Raoul Pal's Introduction to the Exponential Age
RAOUL PAL: Hi. The video you're about to watch, I think is a really important video. It's a real journey of understanding. Now, I did this pretty much in one take, without notes, just sitting down to get what's in my head out on video. The first 17 minutes, the sound quality is pretty crap. That's my fault because I went rogue, did this without producers, editors, anybody because I knew I had to do it.
Excuse me for that. It does get better as we go on. Also, once I've rewatched it, I realized that there was some footnotes or wants to add, further clarifications, further learnings that I thought were really important into this.
Make sure you watch through to the end as well. I really hope you enjoy it. Again, apologies for the crappy sound of the beginning. Hi. In this piece, I'm going to be representing myself as Raoul Pal of Global Macro Investor as opposed to Raoul Pal, CEO Real Vision. I like to make difference between the two because Real Vision doesn't have an opinion, but I obviously do.
I'm paid to have an opinion for some of the world's largest hedge funds, sovereign wealth funds, family offices, high net worths, etc. That's my research business, Global Macro Investor. I want to give you the big picture, the really big picture where I think everything is going. It's obviously mainly about the digital asset space, because I think it's the single most important thing for everybody to understand.
In order to do that, I'm going to give you my journey of discovery, so you can piece together some of what I've learned on my way, because there are many narratives you've heard me speak about, but haven't really put the whole lot together to give somebody or all of you something really meaty to get your heads around. Now, again, you don't need to agree with all of it, but I want to show you my journey, how I got here, what I think is going on in the macro backdrop, what I think this means and why I chose Bitcoin and then cryptocurrencies, why I diversified, where I think the actual space is really headed, and where this whole thing is going, and how it fits in to the future of everything. There's quite a lot here.
It's going to take a bit of time, and it'll take probably a few watches of this to get across everything that I'm trying to talk about. Let's get back to the beginning. 2008 was a period, in fact, I'm going to go back to 2000. 2000, we started to see the debt bubble increase, and the rise of central banks.
Alan Greenspan, back in 1987, was the first one to stop using interest rates really to stabilize markets, that became modus operandi by 1998, when long term capital blew up. The Fed did it again and again under Greenspan. Then 2000, we had the stock market crash and the recession.
Again, interest rates were used heavily. Now, the money illusion meant that lower interest rates, people thought, I'm going to take on more debt, so they took on more and more debt. That led to the housing bubble as we know. Then that blew up and almost brought down the world's financial system. Now, I was in Spain at the time.
I'd left the hedge fund industry, but I was still writing, as I do today, Global Macro Investor. I realized that the fragility of the system was now becoming the most urgent thing and that after 2008, we haven't really solved it. In fact, it was bloody clear by the time we got into the European crisis in 2012 that it was not solved at all, and debt was the big issue. The only answer at this stage became the printing of money, because there was no other way to deal with it. It'd become too big, too gigantic, too scary, too dangerous for anybody to let the fire burn.
The whole Austrian economic idea of creative destruction was now almost impossible --- JASON ZIEMIANSKI: What we're showing you here on our YouTube channel is just the tip of the iceberg. No matter where you are in your financial journey, whether you're a beginner just looking to break into the market or a financial professional looking to up your game, Real Vision has something for everyone. Every day, our team of expert journalists provides in-depth analysis, written reports, access to live streams, and access to our community, The Exchange, where you can interact with people just like you from all over the world. For just $1, you can unlock all of this and more at realvision.com.
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We look forward to seeing you there. RAOUL PAL: for anybody to let the fire burn. The whole Austrian economic idea of creative destruction was now almost impossible to implement, because the destruction would have been total and complete. Many people think, well, the bankers could have gone under, maybe we should have let everything clear. Well, at this point with this many old people as baby boomers in the retirement, into their retirement ages, you would have wiped out everybody's savings and investments too.
That is okay if you're starting from nothing, but anybody who started with anything would have been entirely destroyed. Now, this story shouldn't be a surprise to you, because it is the story of Japan. We saw this in Japan, where the Japanese realized that their aging population and their saving assets could not be destroyed.
The only thing to do was try and manage crisis via the role of the Central Bank and the merging with government policy and fiscal policy, and Japan has been basically the petri dish for all of this, and almost everything Japan has done has happened elsewhere in the world. After 2012, I wanted to make sure that there was a way out. Now, that was the first time I wrote an article. It goes back 2013, I wrote an article called The Life Raft, where I talked about gold and in fact, Bitcoin.
I had started to have Bitcoin on my radar screen as some good friends of mine, some Global Macro Investor members had been involved in early days. I was going to set up the world's safest bank, that was the idea. A bank that only held US Treasurys, and that any money on deposit was entirely matched by Treasurys that were held at the Fed. No rehypothecation, no nothing. It was a bank outside of the banking system.
I had that idea, but it's bloody hard to set up a bank and people like Caitlin Long are good on it, it's really hard to do. I was running around the world looking at this idea, and the Bitcoin idea came to me from Emil Woods. Emil said to me, listen, this might be your answer. I had seen it and looked at it, and it was very interesting.
In 2013, I bought it, it went up 100% in a month, and I sold, I was like, wow, okay, what was that? I wrote an article in 2013 or 2014 about the stock to flow of Bitcoin, looking at it versus gold, and saying, with gold at about 1300 bucks, where it was at the time, I would impute roughly without the great maths that my friend Plan B has managed to do. I had a rough rule of thumb that Bitcoin is probably worth a million dollars in comparable terms using stock to flow, how much gold was on the ground, how much gold is being mined, etc., and in back imputing it into the Bitcoin price. That gave us a macro framework.
That macro framework became quite well known at the time and got passed around and got many people into the space actually. Then I was out of the space for a while and got back in around 2015, 2016. I started buying, again, probably around 200 and I think I sold out early when the forks were happening. That was the FUD of the day. We've had scandals all the way through S curve moments within Bitcoin.
That moment in time, I didn't understand the ecosystem. I didn't understand the adoption effects of Metcalfe's law, and it was much earlier. I thought this was an existential crisis.
