What Ray Dalio is Missing About Bitcoin

By John Banks

Paul Tudor Jones and Stanley Druckenmiller have at least three things in common. They are both multi-billionaires. They are both hedge fund legends in the global macro space. And they have both publicly endorsed Bitcoin and confirmed they are long.

Ray Dalio is another global macro hedge fund legend, with a net worth in the vicinity of $15 to $20 billion. Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world and one of the most successful macro hedge funds of all time. 

Dalio is not yet in the Bitcoin bull camp. But he is on his way. Bitcoin seems to have a magnetic effect on intelligent people: The more they look into it, and the more they genuinely seek to understand it, the more compelling the ownership case becomes.

On Nov. 17 Dalio posted an inquiry on Twitter — you can see the Twitter thread here — to learn more about Bitcoin.

“I might be missing something about Bitcoin so I’d love to be corrected,” Dalio said to start the thread. He then went on to enumerate the problems he sees with Bitcoin being “an effective currency.”

Here is our summary of the problems that Dalio listed (and again, you can see the Tweet thread here):

  • Bitcoin is not very good as a medium of exchange. Dalio believes you can’t buy much with it, and it is too volatile for merchants to be comfortable with.
  • Bitcoin is too volatile to serve as a store of wealth. It doesn’t have correlation with the things he needs to buy, Dalio says, and thus doesn’t protect his buying power.
  • Bitcoin is in danger of being outlawed by governments. If it becomes too successful, Dalio fears that governments will outlaw it.
  • It is hard to imagine central banks or corporations using Bitcoin as a reserve asset. Unlike gold, which Dalio points out is the third-most-popular reserve asset — presumably behind government bonds and high-grade corporate bonds — Dalio has trouble seeing a comparable role for Bitcoin.

“If I’m wrong about these things I’d love to be corrected. Thank you,” Dalio said at the end of the thread.

Let’s dig into the points one by one.

First, Bitcoin is absolutely fine as a medium of exchange. There is no friction on this point whatsoever. We can understand why doubters would believe otherwise. But their mental blockage is a form of misunderstanding.

It is true that the Bitcoin blockchain does not move quickly enough to facilitate tens of thousands of transactions per second, and likely never will. But this has no bearing on Bitcoin’s effectiveness as a medium of exchange.

We can explain why Bitcoin will do fine as a medium of exchange via three words — “intermediary payments layer” — and then demonstrate proof of concept with one word, “PayPal.”

When people try to envision Bitcoin as a currency, they often get confused by the difference between the role of Bitcoin itself and the role of payment processors that will facilitate low-stakes transactions.

We can use PayPal as an example here. PayPal, a payments processing company worth $220 billion, is currently in the top 25 of the S&P 500.

PayPal recently announced that, beginning in early 2021, active PayPal users (there are 346 million of them) will be able to use supported cryptocurrency assets (including Bitcoin) to buy things with PayPal’s worldwide network of 26 million merchants.

This means that, if you are one of the 346 million users with a PayPal account, you will be able to use Bitcoin to buy stuff. And if you are one of the 26 million merchants on the PayPal network, you will be able to accept Bitcoin as a form of payment.

So much for a lack of ability to buy things.

Why does this work? Because PayPal will facilitate the intermediary payments layer. Every time a user buys something with Bitcoin, or a merchant takes payment in Bitcoin, PayPal will facilitate the transaction behind the scenes.

In many instances, PayPal will not have to trade on the underlying Bitcoin blockchain at all. If someone in the PayPal ecosystem is buying $100 worth of Bitcoin, and someone else is selling $100 worth of Bitcoin, PayPal will be able to cross-swap those transactions on its own internal ledger.

This is not a new thing. Stock exchanges and banks have done internal cross-transactions, where one user trades assets with another inside the system, for decades. It is a highly efficient way to take advantage of a network.

Then, too, imagine you want to pay for something in Bitcoin, but the merchant you are buying from prefers to be paid in euros. If PayPal is involved, this is once again no problem, because the PayPal trading desk — combined with extremely powerful software — will simply handle the exchange behind the scenes.

Exchanging Bitcoin for euros, or yen, or pesetas, or whatever the local is, will not prove much different than any point-of-sale foreign currency exchange — and banks have again been doing this for decades.

If you have ever traveled abroad, you may have heard the advice that paying for things with an international credit card is a smart thing to do, because the bank will do the foreign currency transaction on your behalf, and likely give you a better rate than you could get on your own.

