Ray Dalio, founder of Bridgewater Associates which has $150 billion in assets under management, has become one of the most high profile financier to u-turn on bitcoin.
“I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment,” he said.
Just this November Dalio said the government will ban bitcoin. However in a statement where he analyzes the new currency, he revealed he didn’t know much about the crypto.
That makes it interesting because Dalio shares many of the views of bitcoiners. He said for example that the dollar has entered the last phase.
Now after being acquainted with the digital gold, he says “I and my colleagues at Bridgewater are intently focusing on alternative storehold of wealth assets, and Bitcoin won’t escape our scrutiny.”
Bridgewater therefore may well become the biggest hedge fund yet to potentially even turn into a bitcoin believer, with their analysis concluding that bitcoin is “like an option on a potential storehold of wealth.”
So it is not quite there yet, which means it is still early, with Dalio’s influential analysis of the financial system now potentially taking a bitcoin angle. We quote him in full:
“I am writing this to clarify what I think of Bitcoin. Not being a Bitcoin/cryptocurrency expert I believe my views are not valuable enough to be relied on so I shouldn’t put them out there. I know how much one needs to know in order to have a valuable opinion in the markets. At the same time the little I have said when asked is usually distorted by most folks in the media into brief and incorrect sound bites, so my saying anything does more harm than good. Still, people demand my non-expert assessment of it and clarifications are better than distortions, so here goes, presented with the warning not to rely on it. The only thing I ask of you is that you read what I wrote here rather than pay attention to the sound bites.
I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment. That, like creating the existing credit-based monetary system, is of course a type of alchemy—i.e., making money out of little or nothing. It, like the making of credit that made bankers rich starting with the Medicis around 1350, is making its inventors and those who got in on it early very rich and has the potential to make many more people very rich and to disrupt the existing monetary system. Those who have built it and supported the dream of making this new kind of money a reality have done a fabulous job of sustaining that dream and moving Bitcoin (by which I mean it and its analogous competitors) into being an alternative gold-like asset.
There aren’t many alternative gold-like assets at this time of rising need for them (because of all the debt and money creations that are underway and will happen in the future). Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren’t many of these gold-like storehold of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need. It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in short order to probably being around and probably having some value in the future. The big questions to me are what can it realistically be used for and what amount of demand will it have. Since the supply is known, one has to estimate the demand to estimate its price.
I should clarify what I said about its supply. Although Bitcoin is limited in supply, digital currencies are not limited in supply because new ones have come along and will continue to come along to compete so the supply of Bitcoin-like assets should, and competition will, play a role in determining Bitcoin and other cryptocurrency prices. In fact I assume that better ones will come along and displace this one because that is the way the evolution of everything works—i.e., new ways of doing things and new things always have and always will replace old ways of doing things and old things. Since the way Bitcoin works is fixed, it won’t be able to evolve and I presume that a better alternative will be invented and pass it by. I see that as a risk. For those reasons the “limited supply” argument isn’t as true as it might appear—e.g., if Blackberries were in limited supply they still wouldn’t be worth much because they were replaced by competitors that were more advanced. I still don’t know the answer to why that isn’t a risk, but I would welcome my naïveté being corrected.
At the same time I greatly admire how Bitcoin has stood the test of 10 years of time, not only in this regard but also in how its technology has been working so well and has not been hacked. Still, to one holding digital/cyber assets at a time when cyber offense is much more powerful than cyber defense, the cyber risk is a risk that I can’t ignore. When the Department of Defense can’t protect its systems from being hacked it would be naïve to be totally comfortable that digital assets can’t be hacked, which is one of the advantages of gold-like assets and is one of the risks of all financial assets. In fact I think that there is a good chance that someday we will see the financial system, which consists mostly of digits, be shown to be more vulnerable to disruption and/or to cyber blackmail than is now recognized. By the way, these things are now happening at a growing rate and can threaten the value of traditional financial assets. While I recognize that Bitcoin can be held offline via “cold storage,” I understand it is difficult to do and that very few people actually do it. So, by and large, my understanding is that, by Bitcoin being digital and connected, it is not protected against cyber risks to my satisfaction. I look forward to being corrected.