When you're forking something, what did it mean? I didn't really know. I wasn't comfortable and I'd made 10 times of my money, it was at 2000 at that point, so I took profits. Obviously, it then went up another 10x and I felt like an idiot. Well, I didn't. I have money in the bank, but I didn't make as much money as I could have done, should have done.
I didn't have a massive allocation. I have a deep, reasonable size, but not life changing amounts. It taught me a lot about the cycle. I pretty much saw the top of the market, and then it came down.
I still believed in what Bitcoin was, but I didn't think at a time and a place right now. I thought that was important because macro does matter to Bitcoin, doesn't exist in a vacuum. It was off my radar screen. I was looking at most macro opportunities. We're talking about 2018, 2019. 2018-2019, we saw some interesting opportunities in the bond market, because I thought the global business cycle was slowing down and we had one last shot at the rate trade, the heroic trade of loading up on Eurodollar futures because the Fed had to cut and offset the rising in rates that they've done.
I know the bond market was going to start pricing in deflation again, as my economic indicator started forward looking predicting a recession. That came, as we know, in March, but in March, we go back a bit. I'd always said that crypto and Bitcoin in particular, and macro were the same thing. They just didn't know it yet. Most participants didn't know it and didn't understand it. Crypto came from a different community.
They came from a community of developers, the cypherpunks. It came from Austrian economics school philosophy. It came from libertarian philosophy. It came from a number of different things, but it started to attract the attention of finance people, particularly the macro guys like myself.
Our job is to find assets that best represent our views, and where we are in the world and we are all without question troubled by the debt supercycle and how this all plays out. When we saw Bitcoin, one by one, people moved across. Famously, Dan Morehead was first and then a lot of people whether it was John Burbank, Mark Yusko, whether it's Dan Tapiero, whether it's myself, Mike Novogratz. Bit by bit, everybody from the macro world.
Stan Druckenmiller, Paul Tudor Jones, Alan Howard, you name it, they're all moving across. Because they've seen the magnitude of the opportunity, because we all knew that they weren't parallel paths, they were convergent paths. They all converged last March. That's when I got really excited when Bitcoin collapsed in the big liquidation. It had been building this beautiful chart pattern, that beautiful, massive, gigantic wedge, I call it the best chart pattern in the world and a break of 10,000 was going to be the confirmation.
I loaded up with every single penny that I had available. I put it all in to Bitcoin, and it broke out. Because what was going on was we were now going into the biggest recession, maybe in all recorded history.
As you remember, my thesis was liquidation phase, which was into March, and I closed out on my shorts, then it was going to be the hope phase. Then it was going to be the insolvency phase. The hope phase happened, and that was built on vaccines and things are going to be okay, and herd immunity and all the narratives that happen. Something different happened as well. Interestingly enough, the real time economies never really picked up for a while.
They did exactly as expected, but the markets didn't. The markets did the opposite. I said we'd probably finished the year -3% to -5% year-on-year GDP growth, and that's exactly where we got to. The hope was misplaced because the economy was shit and people had been laid off and the structural unemployment, and many of the people in retail, for example, are never going back to jobs again.
There was a real structural problem. The insolvency phase should have been that the BBB entities, the giant corporates should have run out of cash, because they didn't have enough cash flow to paper over the debt payments that it needs to make. It becomes harder and harder, the equity price falls and it all becomes more difficult.
That was also going to happen at household level, where households, where some people were furloughed, some people were given payments, but eventually the payments stopped. If they didn't have jobs, the musical chairs stops, and you're screwed. The same with small businesses.
We saw immediately the government do something it's never done before, which is instant transfer payments, which was stunning move towards a more MMT style environment where fiscal policy and monetary policy are roughly the same thing, or they work hand in hand, which is what we've seen in Japan over the years. That was amazing. It helped a lot of people and basically delayed the insolvency phase. Technically, many firms, many people, many businesses are insolvent but they're being kept alive by the central banks and the governments. Still to this day, we're still in that same cycle. It's become apparent, and I've talked about it in the past, is governments and central banks have to do absolutely everything to avoid the insolvency phase.
My guess was that we're unlikely to resolve it all. I think it actually plays out longer and it is actually in reality in play but we're not going to know until we try and revert back to some normality. This is one of the key reasons why the central banks simply cannot allow rates to go up, because you will destroy any chance of recovery. Anything, if the market wants to go there and try and price in higher rates, yield curve control is going to kick in. We've got pseudo yield curve control in Europe, and we've got yield curve control in Australia, we've got it in Japan, and I think it would come in the US. That means that rates can't actually price inflation.
Now, I'm not an inflationist. I think we will get cyclical inflation, because of the supply constraints and the massive rise of people coming back into the labor force and back in economic life. As we settled down, I think the debt deflation narrative, technology, globalization, aging population, all of this stuff continues to wham inflation.
Over time, as the economy settles to trend rate of growth, potentially inflation falls. I actually think trend rate of growth might change positively, and I'll come on to that at the very end of this, but there's not really a piece for this and that all comes later. It's the macro backdrop of that that is very important to understand, because within this, the only answer was the creation of more money, and that creation of more money was clearly going to be very, very beneficial to Bitcoin because it was basically created for this. I pointed out that early on back in March and April that Bitcoin was two things. It was the store of value narrative, and it also had a call option on the future. I started developing some big meta narratives to help get people across the line.
Because I know it's a scary different world and people don't understand this weird digital bunny. I don't want to throw money at this. I tried to explain to people in simple terms things like pristine collateral, how this is superior to many things that we have in the existing system, or in fact, all of the things that we have, how it acts differently, how you can't create more of it o as collateral, it's worth more, and therefore, it's a better foundation stone for the financial system of the future.
How as a store of value, it offsets the monetary printing and how this could all transition into a future economic system that had incredible value. That's what made me irresponsibly long. That I think, helped a lot of people get across the line. The next part of it that I think was maybe the lightbulb moment for many was my Bretton Woods, new Bretton Woods, the Bitcoin Life Raft piece, and that essentially was saying that, okay, we all see this coming, it's the central banks have seen this digitalization of money, and they want to be involved. They want to be involved by creating a Central Bank Digital Currency, not as a competitor to Bitcoin, but as an ancillary agent within this new digital money system.