With Bitcoin, it is the exact same deal. It all comes down to the intermediary payments layer, which is facilitated by PayPal, Visa, Mastercard, and a whole host of others.

The key thing is having Bitcoin become popular enough for the 1,000-pound gorillas in the payment processing space to show willingness to take on Bitcoin and support it. Once that happens, and the payment processors have set up the infrastructure to handle Bitcoin behind the scenes, that’s all you need. And guess what? That has already happened, because PayPal has opened the door.

Bitcoin, in other words, can do just fine as a medium of exchange, because public desire to transact in Bitcoin will create the ability to do so — via integration into the intermediate payments layer — as a matter of free market forces rising to meet demand. Again, with PayPal embracing cryptocurrency payments, and promising a big rollout in 2021, this has already happened.

Moving on to the next objection, Dalio surmises Bitcoin is too volatile to serve as a store of wealth. This is a short-term view and shows a lack of awareness as to where Bitcoin is headed.

Various surveys and forensic analyses of blockchain transactions have shown that a majority of Bitcoin investors tend to hold Bitcoin, rather than trade it. They buy it and hold onto it. Why?

First of all, imagine you had shares in a company you believed could be the next Amazon or Google, and you had bought in at the equivalent of $100. Would you trade those shares? Not if you were sane, you wouldn’t. You might trade a little around the edges of the position — but for the most part you would hold the shares and wait for the multi-thousand-percent price appreciation that was in store.

With Bitcoin, the mentality is comparable. Bitcoin’s ultimate destiny is to be a globally recognized store of value, a kind of “digital gold,” with a multi-trillion-dollar cap. When Bitcoin investors start to understand this trajectory — when the light bulb clicks on — for the most part they lose the desire to trade BTC. They just want to buy more and sit on it, like dematerialized gold in a digital vault.

Eventually, Bitcoin will become a super-boring asset. Imagine a world in which, say, 70% of the Bitcoin in circulation is simply held for the long-term, and Bitcoin has truly global distribution.

In a world like that, the Bitcoin price will be the opposite of volatile. It will be sleepy, with a relatively narrow trading band, because the size and stability of the investment base will dwarf the portion of Bitcoin that is actively traded.

But in order for Bitcoin to get from here to there — to fulfill its destiny as a globally distributed sovereign asset — Bitcoin first needs to see its market cap expand dramatically, on a one-time journey from the hundreds of billions into the multiple trillions, representing a price increase of 10X to 20X, if not more.

To put it another way, imagine Bitcoin as a rocket ship en route to another planet. During the journey, Bitcoin’s price behavior will undoubtedly be dramatic at times. But once it reaches the final destination, the volatility will dissipate.

Then, remember that safe-haven assets often appear volatile because they are priced in volatile fiat currencies, and it is movement in the fiat currency value that gives the appearance of safe-haven volatility.

For example, when the price of gold is rising in U.S. dollar terms, what does that mean? Does it mean that gold is becoming more valuable relative to dollars, or that the U.S. dollar is becoming less valuable relative to gold? If you are pricing gold in dollars, you can’t really separate the two views.

To some extent, if Bitcoin continues to be volatile after reaching maturity as a globally distributed sovereign asset with a multi-trillion market cap, it will likely be due to the currency debasement actions of sovereign governments.

Bitcoin will eventually become the stable and boring benchmark against which other currencies are measured — at which point, if the Bitcoin price moves around a lot in U.S. dollar terms, that will say more about the goings on of the U.S. dollar than it does about Bitcoin.

But again, to reach that point of global distribution, the Bitcoin price will have to rise dramatically. Because the Bitcoin supply is mathematically fixed, and new supply will diminish to zero, the only way to express upward movement in Bitcoin demand is through violent upward movement in the price.

Moving on to the next objection, regarding Bitcoin being outlawed by governments: It is not realistic to think governments can outlaw Bitcoin. It is too late, and the political will is lacking regardless.

Bitcoin, as the world’s first digital store of value, has global consensus and global buy-in. There is only one Bitcoin — and there can only ever be one — because Bitcoin has a train of blockchain transactions dating back more than a decade, and the open endorsement and embrace of wealthy investors and cutting-edge corporate entities on multiple continents.

How do you compete with that? You don’t. It is impossible to recreate the network effects created by global consensus born of 10 years’ worth of head start. Bitcoin’s history, and Bitcoin’s network effects, and the level of commitment and buy-in attached to the Bitcoin transaction ledger specifically, cannot be replicated, ever, under any circumstance.

