Ray Dalio Says Governments Will Kill Bitcoin. Is He Right? Here’s My Response #41
Market Meditations | November 16, 2020
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Hello Meditators
The headline that caught my attention recently is centred around Ray Dalio. As I am sure most market meditators are aware, Dalio is the CEO of Bridgewater Associates. Only the biggest hedge fund in the world. Naturally, when Dalio speaks, the world listens. In a recent interview, Dalio (arguably unexpectedly) came out with a bearish tone on bitcoin. In today’s meditation, I would like to briefly cover the increase in institutional interest in cryptocurrencies. I will move on to explore Dalio’s argument and explain to you why this doesn’t mean you should take a bearish stance. Rather, I would like to guide you through my thoughts and reinforce the bullish outlook on bitcoin. I hope this will bring confidence to traders and avoid them being led astray by such headlines.
It is unsurprising that Dalio would comment on bitcoin. After all, it has been a really hot topic amongst institutional investors. Stanley Druckenmiller and Paul Tudor Jones have been public about their bitcoin position as a hedge against future inflation caused by excessive money printing by central banks around the world. Outside of bitcoin’s inflationary properties, with the recent Covid-19 backdrop and slow economic recovery on top of interest rates at historical lows, global markets have become less attractive in terms of risk/reward. We have also recently seen Stone Ridge buy 10,000 bitcoin ($162 million). So plenty of new engagement in the space.
And what exactly did Dalio have to say?
In his interview, Ray Dalio said that he expects more digitized (government) currencies in the future but gave 3 separate arguments explaining why he wasn’t bullish on bitcoin and why he thinks it won’t play out the way others expect it to. After summarising each reason, I will provide a response based on Nathaniel Whittemore’s podcast episode on The Breakdown, which I believe is more compelling and a more useful guide to traders.
1) Bitcoin as a Medium of Exchange. The first problem that Dalio mentioned was the fact that bitcoin could not really be used as a medium of exchange. He said that bitcoin holders could not easily purchase assets with their bitcoin today. In response: Dalio’s statement that bitcoin cannot be used to buy things, is simply not a strong argument. Even if you believe that bitcoin is only a store of value, the upside potential is considerable. Gold is barely used in transactions but currently sits at a market cap of at least $7 trillion. Given bitcoin’s ease of use over gold as a digital asset, making it so much easier to move around, further adoption doesn’t seem unreasonable.
2) Bitcoin as a Store of Value. According to Dalio, bitcoin‘s volatility is a major problem for its store of value function. Dalio said that the volatility based on speculation is much greater than bitcoin’s store of value property today, making it difficult for venues to accept bitcoin because of price fluctuations on both sides. In response: Bitcoin’s narrative as a store of value is the exact reason why the most popular cryptocurrency has attracted so much new interest this year. Sophisticated investors started looking at bitcoin as ‘the fastest horse’ in the inflation hedge trade and even directly called it ‘the birthing of a store of value’. While short-term volatility might scare a lot of investors, bitcoin has been the best performing asset over any longer time horizon since its inception in 2008 and thus performing as a store of value to date. Secondly, major payment companies like Paypal and Square are already abstracting away all the complexities that come with accepting bitcoin as a payment method. Paypal will be accepting bitcoin through their merchant network of 26 million merchants, making it very easy for merchants to accept crypto, essentially eliminating barriers for bitcoin’s further adoption as a medium of exchange around the world. Merchants will be able to price goods in dollars and other major currencies without having to worry about bitcoin’s volatility.
3) A Government Ban. If it were to become too big, Dalio believes that bitcoin won’t be allowed by governments and they’ll use whatever it takes to enforce that. In response: Peer-to-peer networks have proven quite resilient against government interventions. Bitcoin’s decentralization makes the network antifragile, a term coined by popular author Nassim Taleb, and any attempt to outlaw mining will lead to opportunities elsewhere. In order to bring down the entire bitcoin network, one would have to essentially turn off the entire internet.
In conclusion: Ray Dalio provides 3 reasons for his bearish stance on bitcoin. We have countered each reason that might lead traders to follow this bearish approach to trading the coin. Perhaps his critique was valid a few years ago. However, innovation hasn’t stopped and further adoption for bitcoin as both a store of value and medium of exchanges seems very likely given the increased interest from both retail and institutional investors. Critiques of cryptocurrencies are welcome, they offer a fantastic opportunity to analyse coins, as we have done together above. On this occasion, we have come out with our bullish stance unchanged. So, as my final statement: May the bull market continue!
Citibank Executive Says Bitcoin Could Pass $300K by December 2021. ThomasFitzpatrick, a senior executive at U.S.-based financial institution Citibank has drawn similarities between the 1970s gold market and bitcoin in a report to clients. The report was leaked on Twitter with the disclaimer that the author of the report is ‘a big fan of moon targets’, referring to an earlier prediction on gold prices. The executive used bitcoin’s weekly chart and technical analysis to determine a target of $318,000 by December 2021. Read more.
Tornado Cash’s Privacy Pool USD Value Surpasses $13m, Hitting a New High. The USD value Tornado Cash’s privacy pool, an Ethereum-based transaction mixer, reached a new all-time high last week with $13 million in their privacy pool according to data from Dune Analytics. The value has since then dropped and currently sits at around $8.8 million. The non-custodial privacy service saw exponential growth this year, going from $100,000 in the beginning of the year to several millions right now. The service aims to protect a user’s identity by obscuring the link between their withdrawal address and their address they use to deposit their assets. Read more.