That's all well and good. That's basically government stablecoins. Fine. I get it, it's much better. It works really well, but it also has other qualities.
Because the other qualities are it's programmable. Essentially, central banks can program money so we all have different monetary policy or different tax regimes, or whatever it may be. The point being is behavioral economics is going to shoehorn its way in to monetary and fiscal policy which are combining. At that point, we are really beholden to what central banks do.
Can they destroy money? Can they destroy our capital, our savings? Of course, they can, and we needed a life raft, and Bitcoin was going to be it. Now, as we wind forward, we're now seeing pretty much every government on earth running record deficits. This means that, theoretically, they're all bankrupt. We know in this modern world of printing of money, bankruptcy in governments doesn't mean the same thing unless you can't print money, hence when emerging markets go bankrupt, developed markets don't.
The answers to these record deficits is all the story of debt really. How do you finance that debt? Well, you finance it in the age old way, taxation, inflation, and debasement. Taxation around the world is going up everywhere, without question. There's very little things you can do about that because of legalities, whether you like it or not, but inflation and debasement, they're two different things.
Now, central banks around the world have put inflation targets that are higher than where we are now. Will they be able to meet those? My view remains and has been for the last 20 years or maybe even 30 years, no, I don't think inflation is structurally able to be generated. I could be wrong. Of course, I could. Let's wait and see the massive amounts of fiscal stimulus that has to come. Because these deficits aren't going away.
There's another round of huge stimulus to come this year in the US alone, let alone Europe. Now, Europe is obviously slowing down with the virus again, there is more stimulus to come. There's more stimulus almost everywhere. I don't think maybe that infrastructure spend generates inflation, maybe it's just cyclical, maybe structural, maybe everything changes.
I do not see how you get around the rise of technology, the aging population, globalization, and the dynamics of debt. I don't know how you generate inflation in that. Let's assume that doesn't happen.
It's cyclical, it spooks the bond market, the Fed do yield curve control and expand the balance sheet again when that happens. That's an interesting thing, but monetary debasement is the thing that I thought about. I think people confuse inflation, CPI and debasement. You see, most people are looking for the dollar to collapse, not really thinking through the fact that everybody else is also printing money. It seems to be, sure, the dollar might go lower, well, they're doing more than the Europeans, but overall, if you look with honesty at the DXY, something that I was expecting to see break higher, either dollar higher over last year, and it didn't. When I look at the chart, it didn't break lower either, because everybody thought that.
It looks like it's range bound at about 96 as the average. Therefore, currencies don't move. That's interesting, that got me thinking, and rates can't really move either.
Because if they go up, then yield curve control comes in. If they go down, they're going to try and stimulate more, so then rates come drift higher a bit. Let's say US 10-year rates are maybe range bound between zero and 2%.
Maybe they go negative, maybe not. Either way, there's no rates trade to be had, the death depth of macro in rates, I think, is writ large. I know many people think, no, no, you can short rates forever inflation is coming back here, but the central bank and not going to do that. We've seen that in Japan.
What's very interesting is that as yield curve control comes in, it means that they buy bonds, and the Fed buy bonds by printing money. I've looked at that, and I've looked at, okay, if there's no inflation, then where is this monetary printing going? The argument had been for a long time that I didn't agree with, that QE found its way into financial markets. I thought, I don't see that mechanism per se. Of course, it finds its way in some places, wealthier people, corporates with better balance sheets find it easier to borrow.
You see it in the credit markets, how easy they are, that kind of thing. I get that, but the equity market was the one that didn't really pass the smell test, because the equity market rose on the back of QE but volumes didn't. Then what's the buy? Where is the buy? What's going on? At that point, I started looking at the chart of Bitcoin versus other assets, and many of you will have seen this in Macro Insiders and also on Twitter. What became clear, and this was weird now talking about September, October last year, that Bitcoin was about had already and was about to outperform every single asset on Earth. All of the charts of let's say Bitcoin versus the S&P, Bitcoin versus the NASDAQ, Bitcoin versus gold, Bitcoin versus real estate, Bitcoin versus anything, anything I could find, any asset. Sure, you can all find a single stock that's done better but an asset class, not one asset class on Earth looked like it was going to outperform Bitcoin.
I've never seen anything like that in my entire career. That made me pay attention. Then I put it against the Fed balance sheet.
First, I looked at the S&P versus the Fed balance sheet, because the Fed balance sheet is the purest expression of monetary printing. I also use the G4 central bank balance sheets to look at the global printing of money. Let's use the S&P versus the Fed balance sheet, you can see the chart here. The market basically fell in 2008 80% and traded sideways ever since in this chart. What's interesting is gold looks similar.
If you look at the chart of gold divided by the Central Bank balance sheet, it looks similar. If I look at the chart of real estate versus the central bank balance sheet, it too looks similar. If I look at the chart of gold, which is the oldest denominator, the form of money against the S&P, the S&P doesn't look particularly expensive, a little bit expensive, but not the bubble that we're seeing. That got me thinking about these relative asset prices, and the fact that Bitcoin was outperforming everything. I realized that I think we're all looking at this roll, and I certainly had been. What that chart shows or those charts, is that the denominator, which is not the US dollar, per se, but the value of fiat currency in terms of what assets it could buy, because these are all fixed assets, essentially, or low supply assets.
Anything that was a low supply asset was going up in price, but it's going up in price in dollar terms, but when you look in money printing terms, they were basically holding their own after the massive collapse of 2008, and that intuitively feels right to us. The anger and the frustration and the economic misery that's happened since is a function of that, and that makes sense. Variable inputs, like consumer goods and wages were destroyed by this. That makes sense too. With your wage, you were able to buy less assets. If assets are a way to create savings for future consumption, you were able to buy less of them.
