. It's how you organize a group of humans, right. And you generally organize them along the lines of a mission, a set of rules, and a system of incentives or accounting. And so that's basically every country, every religion, everything. In religion, it's interesting, because the reward system is heaven or hell, or rebirth, or not rebirth, and whatever it is. But they all have a similar kind of setup. So that's how you organize humans at scale.
What these social tokens do is allow you to do that, and create the country of Disney, the country of Real Vision, the country of The Defiant podcast; everybody can do that. And that is incredibly powerful, because then you're building everything around network effects and network effect businesses grow much faster than ordinary businesses.
“What these social tokens do is allow you to do that, and create the country of Disney, the country of Real Vision, the country of The Defiant podcast; everybody can do that. And that is incredibly powerful, because then you're building everything around network effects and network effect businesses grow much faster than ordinary businesses.”
CR: It's so fascinating, and I love this kind of framework of thinking about even religions as communities. And if the incentive for religion is something as intangible as heaven or hell, how powerful is it when you have actual tangible incentives?
RP: Correct. So network effect businesses are relatively new. The internet has really driven them massively. So if we look at, a great example will be Facebook. So Facebook grew on network effects. You know, the more connections on the network, the more value we got, the more it brought brands on to sell stuff, people built businesses off it, and it grew. And then it became Instagram as well and WhatsApp.
But there was a difference between the network user and the equity holder. The equity holder made all the money, the user got all the benefits. Now, Bitcoin comes along, and it does something extraordinary. The network user is the same person who owns a part of the network. So now you're hyper incentivized to grow the network, which is why Bitcoin itself is so religious in connotation, because you're hyper incentivized to save souls to bring them into Bitcoin, right. So that's an extraordinary change.
“But there was a difference between the network user and the equity holder. The equity holder made all the money, the user got all the benefits. Now, Bitcoin comes along, and it does something extraordinary. The network user is the same person who owns a part of the network. So now you're hyper incentivized to grow the network…”
Now, that is the reason why the internet between 1990 and 2000 grew at 63% a year, the fastest adoption of any technology in all recorded human history. Crypto, as an ecosystem, is growing at 113% a year, twice the speed of the internet, starting from the same number of users. So this is at light speed because of these network effects that you point out that you're so incentivized that it's really amazing.
“...the internet between 1990 and 2000 grew at 63% a year, the fastest adoption of any technology in all recorded human history. Crypto, as an ecosystem, is growing at 113% a year, twice the speed of the internet, starting from the same number of users.”
CR: Yes, I think you're totally right that you start to see these religious qualities in crypto communities. And it is because they are hyper incentivized to convert.
RP: That’s exactly right. That’s exactly right. That's how these things work. I mean, it's behavioral economics. Behavioral economics is something, without the internet and without massive amounts of data, that was interesting for stuff like advertising, but now you can apply it at scale. And behavioral economics, the best thing you could possibly have is a network that pays the users or goes up in value when you bring people to it. You can create outcomes from that.
CR: Yeah, I mean, I love this new phase in the internet that we're entering into, which is users becoming owners of the applications. It’s so empowering.
RP: It’s so egalitarian. People can share so it doesn't go to a monopoly. It doesn't go to the monopoly who captures all by using your eyeballs and attention and selling them to other people. You get a chance to participate in everything. And that's true when we get to tokenizing real estate.
The apartment in Manhattan that costs $50 million that nobody can afford except the really rich that goes up in value more than any other apartments, well, the rich people got richer. But now you can tokenize stuff, we can all put 5% of our net worth into that same apartment, and we can all participate on an equal playing field. That's going to be the same for equities. It's the same for art. It's the same for everything. And that's a game changer in itself.
“The apartment in Manhattan that costs $50 million that nobody can afford except the really rich that goes up in value more than any other apartments, well, the rich people got richer. But now you can tokenize stuff, we can all put 5% of our net worth into that same apartment, and we can all participate on an equal playing field.”
And then let alone that, within cultural stuff like communities, we'll be able to generate income by doing things for those communities. So we can now generate income in our online activities in ways that we couldn't do before. So that's all coming as well, and that helps.