Value DeFi Suffers $6M Flash Loan Attack. Yet another decentralized finance (DeFi) protocol was the victim of an attack this weekend. Value DeFi, a yield aggregating protocol was exploited for $7.4 million in DAI. The attacker once again used a flash loan attack in order to steal funds from the protocol. The attacker returned $2 million and kept $5.4 for himself also leaving a message “do you really know flash loan?” in the transaction data. This serves as another reminder that yields in DeFi are high because there are still risks involved. Don’t put all your money in protocols you do not understand. Read more.
Morgan Stanley Says Go Risk-On and ‘Trust the Recovery’ in 2021. Morgan Stanley strategies expect a ‘V-shaped’ recovery, greater clarity on Covid-19 vaccines and continued policy support. This translates to a recommendation for overweighting equities and selling the U.S. dollar. JPMorgan Chase & Co. and Goldman Sachs Group Inc. have also painted a positive outlook for equities. The base case is for the S&P 500 to reach 3,900 by the end of 2021 and the U.S. Dollar Index to weaken by about 4% by the end of 2021. Read more.
Moderna’s Covid Jab Shows 94.5% Efficacy in Clinical Trials. We saw another highly positive Covid headline today when US biotech group Moderna said its vaccine had more than 94.5% efficacy in clinical trials – a week after another set of positive results for a rival coronavirus jab. For market meditators who have started looking at sOIL after last week’s newsletter, please note oil advanced amid these signals. Futures climbed as much as 4.9% in New York. Prices are also being supported by a monthly rebound in China’s oil processing. Read more.
Nov 17. USD Retail Sales:
Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or bearish). Consensus: 0.5%. Previous: 1.9%.Nov 18. Zcash (ZEC) Halving:
Zcash halving is the long-awaited event where the rewards for mining a block on the Zcash blockchain is cut in half. The reward will be reduced from 6.25 ZEC to 3.125 ZEC, cutting the daily new supply in half and thus reducing inflation.Nov 19. Blockstack (STX) Exchange Announcement and Turkish Monetary Policy Committee Meeting:
Exchange announcements are generally non-events in terms of price action unless an exchange like Coinbase is announced. STX already trades on liquid exchanges like Binance and Kucoin so changes in price should be minimal.
In the Turkish Monetary Policy Committee Meeting, investors will look for Turkey to get on the right path and signal that it plans to raise interest rates. It is the right time for such a move. The Turkish lira has been depreciating for many years (about 40% in real terms since 2013, after adjusting for inflation)Nov 21. SINOVATE (SIN) Mainnet Launch:
The AURORA mainnet upgrade will go live ‘at block height 550,000 (taking place around 21 November 2020).’ The mainnet upgrade will transform the SINOVATE repository to be ‘100% unique and developed in-house’, which will enable decentralized data storage capabilities.
5 Hindrances to Self Mastery
We are seeing a lot of hype around BTC recently, particularly with Dalio’s statements. More so than ever, we must be able to think with clarity. These headlines should not cause us to panic and change our trading strategy. Master Shi Heng Yi, in an excellent TEDx Talk, shares with us his 5 hindrances to self mastery. He guides us through a compelling story. I would like to share the key takeaways with you. You will be a better trader for it. After all, trading is all about mental clarity and the ability to execute a trading plan.
The 5 hindrances can be summarised as follows. Each hindrance describes a state of the mind that makes it difficult to see clearly, and therefore engage in the right decisions.
Sensual Desire. A positive emotion originating from the five senses. These positive emotions can turn into obsessions that mean we can’t get clarity.
Ill Will / Aversion. State of mind that arises from negative emotions. A rejection or dislike against an object, situation or person. We are unlikely to make the right decisions if we reject the path to getting there.
Dullness / Heaviness. Lack of energy, sleepiness or a state of depression. Buddhism describes it as imprisonment; you are locked in a cell where you cannot make any mental or physical effort.
Restlessness. State of an unsettled mind: your mind is unable to settle in the present moment. You are either worrying about the future or judging the past. ‘The monkey mind’, jumping from one branch to another, unable to stay in the present moment.
Sceptical Doubt. Indecisiveness. In this state of mind, it is very easy to get lost. A ‘what if’ mentality means you get disconnected with the goals and aspirations you once set yourself. Doubt encourages you to stop rather than move forward.
Now we know the hindrances, what will we do about them? Well, this is the action I have for the market meditators. We need to align our lives in a way that prevents these hindrances from occurring. Each hindrance places a dark cloud on your success. The Master identifies a solution: ‘just let it rain’. This is a four step approach. First, recognise which one you’re experiencing. Next, accept and acknowledge that’s what you’re experiencing. Thirdly, investigate why this is your emotional state and ask yourself why this hindrance came up and what the consequence will be if you remain in this state. Finally, non-identify with that experience. Do not allow the hindrance to define you or get in your way. Identify it as an external force that you can clearly identify and reject from your being. This is the path to clarity. The clarity that will allow you to see through the noise and stick to your trading plan.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.