So in lies the pension crisis, so in lies the ability for millennials to buy housing. So in lies why the middle classes got hold out. Now, obviously, wages is also competition amongst global workers.
It's also a competition, importantly, against technology, which is slowly grinding away and destroying job of the job of the job. This is creating this imbalance. Everyone's dead right. The central banks are creating a problem here, because they're doing the age old thing of debasing currency. Everybody's looking the wrong way, because they're looking for CPI inflation and cost of goods are going up.
Yes, and no, the cost of some things are going up, things that are driven by the baby boomers, because they've been the driver of inflation, stuff like health care, and also their kids, the millennials, record number drove up the cost of tuition. That's actually coming down now, because they're all coming out of university age, and the Gen Z generation is smaller, but the boomers still drive that. Overall, the basket of goods falls, but the basket of fixed assets keeps going up.
What it's doing, it's just readjusting its price terms versus the fall in the denominator since 2008, which is the endless printing of money. It's not that it's creating a bubble. The bubble is in the Central Bank balance sheet, the assets are not in a bubble, because when you look at them relative to each other, they make pretty much total sense. That's a big change of thinking.
You need to think about what that means, but the only asset in the world that is offsetting the monetary printing is not gold. It's Bitcoin. Bitcoin has not only offset the monetary printing, but massively outperformed it.
One other asset has, which is the NASDAQ after 2008. Before 2008, no, Bitcoin didn't exist before 2008 either. In fair terms, the NASDAQ does and I'll come on to that towards the end. Bitcoin is the one thing that is outperforming the Fed balance sheet. That means that it is offsetting the debasement of currency. We can look at this trend globally too.
It works for the MSCI world versus the G4 Central Banks. Everything is basically a function of any limited supply asset is exploding in price. This is where the art market is going up, the wine market is going up, the classic car market is going up. It's not because rich people have exponentially more money.
Well, they do because they can buy these things and they go up in price, but actually, even real estate has only basically offset that debasement of currency. Once I realized that, and that Bitcoin was going to be the supermassive black hole that hits all other asset classes, I just realized there was no point doing anything else. It's the same point we launched Real Vision crypto, because I realized it's the biggest fucking thing I've ever seen in my life. The more time I spend in it, the bigger it is. I wildly underestimated how big this all is.
Now, there is a school of thoughts now that Bitcoin as it develops becomes the one true money. Is it possible? Of course, it's possible. Is it probable? Less probable I think. I don't really believe in the Gresham's law that all money attracts goes to the hardest form of money. I don't think that's been proven out over time.
I understand the arguments and right now, doesn't matter. Also, I do believe that Bitcoin is the foundation stone of what we need for a new financial system, because we're certainly destroying the one we're in. It's self-destruction.
There's no bond market collapse, the equity market's not allowed to collapse, because the Central Bank prints money every time. Now, that money doesn't flow into the stock market, the stock market's repricing. Again, just to get this across, here's the chart of the Venezuelan stock market. It's gone exponential. Here's the chart of the Venezuelan stock market in dollar terms. It's collapsed, from that currency deval and then traded sideways cents.
That is exactly the same mechanism, it was exactly the same mechanism in the Weimer Republic. Now, I don't necessarily know or think we go that far, but who the fuck knows? That's what we need the right life raft, because we're going into unprecedented times. Now what's so cunning about this strategy, it doesn't show up in the bond market.
Even if it does, it gets hidden. It doesn't show up in CPI, because it's not changed the cost of computers or TVs or food, doesn't do that. It doesn't show up in things that look bad.
The equity market goes up, hurrah. It's not obvious to people how they're getting screwed, but everybody knows they're getting screwed. It's the change in the denominator, the devaluation of fiat currency overall that means you cannot buy as many assets as you could, and therefore your structural savings are worse. Now with record low interest rates, you now have no chance of making money. Well, not until Bitcoin [?]. Bitcoin was the game changer.
That supermassive black hole that the people were going to realize was going to suck every but everybody in and it is definitely going to for this basis of the financial system, because it is pristine collateral. Right now, collateral for the whole market is US Treasurys, but bizarrely enough, you can create more of them. Why would I hold your collateral if you keep creating more of it, and the yields fall? I get rewarded less for lending out my collateral to you? Why should I? Bitcoin entirely different? The structure of Bitcoin means that you can't create more of it. As a piece of collateral, it's extremely valuable. It doesn't change because more people, because the government can print more of it like the current collateral. It is pristine.
It's also a fantastic store of value because of the limited supply and all of the other parts of it, the robustness and distributed network. It's an incredibly powerful technology that we all know by now. That takes me into about December. In December, I started digging into Ethereum. I wanted to understand the crypto space at large. Because when somebody tells me and many people did, don't look at anything else, you're a scammer.
You're a shitcoiner, you're a fraud if I look at something else, that makes me want to look at it. I started digging into Ethereum. I realized how incredibly robust an ecosystem it was. The amount, the sheer number of developers, programmers, applications, the ecosystem was bigger than Bitcoin. The growth in wallet addresses was about the same pace as Bitcoin.
I'm thinking about that. I got sent an article by-- I think it was the NYDIG guys. They were looking at Metcalfe's law.
I understood Metcalfe's law, and how it probably applied to Bitcoin. I asked Remi and actually reached out to Santiago Velez and said, listen, can you help me develop a Metcalfe's law model, just a simple one? We don't need the complex maths, we need to prove that Bitcoin is basically priced in there. Maybe that stock to flow is representing that in a different way. Again, I'm not trying to refute the stock to flow model, I use it, I love it.
Everything Plan B's done is a gamechanger, and he deserves all the plaudits. Once I started understanding the power of what Bitcoin was, it was clearly a behavioral economics driven mode, the best of all. Behavioral economics in Facebook is why Metcalfe's law exists in Facebook, is because it originally you bring on your uncle, aunt, your friend from school, blah, blah, blah, and you create your network of people, you can keep in contact with them, and you can communicate with them. That became network effects. Then businesses came on to it creating more network effects, etc., but the shareholders were the ones who got rich, not the users.