CR: Totally. And I love to see, for example, people who had either created super famous memes or had been the subject of those memes monetize their fame through NFTs for the first time ever.
RP: The girl with a burning house, I mean, brilliant.
NFTs Empowering Artists
CR: Yeah, I mean, the people have seen that image over and over, but the girl had never been able to benefit from that, and now for the first time, she could.
RP: Also, artists who are able to see that artwork get sold several times and go up in price, and always take a share. That's what NFTs are, these programmable contracts mean that your IP becomes more protectable. That's really what that meme thing is about. Your intellectual property, you can protect better, and transfer it better. And that's really helpful. You know, musicians lose so much money from all of the usage of their rights, because everybody sticks some music onto their podcast, and nobody polices it and that music goes everywhere. Yes, it helps network effects of that music, but realistically, they should get paid for it. And if you tokenize all IP rights for music, or even images, it's going to change a lot as well.
CR: And also the fact of being able to sell directly to fans without having to go through intermediaries. You're seeing, musicians make millions off one record album, and beat everything they have ever made on Spotify in their 20 year careers with one NFT sale.
RP: Yeah. But they need to be careful not to extract from a community. Because if it's a cash grab, that doesn't look good. So sure you've got this curve of fans who are super fans who have more money, and you can provide products and services to them at a price. But don't just do that, or it just looks like you're taking money. You need to have for your super fans who don't have money, but are your real fans, they need to be looked after too. And the balance of building these communities is not easy. Because most people tend towards how can I make money? The answer is how can I build the best community, money will come. If you don’t build a good community, you're going to destroy the future trust. And if you don't have trust, you got no value.
“Because most people tend towards how can I make money? The answer is how can I build the best community, money will come. If you don’t build a good community, you're going to destroy the future trust. And if you don't have trust, you’ve got no value.”
CR: Such a great point. I mean, making sure that benefit is going both ways, to the artist and back to the community.
RP: Yeah, because the Kings of Leon did not do a good job by doing this. The NFT didn't hold its value. It felt extractive. They hadn't built a community first. So just taking money from people didn't feel right.
Real Vision Bot
CR: That's a great point, not all NFTs are created equal. And speaking of NFTs, the art behind you. I just wanted to ask you the story behind that. And for those listening, this will be uploaded to our YouTube and you can see the great art behind Raoul.
RP: So this is kind of a cartoon art of me and a bunch of things around financial markets and crypto. There's somebody who started following Real Vision and commenting in this weird phraseology, something called the Real Vision Bot on Twitter. I'm like, who the hell is this? So I said, okay, what are you guys doing here? Why is it called the Real Vision Bot? And why does it always have these strange sentences? And they revealed themselves as the guys from Munich Re’s Quants Strategies… And they built another business called the Two Quants on the side with Munich Re’s approval, and they're very interested in crypto, very interested in all sorts of things, and they love Real Vision.
So they built this bot to scrape our transcripts of our interviews. And then they were teaching it natural language processing. So the bot was giving kind of fake Real Vision’s commentary. So then I was like, wow, this is really cool, and they created a character around it, this cartoon bot that's actually sitting in the car over there behind me. So they, then with our permission started getting all of the transcript data, and they started engaging our community and doing surveys and stuff like that.
And they also are very much into crypto. So they decided, the guy who made the bot and the way that its image appears on Twitter and elsewhere, that they would do some other pieces of art. So they made a series of pieces of art, one of them happened to have me in, and then he sold a bunch of these, just as some experiments to see how it all works as NFTs and then they sent me this. So this one's one of five, I think, but there’s some variations of this and so I printed it off and put it on my wall as a picture.
CR: Very cool. Well, that's an example of an engaged community. And you don't even have a token.
RP: No, that's right. That's right. I mean, they built applications on top of the Real Vision world, then created NFTs on top of the Real Vision world without anything to do with Real Vision. That's community.
Slowdown and Stimulus Incoming
CR: Very cool. Okay, so I want you to get your macro hat on and talk about the environment that you're seeing now. I read something you said about the second half of this year that you expect it to be weaker than expected, which would mean a risk-off positioning, dollar up, US Treasuries up. Is that still your view? And if so, what does that mean in crypto?