And because Bitcoin’s combination of history, buy-in, and network effects make it too powerful to replicate — you can’t just “fork” ten years of history! — Bitcoin is also too powerful for any government to ban successfully. It is too late.

Perhaps years ago, if governments had banded together and recognized the Bitcoin threat before Bitcoin adoption had reached critical mass, they could have stopped it. This would have been a matter of killing off a phenomenon before the phenomenon had a chance to truly take hold, and truly exploit the network effects of awareness and buy-in on a global scale.

But again, you cannot create history and you cannot rewrite history. For government bans to kill Bitcoin now would require a time machine.

Then, too, freedom-loving governments would not likely tolerate the notion of banning Bitcoin in the first place. In 2021, the state of Wyoming will have a sitting U.S. Senator who has been a Bitcoin “hodler” since 2013.

Deciding to ban Bitcoin, at this point, would potentially create as much uproar as attempting to ban gold. The very act would be seen as so desperate, and so anti-free market, that it would potentially create capital flight from the country’s fiat currency and bonds, for fear something was seriously going wrong.

 So, no, Bitcoin is not in serious danger of being banned by governments. That was true five years ago. It isn’t true now. And with each passing day, Bitcoin becomes more and more powerful. The global consensus behind Bitcoin is a kind of decentralized sovereignty, minus the need for heads of state or border defense or aircraft carriers. It is bigger than any government now, even America’s or China’s.

As for the last objection, where Dalio suggests it is hard to see corporations or central banks using Bitcoin as a reserve asset: This objection is already out of date.

We have already seen two publicly traded corporations, MicroStrategy and Twitter, endorse Bitcoin as a corporate treasury asset. That has already happened. There will be more.

As another sign of the times, consider this: On Nov. 17, Brian Brooks, the acting head of the Office of the Comptroller of the Currency (OCC) for the U.S. government, was nominated to serve a full five-year term. Why is that notable? Because Brooks was previously the Chief Legal Officer (CLO) for Coinbase, one of the world’s most prominent crypto exchanges (which will likely go public in 2021).

Cryptocurrency is no longer “magical internet money.” It is here, it is real, and it is transforming the system from the inside, rather than trying to bulldoze the system head-on. Libertarian fantasies aside, this is always the way it was going to happen.

As acting head of the OCC — and soon to be permanent head of the OCC, if confirmed by the U.S. Senate — Brian Brooks has taken steps to let American banks take custody of crypto assets. From that point, as market demand dictates, it is easy to picture Bitcoin deposits becoming as readily available and accessible as U.S. dollar deposits.

And then, from there, is it really so hard to see central banks adopting Bitcoin as a reserve asset alongside gold? Why?

Keep in mind that Bitcoin’s store-of-value function — its role as “digital gold” — is far and away the most important use case. Compared to the value of that, the medium-of-exchange aspects pale in comparison. This is why it was a stroke of pure genius to keep Bitcoin free of features and gizmos, making it easier to emphasize the one use case that dominates all others.

Then, too, once traditional banks go the way of PayPal (in part to keep PayPal from eating their lunch) and start offering Bitcoin deposits to consumers, it will only be natural for Bitcoin reserves to become a part of the banking system, and then to become a staple reserve asset for central banks themselves.

For those who can’t get their head around this — because it seems too crazy — keep in mind that all breakthrough technology developments sounded crazy at one time.

Popular Mechanics in 1949: “Computers in the future may weigh no more than 1.5 tons.”

Ken Olsen, CEO of Digital Equipment Corporation, in 1977: “There is no reason anyone would want a computer in their home.”

Bill Gates, founder-CEO of Microsoft, in 1989: “We will never make a 32-bit operating system.”

Steve Ballmer, CEO of Microsoft, in 2005: “There’s no chance that the iPhone is going to get any significant market share. No chance.”

To that roster of infamous predictions — from people who were supposed to understand technology! — will eventually be added the quaint notion that “Bitcoin will never become digital gold.”

It is already happening. The fact that it feels strange is par for the course as we accelerate into humanity’s fourth great age (Stone Age → Agricultural Age → Industrial Age → Information Age).

In closing, we can say with confidence that another big, future event for Bitcoin — we don’t know when, but we know the day will come, and perhaps sooner than anyone thinks — will be the first announcement from a credible central bank that Bitcoin has been added to its reserve mix.

Because, really, why wouldn’t they take action at this point, when the reward for being an early mover (it is still early) is the potential for 10X asset appreciation, if not multiples more?