The shareholders benefited from the exponential revaluation of the network. Because Metcalfe's law essentially is the value of the network goes up with the more nodes in operation and so the users was separate from the capital. The investors got rich and the users got to talk to their friends, and then their parents joined Facebook and they all left, moving to Instagram, etc. Bitcoin was groundbreaker, and so all of the Silicon Valley models were basically all of the same. They were all Metcalfe's law, everything that came out of the internet, from Google to Facebook to Reddit, the whole damn lot of them. They will all came out of meetings with people like Daniel Kahneman, the Godfather of Behavioral Economics, who basically taught them how to trigger dopamine receptors in the brain by like buttons and motor cons, and how emotion drives behavior, because it's all behavior is what you're trying to do.
With Bitcoin, you've created a network driven by behavioral economics, which is the network of money. Every participant gets rewarded by bringing participants in. That creates an incredibly robust network effect. In fact, it's genius. Because more of us who believe in it, the more we attract other people in, the more we'll get rewarded for it. The behavioral incentive is extraordinary.
That is a way to gain adoption for new money. Because otherwise, it's very hard to do. It's very hard to get adoption unless you get rewarded.
This is stunningly good. I wondered how you can value Ethereum because I could start to see I can value Bitcoin and why it's exponential, why we have to use log charts. It's because the network effects and more people mean that the chart is always exponential. We've only just started. We got billions of people to bring onto this, so this is going a lot further.
As I've talked about, I have no problem. When I use this log chart, for example, it would suggest potentially, this rally could take us to 400,000, maybe even a million on an offshoot because of the wall of money that I've talked about as institutions come in. Maybe not, maybe Plan B's stock to flow is right and it gets out to 288.
I don't know, doesn't really matter right now, but be surprised, because network effects go more exponential over time. When I looked at Ethereum, the thing I was told not to look at, I realized that not only was the technology very interesting, yes, it has problems. Yes, it's very different to Bitcoin. In fact, it's not even a capacitor to Bitcoin.
It's just part of a new digital asset ecosystem, I realized that Ethereum was actually probably the basis of the internet of value. The internet of value is something hard to get your head around as well. I'll talk a bit about it later, but basically, anything that you exchange that has value is going to be digitized.
Ethereum is breaking the ground for that. Now, there's the Ethereum 2.0 coming out, which actually hardens it as a platform and lowers the supply, and it speeds it up and probably cheapens the cost. It is not perfect.
Bitcoin is not perfect for certain things. There is a massive ecosystem also being built in layer-two solutions. Ethereum has layer-two solutions, too, but it's also able to be changed, which is not Bitcoin, because Bitcoin is this hard, super wonderful asset of money.
Ethereum is not that. This war between Bitcoin and Ethereum is nonsense. They're not even the same thing.
I started to get the internet of value, and we started to see the rise of defi, and I'll come on to that again. You could start to see real applications that were getting massive network effects immediately. Then I put Ethereum in the same terms as I looked at the network effects of Bitcoin, which was using essentially number of active wallet addresses. It's a simplistic way of showing network effects. What it showed was Metcalfe's law.
When I put it against Bitcoin, if you see the chart here, you can see it's basically exhibiting the same traits as Bitcoin in Metcalfe's law, but actually the adoptions earlier and faster. Then when I put the chart of Ethereum against Bitcoin, starting at 5 million wallet addresses to rebase them to a point where network effect starts taking hold, the prices were identical and the chart patterns are identical but they were about four years different. How was that? Whoa. These are being valued exactly the same at different points, because it's only the network effect that's valuing them.
That was an incredibly exciting discovery, and I realized that the entire space is driven by network effects only. Then you understand that some tokens and they get network effect, and then have S curve moments so they start to look like to get adopted, nobody really uses it, and it falls. That's called the S curve.
The S curve can be a failure, or a pivot or a change in use, and then it goes. We've seen that, we see that in businesses and startups all the time. We've seen it in Bitcoin, where the narrative has changed, Mt. Gox, it's going to be a scam,
it's all about dirty money. Bitcoin goes off 2013, S curve, back up exponential, it survives and we go into the next set of FUD narratives, S curve. That was abandoned by China and forking, and all the other stuff, S curve. Then back up again, so now we've got the Lindy effect, which is basically if you can't destroy, it's going to get stronger. Ethereum is going through the same, and this whole space goes through the same. Some fail, some that don't fail get stronger.
That was mind blowing to me. I now realized I had a framework of understanding that I could apply to anything within the space. That was the big growth for me. When you look at the speed of which this happens, because don't forget, exponential means it gets faster all the time. In log charts, it looks normal.
It's linear, but actually, it's nonlinear. It's moved. We've seen this. I don't know. I had an interview with CZ, who built Binance.
In three years, he went to the largest crypto exchange and 1500 employees. I think it's the fastest startup in history. Speaking to Sam at FTX, I don't know how he did it but he got this whole from idea to launching in four or five months and then a year later, the third largest exchange in the world. Look at Coinbase.
56 million accounts. That's more than Robinhood and Fidelity added together. It's astonishing, the network effect. We're bringing in the institutions, and they're spreading into Ethereum, and everybody else is building products on Ethereum. It's coming at a lightning speed.
I don't think the space can catch up with the narrative change that is happening so fast. First was the rise of alternative protocols, interoperability, Polkadots, ChainLinks, etc. The alternatives to Ethereum things like Cardano, different types, non-blockchain like Hedera.
The list is endless. I know you'd say you didn't mention my favorite coin, I don't really care at this point. There's too many of them, I can't figure them out.
There were some really exciting things because I sit back as a macro guy and look at the mega trends. What is the mega trend here? First, defi. Holy shit. Here is a whole lending/borrowing system, probably insurance system, all distributed on blockchain.
This is what the world needed. Now, it's really nascent. Some of these are going to blow up. Some are going to work. Which ones do? I don't know.
I'm invested in a whole bunch of these, and I just hold them as a basket, but oh my God, this is changing everything. Bitcoin lending markets. Remember what I was talking a year ago is that, well, we need a Bitcoin yield curve. Christ, it's happening everywhere. There's yield curves popping up on everything.
