Thinking Crypto: Raoul Pal on When the Next Crypto Bull Market Starts - Bitcoin ETFs, ETH, Solana, BlackRock, Fed

0:01Hey, everyone. If you like this podcast, go behind the paywall to get privilege access to the smartest minds in finance. Visit realvision.com slash RVpod and use the promo code podcast10 to get 10 % off our essential membership for the first year. Join the Real Vision community and learn how to become a better investor. And now to today's episode of Rao Pal Real Vision. Larry Fink of BlackRock talked about it in the last cycle too, because they put some stuff on Bitcoin on their website. They had the most ever hits on their website in BlackRock history. They've been all working on this. everybody from golden sacks to jp morgan to blackrock to apollo to i mean you name it they're all involved

0:53this content is brought to you by link to which makes private equity investment easy link to is a great platform that allows you to get equity in companies before they go public before they do an IPO. Within their portfolio includes crypto companies, AI companies, and fintech companies. Some of the crypto companies you may recognize include Circle, Ripple, Chainalysis, Ledger, Dapper Labs, and many more. If you'd like to learn more about Link2, please visit the link in the description. Welcome back to the Thinking Crypto podcast, your home for cryptocurrency news and interviews. With me today is Raoul Pal, who's the co-founder and CEO of Real Vision, also the co-founder of Exponential Age Asset Management, and the founder and CEO of Global Macro Investor.

1:37Raoul, absolutely great to have you back on. Great to be here. Looking forward to this. Raoul, the last time we spoke was in 2021, and things have certainly changed from a macro perspective, from a crypto perspective. And I want to set the table here. Maybe we can start with macro. Where do you feel we are at in the QT, quantitative tightening cycle? Are we at the tail end? Will the Fed pause rate hike soon? Yes. My view is that the whole global business cycle, including the crypto cycle, is driven by the debt refinancing cycle. So if you go cast your mind back to 2008, 2009, we had a global reset.

2:19And people didn't really realize at the time what it was. But people were looking for a reset that nobody had to pay debts or something of that form. But what actually happened is they said nobody needs to pay interest on debts. So everybody set interest rates to zero back in 2009. Since then, every major economy refinance interest rates at every three to five years. So we've got this four-year cycle that happens to be the same as the Bitcoin halving cycle. And we see the economy, what happens is as you get later cycle, inflation picks up, interest rates pick up, the economy slows down because the economy really doesn't grow fast enough to pay the interest payments.

3:01So cut forward to today, where we are is a position where interest rates have gone up a lot because inflation went up a lot because of the pandemic, the economy slowing down, and now the payments, the interest payments are due from the pandemic from three years ago. And those payments just keep accelerating. And we've seen the bond market get very unnerved by this, by the amount of issuance that needs to go on to pay all of the interest on the debts, the previous debts, plus the new debts. So at some point soon, the Fed will have to stop quantitative tightening. We saw something similar back in 2018.

3:40End of 2018, the bond market blew up. That time it was actually the repo market, but part of the bond market blew up and the Fed kind of started saying, okay, we're going to stop raising rates. Then eventually, several months later, they stopped doing QT and eventually cut rates. So I think we're in the similar kind of zone where the Fed have stopped raising interest rates. And soon they'll either have to stop the bond market on yields rising by something called yield curve control, or the inflation falls fast enough that they've got the cover to start cutting rates again so that they can roll these interest payments at a lower level.

4:21So we're at that phase where actually the bulk of the downside of the economy should be playing through in this quarter or so, but inflation should be continuing lower for a long period of time because inflation, for example, is driven by two things. One is the short end, which is the stuff that moves a lot like commodity prices and the dollar and stuff like that. The other side is stuff like rents and wages. They're really lagged. And those things take a long time to slow down. So what you tend to see is you tend to see a fall in inflation, which we saw, this kind of sideways period where commodities start pricing in the other side of the business cycle.

5:03And then eventually, you'll see inflation continue to grind lower over time. So that's what I think is going to happen. So we won't see anything but disinflation going forwards. And we'll probably see continuing weakness from the labor market. So again, that gives the Fed an excuse. So I think everything starts to change in Q4. The other thing that could happen is if the yield curve stays as it is, we could see some some of the banks blow up you know we almost saw Metro Bank in the UK blowing up um and we've obviously seen a lot of the banks in the US under pressure right so that whole scenario I think is all in Q4 so I think we're at the point where liquidity starts coming back into the markets which is something we've all been waiting for so it sounds like you're saying there's going to be a hard landing uh we saw a bit of it earlier this year with uh you know these banks having some issues and they're going to have to start the money printer again and sometime in Q4 or next year they start the money printer again.

6:07Exactly right. Exactly right. Now, I don't think it's a very hard landing. I think it's a relatively mild recession. But for all of us, the market's prices in last year, the crypto market was down 80 % last year. The NASDAQ was down 35%, 38 % last year. So the markets have been trading on the forward-looking part of the economy. So everyone's like, well, the economy's slowing down. Why is the stock market down, not down 30 % right now? Well, it happened last year. And so what I'm now seeing is my forward-looking economic indicators saying, well, the bottom in growth will happen sometime in this quarter and then should start picking up afterwards.

6:51So the markets have been trading that. That's why it's been such a good start to a year. Crypto Spring, for example, has been going on. So if I look at Bitcoin's up 68 % and Solana's up 130, that's a pretty good start to a year. We forget that because we feel miserable because it's still so far below all-time highs. But that's how the cycle works. And it's been forward pricing this for a while. Yeah, Rao, I love that concept because you're probably the first person I've heard say that that markets are forward-looking and things are usually priced in, but we miss it. We miss the in the moment. And we're always looking at, hey, what about the all-time highs that took place here?

