Hedge Funds on Crypto, with Raoul Pal of Real Vision Group


Hedge Funds on Crypto, with Raoul Pal of Real Vision Group

Raoul Pal is the Co-Founder and CEO of Real Vision and the Global Macro Investor. In this episode of The Metaverse Podcast, he shares with Jamie Burke his journey from TradFi into Crypto and his reasoning behind the move. He sheds light on macro events in our world and how this all points to Crypto — exponential assets that become all the stronger when the reach of their network increases.

Posted by Hedge Funds on Crypto, with Raoul Pal of Real Vision Group - January 2022


Hedge Funds on Crypto, with Raoul Pal of Real Vision Group Outlier Ventures

  • Co-Founder of Real Vision
  • CEO and publisher of the Global Macro Investor
  • Previously, he was a Hedge Fund manager
  • One of the few investors who predicted the mortgage crisis in 2008

Reconciling “Crypto Is Macro” And “The Rest Of Macro Is Dying”

💡 Raoul mentioned “Crypto is Macro” at the same time as “the rest of Macro is dying.” What did he mean by that?

  • Macro people became interested in crypto from 2011/2012 onwards
  • Macro investors realized that society has become highly indebted
  • In recessions, interest rates are cut to make sure the debt doesn’t blow up

But that whole thing everyone looks at in the macro world and said, this is going to blow up. And the only way it’s not going to blow up is if we’ve got an alternative.

– Raoul Pal

  • The lower the interest rates go, the more debt goes up
  • To stop everybody from being decimated, governments print more money to inject more money into the system
  • People began looking for alternatives
  • A friend of his introduced Bitcoin to him
  • Invested in Bitcoin in 2012/2013. After buying Bitcoin, it went up 100% and he sold it immediately
  • Did a lot of research on it over time
  • Realized that we have this convergent new financial system, where people are migrating from the old system into this new system

What is all of this stuff we’re talking about? It is literally tens of thousands of really smart people, in real time, building a new system. And it’s not only just a financial system, it’s the whole system of value, and a modern future that doesn’t rely on the past. And if they can scale it fast enough, and build it robust enough, when the other system eventually fails, most of us will be safe.

– Raoul Pal

To What Extent Is Crypto Uncorrelated To The Wider Financial System?

  • Over a time frame of a few months, crypto is not correlated with the wider financial system
  • They are only correlated in a panic because that’s when an overlevered system needs liquidity to delever
  • People new to the markets think that everything’s correlated. That’s actually just the risks that we have in a levered system
  • Bitcoin is a call option on the digital asset space. The entire space trades around Bitcoin, just as the currency markets are all based around the USD
  • Within the crypto market, there will be periods of uncorrelatedness as there are bigger drivers driving the price of other assets in the space

Exiting The World Of Currency Debasement With Bitcoin

Hedge Funds on Crypto, with Raoul Pal of Real Vision Group Outlier Ventures

  • The existing financial system would not blow up, with the dollar crashing to zero
  • Money printing hides currency debasement and lowers the value of your purchasing power

So if you look at it in different terms, your same salary buys less of a share of the S&P 500, bar of gold, or a share of a Bitcoin than it used to, before they started printing money. And every time they print money, these things keep accelerating away.

– Raoul Pal

  • Another issue is that the government has become bankrupt from trying to bail out the economy. Consequently, taxes will rise and future income would fall
  • His exponential age thesis posits that technologies such as AI, robotics, etc. will be taking jobs and opportunities away
  • Baby boomers are in the workforce at the same time as their kids
  • Difficult for salary to go up
  • Only way to generate wealth is to make the right investment decisions, start a business, or be in a business that pays more money

Exponential Assets

  • The mobile phone revolution was the first of these mega network effect businesses
  • Networks become exponentially more valuable as people join them. This idea is encapsulated in Metcalfe’s law: a network is valued not based on the number of nodes in the network but by the number of connections they have with each other

Anybody is trying to value stuff on cash flows or anything else is barking up the wrong tree. It’s how many people are joining the network, are they using the network, and how many other applications have been built on that network.