This is all going on. The defi space is exploding. I've now got friends of mine who are like salting their Bitcoin and then gone through the realization that they don't even need to put it back in a bank, because they put it into a stablecoin, USDC and earn 8%.
Why even go to a bank? Because then they can send it somewhere else instantaneously. You don't need to go to a bank when you want to buy a physical asset in the real world, but savings assets that really needs to be in the real world. This is game changing.
Anybody who's complaining about, I can't get enough interest in my savings, well, here's a worldview that's come out of defi that allows you to do it. What risks are you running? Well, it's not clear what all the risks are, but it's not clear what risks you're running in your pension fund when you're fund manager investing in corporate credit. You don't know what it is, but I do know, they're investing in more junk bonds than they've ever done in history.
As long as you spread your risks out, then you'd probably going to be okay. Because there's unlikely to be catastrophic risk. There's going to be regulatory risk, without question. Regulators only want to put this into their control so they know that there's no money laundering, and you're paying your taxes, box standard stuff.
When we see it everywhere, the narrative of, oh, my God, the regulators, they're going to kill this. It's bullshit, everybody. It's very clear when you see and speak to the regulators, that is not the case. It's very clear that this green narrative, it's dirty money.
It's terrible. It's just a narrative there spread I think, by the ECB to slow adoption and that's all okay. Everyone's got a game to play in this, they want to get their digital currencies out, they want to be able to interact with this new system. When they do, the ECB have talked about defi being a core part of this. I think the US will, too. It's already happening across Asia and China, I'll come on to that in a bit.
Defi and all the lending that it wants to integrate with the new financial system. Why? Because the European banks are fucked, so are the Japanese banks. You can change all of that by using defi and central bank digital currencies, and then they're interoperable or connecting on ramps and off ramps to Bitcoin and all the cryptocurrency world. It's all there.
It's all coming. This whole financial system that I've talked about is being built in front of our goddamn eyes. People are still fighting it saying, well, Bitcoin. That's a bit risky, right? Really? It's all happening.
Everything you've ever wanted, all of you hate the Fed. All of you want gold, all of you who don't trust the equity market, it's all here. This world is coming at you fast, but there's more than that. The next big thing to come out was NFTs. Here we go, again, a lot of [?] saying, well, they're a bubble.
I don't think you even know what NFTs are if you think it's a bubble. What they are is a way of authenticating assets digitally. That is something the world needs. Because all of this internet of value that's being built across Bitcoin, Ethereum and all the other protocols and elsewhere, is all about trust. When you put something on an NFT, you're creating trust.
Trust creates scarcity. Scarcity creates value. Now, this is where everybody gets NFTs wrong.
They're like, well, what? We can just put anything on NFT, attach it to an NFT and now it's valuable? No. Some of that stuff is trading because there's proof of concept going on. Most of this meme stuff is worth zero, most of this stuff is worth zero.
What people did was real. You see, Beeple's piece of art was groundbreaking. A, it was the digital journey of his artwork, over 5000 pieces of art over 14 years, which in itself is extraordinary. That sold for $69 million as we all know.
That's about 15 grand a piece of art, actually not that valuable, but what it was was a real artist that was acknowledged by the art world, i.e., people who want to put money into the asset as valuable. That's great. It was actually outbid by not the art world, but by somebody from the crypto space who also appreciate it. There's a good story behind that, too.
Beeple's art was groundbreaking because this was as abhorrence to most people, as let's say Damien Hirst and a shark in formaldehyde, or Tracy Emin, and that messy room, or any of the modern wave of British artists, as of Jackson Pollock was with his spray paints, his stuff, or Andy Warhol was. Everything that comes out of art that has real value is generally not considered to have value by the majority, they think it's ridiculous. How can a piece of digital stuff that can be replicated be worth anything? Well, interestingly enough, it's all about authentication.
Photographs have value. Original photographs that are signed by the photographer, have real value. If you own the negative, it has even more value. A book that is printed has value, whatever value that is, minimal.
A book, a first edition of that book has rarity, it has more value. A first edition of that book signed by the author has more value. A first edition of a book signed by William Shakespeare has almost limitless value. It's the layers of rarity that come into it.
NFTs do that. I'm really interested in the NFT space because it spreads. It's not just about art, art is an easy way of looking at it. Also, by the way, just think about what painting is.
Yeah, a Michelangelo painting, that's worth millions but this piece of art is rubbish. It's only digital. Well, that's a piece of cotton canvas with some paint on it. Total cost, current price, probably about 50 bucks, but it can trade at $500 million.
The premium is the price of the art and the authenticity and the rarity. Art is a very subjective market. What's nice for you or me is not nice for somebody else.
That picture behind me is actually an NFT made by the two quant guys who developed the Real Vision [?] that we see on Real Vision a lot. That's an NFT, and I printed it out, put it on my wall. Now, is it going to be worth anything? Not unless they become rich and famous, or some other reason, or the artist does. It's currently and it just shows that we can use NFT in different ways.
NFTs are not just about that. NFTs, don't forget, is attaching scarcity and value and trust to an asset digitally. It can apply to real assets like why? They can attach to real estate. We're all waiting for the growth of tokenized real estate. As securities laws change, and come up to speed, we're going to see an explosion of that. My guess is the next cycle, we will see a massive change.
Now, why should real estate be tokenized? Real estate should be tokenized because it stops just the rich people getting rich in the high end real estate because again, if you remember, because of the monetary big debasement and the fact that they get more money, they get to invest in the more expensive property, which goes up more because there's more money in that space, and everybody else gets left behind. If you tokenize it, everybody can own a share. You can have the same percentage share of your net worth in it as a multi-billionaire. That's groundbreaking. That's all of this digital space does there.
It completely levels the playing field. The Beeple art, interestingly enough, there was another bunch of Beeple art that was bought, and then tokenized and then sold. I'll come to that story a bit in the metaverse, but that truly was groundbreaking because everybody can own it. One rich guy can own the $69 million piece, and a bunch of ordinary people can own the rest. Phenomenal, massive game change. It's not like a REIT.