As an extension of Bitcoin being digital are the questions of how private it is and what the government will allow and not allow it to be. Regarding privacy, it appears that Bitcoin will unlikely be as private as some people surmise. It is, after all, a public ledger and a material amount of Bitcoin is held in a non-private manner. If the government (and perhaps hackers) want to see who has what, I doubt that privacy could be protected. Also, it appears to me that if the government wanted to get rid of its use, most of those who are using it wouldn’t be able to use it so the demand for it would plunge. Rather than it being far-fetched that the government would invade the privacy and/or prevent the use of Bitcoin (and its competitors) it seems to me that the more successful it is the more likely these possibilities would be. Starting with the formation of the first central bank (the Bank of England in 1694), for good logical reasons governments wanted control over money and they protected their abilities to have the only monies and credit within their borders. When I a) put myself in the shoes of government officials, b) see their actions, and c) hear what they say, it is hard for me to imagine that they would allow Bitcoin (or gold) to be an obviously better choice than the money and credit that they are producing.
As far as the supply/demand picture is concerned, while the supply is known the long-term demand over the relevant long-term time horizon (because this is a long-duration asset) is tough to know, largely for reasons I previously mentioned. For example since I view Bitcoin as being a gold-like alternative asset, Rebecca Patterson and others at Bridgewater did some calculations like looking at the value of private holdings of gold and then take percentages of those holdings and assume they were shifted to Bitcoin to diversify that type of holding. By way of example, if 10% of the private holdings of gold were switched to Bitcoin as diversifier, or 20% or 30 or 40 or 50%, what would the price be? Rebecca did that and a lot more research that is shown in her write-up. They did a number of what-if scenarios. For example, what if a decent percentage of those who built Bitcoin and got on its wagon wanted to diversify into other assets like gold and stocks, or what if the government wanted to prohibit its use, or what if etc…what would these scenarios look like? (The answer is that they would be terrible for its price.) Altogether, they paint a picture that is highly uncertain. That is why to me Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of.
That is what Bitcoin looks like to this non-expert. I am eager to be corrected and learn more. On the other hand, believe me when I tell you that I and my colleagues at Bridgewater are intently focusing on alternative storehold of wealth assets, and Bitcoin won’t escape our scrutiny.”
We don’t have many corrections to the above except where it concerns bitcoin being overtaken, that has been tested and so we have some theories arising out of that chain-split experience to BCH.
In our view, a transition from bitcoin to some other bitcoin like system, if it happens at all, would be very slow and gradual almost comparable to a transition from the dollar to bitcoin.
It would not be instant, like everyone suddenly moving from MySpace to Facebook, and the reason for that we don’t know, but the main theory is inertia arising due to potential costs.
It costs nothing to create a Facebook profile while maintaining your MySpace one to then gradually move to Facebook.
For something like bitcoin however you’d have to take the decision to sell, which can be costly. Otherwise you can just buy the other asset, but unlike with the MySpace profile which just can be forgotten, your bitcoin wealth is still going up or down so the addition of this other asset doesn’t necessarily shift focus, at least not completely.
This gradual transition as observed during the BCH feud makes Hayek’s theory of competing currencies more palpable because there wouldn’t be a sudden systemic change every-time something better comes along, it would be a slow consensual process.
Because of this underlying chemistry, the answer is probably the same to his other “what if a decent percentage of those who built Bitcoin and got on its wagon wanted to diversify into other assets like gold and stocks, or what if the government wanted to prohibit its use, or what if etc…”
In a free market every actor is of course free to do what they want, including diversifying into stocks or from stocks to bitcoin or any other asset.
Just as one can’t imagine the whole stock market going into bitcoin at once, however, so too one can’t imagine all bitcoiners packing their bags at once for GameStop or gold or bitcoin 5.0 or whatever else.
The process would be very very slow and very very gradual, making the risk thus no different than for any asset, poignantly in this case like for gold holders going into bitcoin.
Finally, the government is free to do whatever it wants as long as the people in general agree with what it does. As they teach in law school, the British Parliament can ban vapping in Paris, but it has a bit of a problem with enforcing it.
China is finding it very difficult to enforce their bitcoin restrictions even now nearly four years on with billions moved out of China in bitcoin.
If all world governments somehow unite to ban bitcoin, then we’d be speaking of a very different world where it’s not clear whether bitcoin’s price in dollars would be more important than the fact one bitcoin is worth one bitcoin.
It is however probable that in this global totalitarianism, bitcoin would fare better than gold or other assets because you can just memorize a bitcoin seed, its private key.
So as new to bitcoin, we have only one advice for Dalio: look at bitcoin as not an abstract idealized thing, but within the context of all things and in comparison to other assets or concepts.
To conclude, the extent of bitcoin’s privacy is to the extent one can have privacy in the digital world.
It is possible today to have no privacy at all on the internet, just as it is possible to be fully private. The latter is shown by the fact we still don’t know who is Satoshi Nakamoto. And therefore that shows bitcoin can be a very private thing and can be safely stored as a decade on Coinbase remains unhacked because it takes security very seriously.