RP: Every single recession since 1962 has seen exactly the same thing. As soon as you come out of the recession, everybody goes oh, my God, inflation, bond yields go up, and then what happens is the stimulus that the government and the central bank has put in during the recession starts wearing off, and bond yields fall because growth starts slowing down again.
And every single time the central bank has had to stimulate two or more times after the recession to find the natural rate of growth, because all the stimulus keeps coming in and then coming off. The government usually stimulates again a couple of times until the economy gets traction. So this would be really normal. Now, most of the time bond yields go back to the all-time low.
So if we repeat the past, we see bond yields go to zero, 10 year bonds go to zero. I don't think that's going to happen this time. I don't know. But there's a lot of stimulus rolling off. We've just had a massive spike in house prices, a massive spike in the cost of food and fuel and all these supply disruptions. So real wages have stayed flat, well, they've actually gone negative, but wages have stayed the same, while costs have gone up, and mortgage rates went up. And usually, that slows things down already because wages haven't gone up en masse, because so many people are still unemployed. And then after that, you've got the role of the stimulus.
So I think that we're going to see, everybody was like, no, this is going to be inflation forever, growth forever, I think same as every time I've ever seen, it will slow down first, and give us a scare. And we might even see one of the emerging markets blow up. That's usually what happens in the latter phases. It was, after 2008, really it ended up being Europe in 2012. It took a while, but it was creaking at the seams. After the 2001 recession, it was Brazil and Argentina. So that's usually how it goes. And I don't expect it to play out differently.
“So I think that we're going to see, everybody was like, no, this is going to be inflation forever, growth forever, I think same as every time I've ever seen, it will slow down first, and give us a scare. And we might even see one of the emerging markets blow up. That's usually what happens in the latter phases.”
CR: Wow, okay, so you're expecting to see things slow down, rates going back to zero or negative?
RP: Look, I think it's possible. I'm not sure about that. I just think rates go lower. So I'm just going to say that for now. So let's say 10 year bonds today at 141, I would say 80 basis points is reasonable guesses where they could go. But I also think that they could go lower if the growth story plays out. And let's say the US can't negotiate a fiscal policy big enough, there's plenty of ways that you can cause a growth slowdown.
CR: Okay. And then what does that mean for crypto?
RP: Okay, so first order thinking is oh, my God, assets are going to sell off, this is terrible for crypto. Look at March 2020, oh, my God! What you should be thinking is what was the outcome of March 2020? Massive central bank stimulus and government stimulus on a scale of which we've never seen in our lives before. So let's say there is a risk-off, okay, it's not as big as March 2020, maybe Bitcoin goes back down, breaks a new low of this move and gets to 27,000 or whatever it is, and let's say equities are down 10% or 15% and the dollar is going higher, a lot higher and that's making the markets feel uncomfortable, and we start to see the beta slow down. What is the outcome? The outcome is exactly the same. The central bank will stimulate more, and the government will try and push through an even bigger stimulus package. What does that do for Bitcoin? It explodes higher.
So the first order effect is oh, my God, Bitcoin’s going lower, but everybody should be thinking, if this happens, then this is what's going to drive it to 200,000.
“So the first-order effect is oh, my God, Bitcoin’s going lower, but everybody should be thinking, if this happens, then this is what's going to drive it to $200,000.”
CR: Seriously, is that your target?
RP: Yes, my target still remains between 200,000-400,000.
CR: On what timeframe?
RP: Probably the next, I think the cycle extends somewhat, so I'll give it the next 12 months.
CR: And for ETH?
RP: At a minimum $20,000.
CR: And would that mean the flippening would happen later?
RP: Not quite. I don’t think the flippening happens this time around. I think it happens maybe over time. So let's see what it could do. Maybe the ETH 2.0 drives the flippening. Maybe it's a short-term boost. We have a huge speculative blow-off, collapse, you know, crypto’s like, it's not very predictable in short-term time horizons, so it kind of goes where it goes. But if you say to me in five years time, does ETH have a larger market cap than Bitcoin? Probably. In 10 years time? I have no idea. Maybe Bitcoin gets more traction with central banks or reserves or whatever. Or maybe other protocols where ETH’s lead, we don't know, I'm not a ‘certaintist’ about any of this stuff.