– Raoul Pal

  • This started with the internet on a dramatic scale. Tech stocks became crazily valued because they are not normal stocks, but because they created a gigantic network
  • A network that comes under an attack and survives is proven to be more robust
  • As adoption grows, prices go exponential. To everyone else, it looks like a bubble
  • Exponential assets tend to be very volatile (e.g. crypto, tech stocks)

Exponential Moving Average

Hedge Funds on Crypto, with Raoul Pal of Real Vision Group Outlier Ventures

  • Concept that takes into account the speed of the trend
  • When exponential assets go exponential, they look like they should mean revert by 90% and everything’s going to crash. However, this is the linear world
  • What he found is that there is a kind of average that most of these assets revert to:
    • A simple way is to use a log chart
    • He likes to put regression lines of standard deviations from the average
    • It will go 2 standard deviations oversold or 2 standard deviations overbought, but still stay within the trend
    • Linear assets do not behave this way
  • Economists do not understand this exponential reality. He himself could not get it for a long time because nobody has explained the concept to him properly

People Not Fully Comprehending The Risks In TradFi

  • People had not understood that they could have lost all of their money in the banking system in 2012 in Europe
  • People in Cyprus understood when all of their money was wiped out
  • There are plenty of risks with the existing financial system:
    • Debasement of money
    • Confiscation risk
    • Underfunded pension system
    • Underfunded social security system
    • Negative interest rates from bonds
  • Bitcoin looks riskier because of its volatility, but what a professional does is to look at the risk/reward ratio instead:
    • Risk is the downside of 75% over a 2 year period
    • The risk of going to zero is almost negligible
    • On average, it goes up 213%
    • Hence, there’s a 3-1 risk/reward every year
    • Over a 3-5 years time horizon, the returns are 10x, with one major drawdown

So it [Bitcoin] may be perceived as risky. But again, you’re also looking at it through linear eyes. Just to explain to people exponentiality versus linearity. So if I take 20 linear steps across my office and into my lounge, I get 10 meters across. If I take 20 exponential steps, I go around the world like twice. That’s what people can’t understand how can that be, but that’s what exponentiality is.

– Raoul Pal

Why Does He Think That Regulators Will Positively Engage With Crypto?

  • Because it is a network that they have no control over
  • The central banks know that the system is broken. They are printing money to support the existing system. They are not going to tell people about it as it would cause them to lose faith in the system
  • Launch of Central Bank Digital Currencies, which may allow people to circumvent the banking system
  • Regulators will have to figure out how they are going to regulate the space

How Does He See DeFi?

  • Sees it as a hybrid — from permissionless systems to permissioned systems
  • DeFi has proven itself to be quite robust in a massive sell-off
  • Algorithms have been replacing people in the financial system for a long time

Is DeFi Yield Sustainable?

  • Doesn’t think it’s sustainable
  • If massive amounts of capital enter DeFi, yields are going to collapse
  • There’s a risk curve for assets, with riskier assets yielding higher returns

On The Metaverse

Hedge Funds on Crypto, with Raoul Pal of Real Vision Group Outlier Ventures

  • A few years ago, he was visiting his friend. His friend’s son was socializing on Fortnite
  • Realized that it’s not a game, but a virtual world
  • Hadn’t put all of it together until he spoke to Piers Kicks
  • People confuse the Metaverse with the dystopian Ready Player One world. The Metaverse could be AR, VR, 2D, 3D, or anything else for that matter
  • From a community angle, humans are tribal — religion, governments, states, or groups people hang out with. With crypto, people can now create states and come together in the Metaverse
  • People have to keep an open mind that the digital world is equivalent to the real world

But in the metaverse, we can all come together. So it’s an extraordinary change to just how humans operate. We can be separate but together.

– Raoul Pal

How Does He View NFTs?

  • People can now invest in culture through NFTs
  • When Beeple’s piece of art came out, he understood it. He has Rock and Roll photographs signed by famous photographers
  • The crypto space has not gotten its head around NFTs. They are busy buying them as collectibles
  • NFTs are not solely about art and culture. It’s about the fact that anything digital or physical can now be recorded, transferable, verifiable instantaneously

Where Can People Find Him?

Hedge Funds on Crypto, with Raoul Pal of Real Vision Group Outlier Ventures

This podcast summary was prepared by The Reading Ape in collaboration with Outlier Ventures. The Reading Ape is a humble servant of the written word.

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