Ray Dalio: "I have some bitcoins"

Fears of a looming global debt crisis have turned the world's top hedge fund managers from being skeptical of Bitcoin (BTC) to gradually accepting it.

Ray Dalio, founder of Bridgewater, said that the dollar is about to depreciate, and the depreciation rate will reach the level of 1971. China is threatening the role of the dollar as the world's reserve currency. In such an environment, bitcoin's gold-like attributes are looking increasingly attractive as a savings vehicle, said Dalio, whose firm begins 2021 with $101.9 billion in assets under management, the world's largest. hedge funds.

“Personally, I’d rather own bitcoin than bonds in an inflationary environment,” Dalio said in an hour-long chat with CoinDesk chief content-zce officer Michael J. Casey.

Now, his interests are not merely hypothetical or academic.

“I have some bitcoin,” Dalio volunteered in the interview, which was recorded on May 6 and will air during CoinDesk 2021’s Consensus on Monday.

Along with fellow billionaire Stanley Druckenmiller, Dalio not only expressed pessimism on the dollar, but also took a position in Bitcoin. By and large, the traditional financial world has gone from ignoring or shying away to tentatively embracing cryptocurrencies, with some looking to profit from their daily volatility and others seeking a way out of government-inflated money supplies during the coronavirus pandemic. haven.

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Bridgewater CFO John Dalby recently left the storied firm to join NYDIG, a bitcoin custodian and prime brokerage that facilitated $100 million in cryptocurrency purchases for insurance giant MassMutual.

After expressing skepticism about cryptocurrencies as recently as November, Dalio has started to show a change of heart this year. “There is a possibility that Bitcoin and its competitors can fill the growing need for alternative stores of value,” he wrote in January.

What Dalio told CoinDesk about owning “some” BTC represents the closest he has come to an endorsement of bitcoin to date. However, in the same conversation, he reiterated his concern that the government, fearing that bitcoin would compete with the national currency system, could crack down on its owners.

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"Bitcoin's biggest risk is its success," Dalio warned.

More than a decade ago, in the aftermath of the 2008 financial crisis (and in the nascent days of Bitcoin), Dalio began researching the recent rise and fall of three global reserve currencies: the guilder, the British pound, and the U.S. dollar.

In Dalio's view, monetary hegemony moves in three potentially simultaneous "cycles": the creation of debt and financial assets; the "internal cohesion conflict cycle" ("as wealth disparities grow and value disparities grow—and political groups growth, there will be more conflicts”); and the rise of another power to challenge the existing top currency.

Whether a currency can weather such cycles depends on the economic strength behind the global reserve currency.

Dalio, who serves as co-chairman and co-chief investment officer of Bridgewater, believes that the dollar is currently in its first cycle, where "debt and credit create purchasing power."

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However, these are both short-term "stimulants" and long-term "disincentives" because things like government debt will eventually have to be repaid, he warned. Still, the debt was issued, but it was getting harder.

"All of these financial assets are claims on real things, real goods and services," Dalio said. “And when the pile of assets becomes so large that the incentive to not own them no longer exists, you have a problem.”

Dalio pointed out that this has happened before in the United States. Following the 1944 Bretton Woods agreement, global exchange rates were pegged to the U.S. dollar, which was backed by gold. In the 1960s, however, federal spending rose sharply due to the expansion of welfare programs, at the same time that the United States was boosting its defense spending to fight the Soviet Union in the Cold War and pay for the rising cost of the Vietnam War.

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Higher debt eventually depleted US gold reserves from about 20 metric tons in the late 1950s to less than 10 metric tons in 1970. President Richard Nixon, feeling that this was untenable, took the United States off the gold standard in 1971. The U.S. dollar has remained a "fiat" currency ever since.

Dalio warns that the situation now is very similar to 1971.

"When you look at the budget and you look ahead, we know we're going to need more money, more debt," he said.

"You need to borrow money? You have to print money. You need more money? Well, taxes need to go up, and that creates a dynamic. Now I can go on and on about what happens in that dynamic. It might It's capital controls... I learned painfully in 1971 that it causes stocks to go up. It causes... gold, bitcoin, real estate, everything goes up because it's literally going down in dollars. And this It's part of the cycle we're in."

