The Metaverse Podcast - Hedge Funds on Crypto, with Raoul Pal of Real Vision Group
Primer: Raoul Pal is the Co-Founder and CEO of Real Vision and the Global Macro Investor. In this episode of The Metaverse Podcast, he shares with Jamie Burke his journey from TradFi into Crypto and his reasoning behind the move. He sheds light on macro events in our world and how this all points to Crypto — exponential assets that become all the stronger when the reach of their network increases.
Background
Co-Founder of Real Vision
CEO and publisher of the Global Macro Investor
Previously, he was a Hedge Fund manager
One of the few investors who predicted the mortgage crisis in 2008
Reconciling “Crypto Is Macro” And “The Rest Of Macro Is Dying”
💡 Raoul mentioned “Crypto is Macro” at the same time as “the rest of Macro is dying.” What did he mean by that?
Macro people became interested in crypto from 2011/2012 onwards
Macro investors realized that society has become highly indebted
In recessions, interest rates are cut to make sure the debt doesn’t blow up
“But that whole thing everyone looks at in the macro world and said, this is going to blow up. And the only way it's not going to blow up is if we've got an alternative.”
- Raoul Pal
The lower the interest rates go, the more debt goes up
To stop everybody from being decimated, governments print more money to inject more money into the system
People began looking for alternatives
A friend of his introduced Bitcoin to him
Invested in Bitcoin in 2012/2013. After buying Bitcoin, it went up 100% and he sold it immediately
Did a lot of research on it over time
Realized that we have this convergent new financial system, where people are migrating from the old system into this new system
“What is all of this stuff we're talking about? It is literally tens of thousands of really smart people, in real time, building a new system. And it's not only just a financial system, it's the whole system of value, and a modern future that doesn't rely on the past. And if they can scale it fast enough, and build it robust enough, when the other system eventually fails, most of us will be safe.”
- Raoul Pal
To What Extent Is Crypto Uncorrelated To The Wider Financial System?
Over a time frame of a few months, crypto is not correlated with the wider financial system
They are only correlated in a panic because that’s when an overlevered system needs liquidity to delever
People new to the markets think that everything’s correlated. That’s actually just the risks that we have in a levered system
Bitcoin is a call option on the digital asset space. The entire space trades around Bitcoin, just as the currency markets are all based around the USD
Within the crypto market, there will be periods of uncorrelatedness as there are bigger drivers driving the price of other assets in the space
Exiting The World Of Currency Debasement With Bitcoin
The existing financial system would not blow up, with the dollar crashing to zero
Money printing hides currency debasement and lowers the value of your purchasing power
”So if you look at it in different terms, your same salary buys less of a share of the S&P 500, bar of gold, or a share of a Bitcoin than it used to, before they started printing money. And every time they print money, these things keep accelerating away.”
- Raoul Pal
Another issue is that the government has become bankrupt from trying to bail out the economy. Consequently, taxes will rise and future income would fall
His exponential age thesis posits that technologies such as AI, robotics, etc. will be taking jobs and opportunities away
Baby boomers are in the workforce at the same time as their kids
Difficult for salary to go up
Only way to generate wealth is to make the right investment decisions, start a business, or be in a business that pays more money
Exponential Assets
The mobile phone revolution was the first of these mega network effect businesses
Networks become exponentially more valuable as people join them. This idea is encapsulated in Metcalfe’s law: a network is valued not based on the number of nodes in the network but by the number of connections they have with each other
“Anybody is trying to value stuff on cash flows or anything else is barking up the wrong tree. It's how many people are joining the network, are they using the network, and how many other applications have been built on that network.”
- Raoul Pal
This started with the internet on a dramatic scale. Tech stocks became crazily valued because they are not normal stocks, but because they created a gigantic network
A network that comes under an attack and survives is proven to be more robust
As adoption grows, prices go exponential. To everyone else, it looks like a bubble
Exponential assets tend to be very volatile (e.g. crypto, tech stocks)
Exponential Moving Average
Concept that takes into account the speed of the trend
When exponential assets go exponential, they look like they should mean revert by 90% and everything’s going to crash. However, this is the linear world
What he found is that there is a kind of average that most of these assets revert to:
A simple way is to use a log chart
He likes to put regression lines of standard deviations from the average
It will go 2 standard deviations oversold or 2 standard deviations overbought, but still stay within the trend
Linear assets do not behave this way
Economists do not understand this exponential reality. He himself could not get it for a long time because nobody has explained the concept to him properly
People Not Fully Comprehending The Risks In TradFi
People had not understood that they could have lost all of their money in the banking system in 2012 in Europe
People in Cyprus understood when all of their money was wiped out
There are plenty of risks with the existing financial system:
Debasement of money
Confiscation risk
Underfunded pension system
Underfunded social security system
Negative interest rates from bonds
Bitcoin looks riskier because of its volatility, but what a professional does is to look at the risk/reward ratio instead:
Risk is the downside of 75% over a 2 year period
The risk of going to zero is almost negligible
On average, it goes up 213%
Hence, there’s a 3-1 risk/reward every year
Over a 3-5 years time horizon, the returns are 10x, with one major drawdown
“So it [Bitcoin] may be perceived as risky. But again, you're also looking at it through linear eyes. Just to explain to people exponentiality versus linearity. So if I take 20 linear steps across my office and into my lounge, I get 10 meters across. If I take 20 exponential steps, I go around the world like twice. That's what people can't understand how can that be, but that's what exponentiality is.”
- Raoul Pal
Why Does He Think That Regulators Will Positively Engage With Crypto?
Because it is a network that they have no control over
The central banks know that the system is broken. They are printing money to support the existing system. They are not going to tell people about it as it would cause them to lose faith in the system
Launch of Central Bank Digital Currencies, which may allow people to circumvent the banking system
Regulators will have to figure out how they are going to regulate the space
How Does He See DeFi?
Sees it as a hybrid — from permissionless systems to permissioned systems
DeFi has proven itself to be quite robust in a massive sell-off
Algorithms have been replacing people in the financial system for a long time
Is DeFi Yield Sustainable?
Doesn’t think it’s sustainable
If massive amounts of capital enter DeFi, yields are going to collapse
There’s a risk curve for assets, with riskier assets yielding higher returns
On The Metaverse
A few years ago, he was visiting his friend. His friend’s son was socializing on Fortnite
Realized that it’s not a game, but a virtual world
Hadn’t put all of it together until he spoke to Piers Kicks
People confuse the Metaverse with the dystopian Ready Player One world. The Metaverse could be AR, VR, 2D, 3D, or anything else for that matter
From a community angle, humans are tribal — religion, governments, states, or groups people hang out with. With crypto, people can now create states and come together in the Metaverse
People have to keep an open mind that the digital world is equivalent to the real world
“But in the metaverse, we can all come together. So it's an extraordinary change to just how humans operate. We can be separate but together.”
- Raoul Pal
How Does He View NFTs?
People can now invest in culture through NFTs
When Beeple’s piece of art came out, he understood it. He has Rock and Roll photographs signed by famous photographers
The crypto space has not gotten its head around NFTs. They are busy buying them as collectibles
NFTs are not solely about art and culture. It’s about the fact that anything digital or physical can now be recorded, transferable, verifiable instantaneously
Where Can People Find Him?
He’s always approachable on Twitter
Started a whole free video channel on crypto at Real Vision
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