A REIT has all sorts of rinky dink shit in it. It's not a pure play. It's different.
You actually physically have legal titles as part of it with NFT. NFTs also are game changing for the music industry. If you see my conversations with people like RAC, Andre. Andre is pioneering there.
We've seen the Kings of Leon, we've seen a bunch of bands starting to realize that this is going to disrupt the middlemen in music. 80% of all money in music goes to middlemen, not the artist, which is insane. We think bankers are egregious in what they take. Well, in this, it's really all of the economics. When you can put your own things on a blockchain and sell them directly to your community as NFTs, well, then you've got a direct relationship with your community, like a community's a bit more upset, but that's fascinating.
What's more fascinating is the fact that you can do price scarcity for different people. If the bulk of your people will buy your album or stream it for free so you get paid virtually nothing from Spotify, then there's the next tier, and currently, that's the people who go to a concert. Your concert ticket's 50 bucks, 100 bucks, okay. You've extracted more value from people, because it's rare, because you get to see the artists physically. Then you might have a meet and greet, which you pay a bit more money for. Okay, that's basically all there is for artists.
Then the rest have to do by whoring themselves out to brands. Here, I love Nike shoes. It's like, really? When what they've got is massive community of millions of people, they can also provide rare assets to them. In the case, for example, you could provide a single recording that nobody else has and give it to your superfan, and it could be worth millions. You can monetize all across your fan base, much like most subscription based businesses do. That creates revenue streams for musicians, they also could put that IP rights on.
As they move around, they automatically accrue IP. You can sell baskets of IP rights. We're already seeing artists sell their catalogs. If you tokenize them and sell them, you can have still a part of the stream maybe maintain 20% much like Beeple has with his art and some of these NFTs are with art. It changes the economics and gets rid of middlemen. It just ekes out more for the actual people.
That I think is really interesting. We're also seeing the rise of community tokens. People haven't quite seen this yet, but this is coming and it's going to be gigantic. There is a platform called Socios that has a coin called Chiliz, which I don't own, but they have built community tokens for big football club, soccer clubs in Europe, AC Milan, FC Barcelona, a bunch of others. What as a fan you get is a token of which you can get benefits, like fan club benefits, including voting for what kit they wear, some of the choices.
You're actually involved. Your community token has meaning. It also has value. If the team does better, your token's worth better. You're part of that ecosystem, and it will give you benefits like tickets and stuff like that. That is the start of where this is going.
Everybody who monetizes online in any way, shape or form is going to have a token. Right now, we're used to subscription models. Right now, artists, for example, or influencers have to leverage Google and Facebook to basically monetize.
That's where brands and themselves meet and they use advertising and other methods. Once you've got community that has a token, and you have direct access to them, then you can monetize in a number of ways and create value for the community, or you can destroy value for the community. That's for the community to be involved in and you can share in successes. We're going to see this from everybody, from sports stars to YouTube channels, to actors and actresses through to charities, through to you name it. Anything with a community is going to tokenize. It's going to unlock vast amounts of value, it's going to unlock ability for people to participate and feel part of something of a society, which has its own form of money.
The money can go up and down in value, or it may be stable, it maybe utility and function. That's okay, but you can't be part of the society without it. Once you've got it, it means the artists can speak to you directly, or the charity or whatever.
Community is going to be explosive, people like Rally and stuff like that. People have no comprehension how large this is going to be. I think it's one of the largest underpriced parts of the market. Because people haven't got their heads around it. We haven't even got heads around insurance, and all of the other contingent stuff, betting that all comes on to smart contracts.
That hasn't really got off the ground, because we're still at the bottom of regulation. Regulation is so fucking far behind where it needs to get to. They're still trying to figure out whether it's a security or not when the fact is you need to rewrite securities laws, because this has nothing to do with securities. This is a whole new asset class. In fourth turning terms, we need a new infrastructure, new institutions that I think it's coming.
You can't learn central bank digital currencies and then not reinvent it. We're seeing Asia much faster adopting how this plays out. That's massively important, to rewrite all regulation from scratch, not shoehorn it into stupid old regulation that requires endless court cases. Figure it out properly.
I think the institutions are keen to do that. It just takes time. It's frustrating for businesses trying to build at lightning speeds when they don't really know. Are they going to get prosecuted for this or not? That's not right when you're building something so incredible, but that's not all.
All that fits into even something larger, which is we are creating digital worlds, which we can call them metaverse, and I urge you to watch the interview that I did with Piers Kicks of Delphi Digital about this, and this is the world where everything is digitized. Barry Silbert launched all of this to us really early on when he started talking about decentraland. Within the digital worlds, there are 3 million gamers. Those gamers live in an alternative world where they socialize with each other. When I went to see a friend of mine, my old friend Darrell, when I see him at his house, his son, Harry was playing, I think it was Fortnite.
I wasn't really aware of this. I think Fortnite was the biggest game in the world. I wasn't really sure why Harry was [?] been in a gaming chair with the headphones on, on Fortnite on a sunny day. Darrell was like, well, he's been out.
He's played football, but now he's socializing with his [?]. I'm like, what do you mean? We used to go to the shopping mall. He said, yeah, well, they don't do that now. Because his friends are spread around. He said, they do it online.
For some of you, you're like, duh, obviously, and to the rest of you watching this, you're going to be what? They hang out and talk to each other and play games together and interact and swap things and trade things with each other. Within these games, there is systems of money, tokens, earning a living, everything. That's one game, and there's many of these games. These games are becoming interoperable, where they connect with each other in all digital universes. Those digital universes have now money that can start spreading from one to the other, so it can be a baseline.
Now, Bitcoin can do that, too. What we're seeing is monetary systems in this digital world where these digital goods have value. Swords in some of these games now have yield curves, because I want to lend my sword to you, and you're going to have to pay me for it so you can get the experience of my level in the game.