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One of the main narratives surrounding bitcoin and other cryptocurrencies is that they can act as a hedge against inflation, or at least benefit from fiscal and monetary stimulus.

As governments around the world continue to try to ward off economic crisis with more spending, many explanations have been given for the outlook for inflation. Annualized U.S. inflation was 4.2% in the 12 months to April, well above the Fed's long-run target of 2%, although that is largely because the rate is compared to April 2020 , during this month, many economies around the world have come to a standstill.

Dalio noted that there are two types of inflation: one is caused by supply and demand, where labor demand is high and production capacity is low, forcing prices up; and the other is monetary inflation, which is caused by currency depreciation.

As money is injected into the economy, it intertwines the two types of inflation.

"We're going to have a lot of demand because we're putting all our money in cash," Dalio said. While the money supply has increased, yields have fallen to lows as investors snap up other assets such as bonds and real estate.

"It's going to change the amount of money in the hands of individuals, et cetera," he said, "and it's going to continue to get worse because cash is crap. I mean, I'm going to say that because it's going to actually go down to negative returns."

It is this second currency type of inflation that will eventually prevail, Dalio said. That might be good for assets like real estate, stocks and cryptocurrencies, but only to a degree.

“As those prices go up — like bonds — their future expected returns go down,” he said. "When they're close to interest rates ... then there's no incentive to buy these things anymore. And you can be in trouble. It becomes very difficult to tighten monetary policy because the whole thing just collapses. Everything is sensitive to interest rates."

Central banks would then have to resort to printing more money, which could end up with negative real returns on assets, albeit nominally, as seen in the 1970s, he added.

Filling the dollar's falling vacuum is China, which has unleashed some fiscal stimulus and relatively modest monetary stimulus since the pandemic began.

The world's most populous country has also been helped by loosening restrictions on foreign investment, Dalio said.

“In 2015, only 2% of the Chinese market was open to foreigners. Now it’s over 60%, but if you look at relative pricing and so on, it’s a whole different story because they’re not doing quantitative easing,” He said. “They still have an attractive bond market. They have an attractive capital market, which is more open. Because they are more open, the big investors—institutional investors, central banks, etc.—think their weighting there Insufficient,” which means their holdings in China are insufficient relative to the returns they can generate.

Attracting investment in capital markets can translate into additional strength for the Chinese renminbi.

“When you buy financial assets in China, like you buy financial assets in the U.S., you have to buy their currency. So it’s supportive for their currency and it’s supportive for their assets,” Dalio said. He believes that when there is an inflow of capital, China gains the ability to settle and lend in its currency. “China has been very reluctant to do that because they don’t want to disrupt the system. But you’re seeing more internationalization of the renminbi. It’s attractive to borrowers and lenders ... the dynamic is actually following the monetary system and the imperial model the same arc."

With one currency (the U.S. dollar) likely to weaken while another (the Chinese yuan) could rise, it is possible for a neutral cryptocurrency like Bitcoin to play out the way gold did in previous centuries.

While he suggests that a diversified portfolio can include the oldest and largest cryptocurrencies by market capitalization, Dalio believes there are risks that many may not be considering.

“I think one of the biggest concerns is the ability of governments to control almost any digital currency, including bitcoin, or digital currency,” he said. "They know where they are, they know what happened."

Governments may start to worry if bondholders sell their bonds in favor of Bitcoin. “The more savings we create in bitcoin, the more you might say, ‘I’d rather own bitcoin than bonds.’” “Personally, I’d rather own bitcoin than bonds,” Dalio said.

This situation could lead to these governments cracking down on Bitcoin holders.

One indicator is the relative value of bitcoin versus gold, Dalio said. Excluding government reserves and ornamental uses, gold is worth about $5 trillion, he estimates, about five times that of bitcoin. "It's about 80/20 in the world right now, so that's something I'll be watching too. But I think those things could go up relative to bonds."

One way to overcome rising debt is through productivity. While this is harder to measure than before, it will depend on technology, he said.

"The world is going to change at an incredible rate," Dalio said. "Whoever wins the technology race wins everything, economically and militarily...that's what the next five years will look like."

By Lawrence Lewitinn

Compiler: Maya

Source: CoinDesk

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