“ If you say to me in five years time, does ETH have a larger market cap than Bitcoin? Probably. In 10 years time? I have no idea”
CR:Okay. So you're saying there will be a slowdown, and then the stimulus will kick back in driving riskier asset prices up? But where does this all end? This stimulus after stimulus and inflating of assets? To me it seems like everything is in a huge bubble, housing, equities, crypto.
RP: It's not a bubble if you look at it in the right terms. So I stumbled across this, gold is the great price anchor, right? Everyone’s used gold as a relative asset pricing forever as a system of money. Real estate versus gold, it's about in-line. So it's kind of at fair value. Equities versus gold, pretty much a fair value. So then, it makes you think, why are we thinking everything's a bubble? And then I realized what was going on is that the central bank printing was devaluing the purchasing power of fiat currency, but against these rare fixed assets, and only against those and not against wages, and not against earnings.
So if you think that through, price of an equity goes up, because equities are rare assets, earnings don't go up. So I just saw today, Microsoft over the last five years, or whatever the number is, their earnings have gone up 50%, their price has gone up 400%. This is to do with the balance sheet and the devaluing of money. That's why people feel poorer because wages aren't going up at the same rate the balance sheet is inflating these assets so you can buy less of them.
“...Microsoft over the last five years, or whatever the number is, their earnings have gone up 50%, their price has gone up 400%. This is to do with the balance sheet and the devaluing of money. That's why people feel poorer because wages aren't going up at the same rate the balance sheet is inflating these assets so you can buy less of them.”
So how does this continue? Well, firstly, we've done the right thing, which is build a parallel financial system with parallel assets that actually keep pace with this, right? Good. Because if we hadn't done that, we're in bigger trouble. So that is our answer. Then how do you transition off this slowly? Well, it's slowly and then all at once, the migration moves.
So will eventually all of this debt be devalued down to nothing? Probably. Will we have to use a different currency system? Potentially. But I think it just continues, and more people become aware of it, and therefore more and more people opt out of it. You know I think it's a slow process, all of us in the macro world thought it was going to end with a bang. And this last recession proved to me it's not going to end with a bang. It's going to end with a whimper. It's going to just, we're all going to move over there, and then we're going to be immune to it.
“So will eventually all of this debt be devalued down to nothing? Probably. Will we have to use a different currency system? Potentially. But I think it just continues, and more people become aware of it, and therefore more and more people opt out of it.”
CR: Amazing. Okay, so how this all plays out? What you're seeing is, all of these asset prices seem to be in a bubble, and inflating. And that seems to be that way, because fiat money is eroding, it's depreciating. So in relative terms, it seems that all these real assets are appreciating, and there's this huge bubble. But in reality, what's happened is that fiat money’s purchasing power is decreasing over time because of this massive stimulus and money printing than central banks are doing.
So that will happen over and over again, these ups and downs, stimulus packages, recessions, booms busts, until people continue to see that this is happening, and realize what's going on, that their fiat currency is depreciating, and will gradually move over to this parallel financial system that is made out of sound money, and that just can't be printed into oblivion, like it is in the traditional regular finance…
RP: Yes, and over the period, Japan is showing the way. The central banks will own all of the government debt. They will not allow credit markets to function, because they can't. They can't really allow equity markets to go down either. So it becomes this place where it's very difficult to get returns, risk isn't priced correctly, so it pushes more and more people into this other world too. In the end, they either have to change course once they’ve bought all the government bonds, or they're going to have to understand that this is going to entirely collapse these currencies, if you play it through to its logical conclusion. And nobody will care because we'll have left it. And so us leaving it is what causes the final collapse of currencies.
I'm not that apocalyptic. I kind of figure human ingenuity will figure some way to stop that end game, the hyperinflation Weimar Republic, Venezuela outcome. But we've just repeated again in Lebanon, and we keep doing it, so it could happen. But the good thing is, is we've got a way out. I called it the Bitcoin Life Raft.