Same with skins or renting the ability to play at different levels in games, there's so many variations. It's not just about gaming, because we're starting to see the rise of education, living in these digital verses. We're starting to see income, businesses, real estate, all happening. There are digital architects that are building digital projects that have digital value, real value that people are paying big money for. Let's go back to that Beeple story. The guy who bought the Beeple had also bought a bunch of the other Beeple artwork, and he created a token, and he created virtual art galleries, physical digital galleries, which you could visit to see the art in various metal verses.
Then he threw a party on the launch of it, where people could go visit the famous DJs in different worlds at parties, play Easter egg hunt. You're exploring this world where you had to cross from one world to another. Then you get to another party and another art gallery, and so on, so forth. That's telling you where this is going. Digital art is trading in a digital gallery with live music, where in some cases, millions of people or 20 million people attended in some of these musical events in the digital world, where people are meeting, exchanging value, conversing with each other, communicating, creating communities, earning money.
That is growing at an exponential rate. Most of us don't see it, because we're not Gen Z, but Gen Z are in it. Millennials have seen this edge of it, but most haven't seen it, and it is coming.
Universities and schools, they can all operate in this world. You can now go into a game and play another game from a different multiverse within a game. It's beyond mind blowing. When you put a VR headset on in an Oculus Rift, and the first thing you come into is that room, and you're like, oh my God, I can live in a garage and think I'm living in a beautiful house.
That's just the start of where this is going. These technologies are exponentially growing. More and more people are being absorbed into the digital world. This whole thing is like the discovery of the Americas. There is an entire new world that has enormous potential. It is going to increase global GDP massively, it might even double it because of what is happening.
We're not constrained in a digital world by the same constraints of the physical world. In the world of universal basic income, people can earn money within these digital verses, not creating something but creating something for a digital company in a digital world, earning digital money. You can live in a digital house but live in your parents' bedroom. I know that makes it sound sad and it's not supposed to be. That's just a dystopian version of this, but there's utopian sides of this, too. This whole extra world-- when I'm talking about the Bitcoin Life Raft, it's not just a life raft to Bitcoin, it's everything that we understand from value is moving and being built at a speed that none of us can comprehend.
Nobody, literally nobody can keep up with what is going on. It is sucking in all of the world's talent, whether it's financial talent, developer talent, philosophical talent, economic talent, everybody is going into this. We're creating opportunity and opportunity to make money and invest at a rate of which has never been seen I don't think in human history. I think this is the largest wealth distribution underway that has ever happened. It's going to happen in such a short space of time, you can't get your head around it.
The reason it's a short space of time is because we really fucking need it. Because this other system is destroying itself. Many of us, me included, thought that this moment that we saw in March was going to be the big bang. Boom.
All over. How does it finish? The endgame. There is no endgame.
The endgame is the ongoing destruction and the ongoing migration. We are all migrating across. I know there's many of you, look, Raoul, I wish you just talked about dollar/yen, and we should go back to bonds or traditional macro. This is traditional macro, where it's going, everything is going here. It's almost irrelevant to talk about the bond market where it's between 2% and zero, when you've got different yields and different assets all going on over here that are fairly priced without the influence of central banks.
Why would you get involved? Why care if the dollar goes up 10% when you can be involved in assets to do this? When they're on an exponential adoption curve, and there's new exciting technology? Why bother? Why does it matter? Why does it matter what the price of oil does over the next nine months? It doesn't. That's the realization. That's why so many macro people have moved across.
Macro is going to be useful as ever for hedging. Because all of this is still beholden to the world of business cycles, even though most business cycles have been drawn out in terms of asset price effects, because of the debasement of currency changing the denominator, but it will still have VAR shocks where everything implodes and goes down because there's too much leverage in the system, and the usual bullshit that humans do. What we've just seen with Archegos, it's very common.
Macro is great for hedging some of that stuff, but literally, I can't express to you how big this is and the opportunity. If we look at the traditional macro world, of which I've now highlighted, I think it's the death of macro, I don't think currencies really move. I don't think bond yields really move, and not in terms of secular bet moves where we can make big money, but following your career in this shit, that's done. What does it leave? It leaves equities? Okay, and it leaves crypto. We've just got to see more money.
Yes, we've got commodities as well. Credit, that's pinned to the rates so that's all gone. Credit's gone, bonds have gone, short term rates have gone, FX trading's gone. Yes, emerging markets are a function of equities and further out the risk curve but really, it's going to force more money and more people to migrate into the source of returns.
Now, what's extraordinary is the alpha that this space generates. The alpha is like I've never seen before. Alpha in digital assets, because there's so many of them. They're complicated.
Everything's going to network effects. People who are buying tokens who really understand it are generating massive returns at this point in the cycle. It is cyclical, they will have points where they lose shit tons of their money. Over time, because it's network effect, it doesn't revert to the mean, like silver did after 1980.
It doesn't work like that, exponential assets revert to the exponential moving average, so it's always rising, which is what Bitcoin's done all the way through, Facebook's done, Google's done, all of these have done. Yes, these tokens, some of them will go to zero, but the whole token space, and these guys, they're going to have boom/bust cycles, and they will keep going up exponentially. There's also the trading firms that trade crypto, algorithm traders, the short term traders, macro guide, everybody, the amount of alpha those guys are generating is unheard of. It will happen in the down cycle too, because they will capture some of the down cycle. There's money to be made all over this. Every day, there are more tokens.
These tokens are complex. It's hard to trade. That's even more alpha for the people who figure it out.
This space is going to be ongoing source of alpha for decades, when all real estate's tokenized. We can trade real estate, when people are tokenized in terms of future careers, or job paths, or all sorts of paths, from community tokens when you can trade FC Barcelona against AC Milan, community tokens you can arbitrage it with something else. Oh my god, you can't get your head around this. If we look at the traditional asset space, which is dying, equities, bonds, they're all credit. They're all $100 trillion, $200 trillion, $300 trillion markets.
The crypto market is 2 trillion. It's 100x from here, but I think it's all of those assets over time. Maybe it's 200x. Now, it won't be a straight line, bu