A New “World Coin”
CR: Right. So interesting. What will happen with national currencies if everyone is going to Bitcoin, or ETH or whatever?
RP: Well, I don’t think that's necessarily going to be the case. I think we've got the option. What I think most likely happens is somewhere down the road, the IMF or the World Bank or G20, create a global basket of currencies, and they basically use that as a world coin. And they're all going to be central bank digital currencies at that point. And to remain as part of that, you won't be able to expand your money supply more than 2%. So then you've got a more stable currency that doesn't go up and down so much, because everything's pegged to the dollar.
“What I think most likely happens is somewhere down the road, the IMF or the World Bank or G20, create a global basket of currencies, and they basically use that as a world coin. And they're all going to be central bank digital currencies at that point.”
So you know, you're a South African exporter, it's a nightmare for you. But if this is a world pricing basket that's a world coin that has restricted supply, well, you solved a lot of problems. Now, you probably want to devalue as much as you can first and then do that. So I think it doesn't have to go to the end game. It can go to a different stopping point. Now does that last forever? Probably not. No currency regime ever does. But that would change the whole conversation a lot if that happened.
CR: I mean, that would be just mind blowing. It would mean that countries don't have their own independent policies anymore, like monetary policies, I don't know how to regulate trade?
RP: Well, that's Europe, right?
CR: Yeah.
RP: That is Europe, and to some extent, it works, and to some extent it doesn't work. Now, do you have internal currencies and external currencies? Well, South Africa had that for years. That's possible too. So, I don't know. I mean, there's ways of solving this. And so you can still have the independent currencies, but maybe everybody trades using this basket, so it kind of lowers everybody's volatility. I don't know. I don't know. But I think there are answers and it doesn't always have to end with everything going to zero.
Crypto Correlation
CR: So interesting. Okay. And then to wrap up, this is a really interesting debate that's been happening in crypto. Do you think, in the next 12 months, will Bitcoin, ETH, DeFi tokens decouple and start trading because of their own separate fundamentals? Or are they going to continue as correlated as they have been?
RP: Pretty much, every equity is correlated to the S&P 500. Every currency is basically driven by the dollar. Every bond market is driven by the US bond market. I don't see why it should be any different. There'll be relative outperformance differences. You know, maybe Bitcoin doesn't do the best, like the S&P doesn't always do the best. But if the crypto market itself is falling, it’s like the equity market itself is falling. I don't have a problem with that. Then there will be whole periods where some DeFi protocol just continues to go up in a down cycle, because it's getting more network effects and it's attracting a larger share of capital than it would do.
So yes, I think there'll be less correlation over time, but it will be correlated by the nature of all assets. Because there's something called a risk curve, right? So the least risky is Bitcoin, and maybe Ethereum. And the social token that's come out on some unknown artist is probably the most risky, who knows, right? Or a DeFi protocol that’s got tons of money, and it could go to zero immediately. People allocate according to the risk curve, and the longer a bull market is in play, the more they go out the risk curve to get better rewards. And the moment things become more volatile, the moment they come back to the least risky asset. It’s how all markets work, so I don't think it's any different.
Raoul’s Biggest Bet
CR: Okay. And then based on that, what's your call for crypto and given the whole macro environment that we've been talking about, what are your biggest bets right now?
RP: Well, my biggest bet, I think the biggest, clearest bet of all is Ethereum. You know, if you say, if you could only own one asset over the next 12 months, what would it be? It'd be Ethereum because it's the least risky with the highest reward. Because of the massive changes happening. I understand those risks may not go through in the way people think, and then some other questions being asked, and that's all fine and good. But I think probability is that you're going to end up with a reduced supply, massively increasing network usage, interconnectedness of their network, and then you're going to get to proof-of-stake as well, which gets rid of the green argument. I think you're going to see institutional investment in the space.
“Well, my biggest bet, I think the biggest, clearest bet of all is Ethereum. You know, if you say, if you could only own one asset over the next 12 months, what would it be? It'd be Ethereum because it's the least risky with the highest reward.”
So I think ETH is the single bet that there is right now. Just trades like shit right now. Certainly, it needs to get some traction. But it feels like we're in for the double pump, the 2013 repeat.
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