7:29So I love that. And it got me to think differently about the markets. Yeah. I think people get very confused by that. Now, markets aren't always as forward-looking, but I think the market understands that recession equals more cowbell, as I say, you know, more stimulus. So they start pricing not based on where the economy is today. Normally, they'd be maybe three months lead indicators on the economy, but they've been a lot longer, as far out as a year. I mean, don't forget, most of the markets, the NASDAQ and crypto bottomed in October. ETH was actually earlier in June. So they started seeing the change in the liquidity process back then.

8:10And again, people are scratching their heads because they don't realize why. Now, Raoul, we have rural conflicts happening and potentially war, another war starting. Do you feel that is also going to help ring the cowbell because they're going to have to print money to fund these wars globally? And we don't know what else is going to happen. Do you think that contributes to it as well? Look at Canada, we don't know the situation and how it's going to play out in geopolitics. But for sure, the more the US relies on its military, the more money has to print and we just doesn't have the money to do this.

8:49So the only way of doing it is printing money. So, you know, stimulus can come in a number of ways. It could be war. It could be protecting the bond market, could be protecting the economy and jobs. We just or it could be protecting the banking system. We don't know, but we know that the economy basically doesn't function without some expansion of the balance sheet because the U.S. economy and most of the Western world is too far in debt to cover the interest payments via GDP growth alone. So, Raoul, a hard question for you, and this, you know, probably needs a lot of data. And I know you and the folks there are doing some great insights.

9:28Are we headed for an Argentina? you know how long can they keep kicking this can down the road especially here in the United States at least it seems like they're going to just keep doing it but how does that I'm thinking about my daughter's future you know and and how what type of world she's going to live in so there were two main outcomes I see here one is that that they just they just lose control of the whole system David Steinemann, Ph.D.: So let's go step back and say, okay, how does this play out? You either have to cap interest rates, which is called yield curve control, but then you're printing currency to do it.

10:11The Japanese are doing it and your currency weakens. So that becomes problematic in its own right. It's doable for periods of time. They did it in the 1940s and 50s for a significant period of time. And the Japanese have done it without massive negative consequences. Yes, their currency is weaker, but that means they can export more. So it's not been terrible for them. If they don't do that, and you keep increasing these interest payments and you keep increasing that, then you've got a real problem on your hands. Then that's the worst of all worlds. But I look at it and think, okay, GDP growth is what covers the debt payments.

10:47We've got the government in debt over 120 % of GDP and the private sector in debt over 100 % of GDP as well. So somebody needs to pay for that, and that's economic activity that does it. And if GDP growth is driven by three factors, one is population growth, one is productivity growth, and the other is debt growth. So the debt growth, we can't have finished. All we're doing is increasing debts to pay interest on the previous debts. So that game's over. Population growth, well, most of the world is now slowing down in terms of population and many areas have gone negative. And immigration policies are tight because there's not enough work for people overall.

11:35So that means that the only thing you've got left is productivity. So how do you make the economy more productive so you can grow GDP again to pay these debts? Now, that's what happened in the 1940s and 50s. It was, you know, they rebuilt America then, right? That was the great part of America with everybody getting a fridge and a car and a television and all of that. But this time around, the most likely outcome, the productivity comes from technology. So we've seen the rise of AI. We'll see the rise of robotics, genetic sciences, cryptocurrencies, big data. There's so many areas that we can see massive growth.

12:17So productivity has a potential to increase dramatically, but not yet. It takes time for this. We're just starting to use AI. We don't know what it's going to do. We know it's massive. We know it's probably the biggest thing maybe to have happened to humanity since learning how to split the atom. And it's of that order of magnitude because we can now scale knowledge infinitely. This is something we can't get our heads around, but that's what we've just unleashed here. But the other part of the equation is energy. So productivity is really driven by how much output you get from a unit of energy.

12:54So if you look what the Western world is doing, in fact, most of the world is doing, is they're trying to find new energy sources by putting massive stimulus in to incentivize people to cheapen the cost of electricity. Now, could that be nuclear? Will it be green? Will it be a whole mix of stuff? Yes. And we're seeing all of these come lower in cost. So let's say we do have a larger energy breakthrough over the next 10 years. And energy goes from, if I look at the inflation adjusted price of oil over the last 60 years been about$40. Now, if we get that down to $10, and productivity goes up 2x, you've got this massive multiplier.

13:35And that can change the game for everybody. Particularly as the baby boom, the baby boom population dies as well and leaves the kind of population, you end up per capita GDP rising. So my actual view is we will be saved by growth, by human ability to drive forwards humanity, society, and the economy. But that may sound utopian. There's obviously a lot of downsides that come with technology as well. But the other side is maybe I'm wrong. Maybe they lose control in the interim. We don't know But I would give it a kind of 65 % weighting that productivity solves this, but it's going to take time and it's going to be tricky versus 35 % of something much worse happening.

14:27Or it'll be a combination of the two, yield curve control plus a rise in productivity, which was the 1950s. So maybe seeing another industrial revolution, but this time with AI, blockchain, crypto and so forth. Yeah, I call it the exponential age. It's the nexus of all of these things getting to adoption effects all at the same time. You know, we all understand how disruptive crypto is and how much productivity it can unleash from the financial system and another, a number of different ways. But that's just part of the equation, along with AI, robotics, and all of the other EV, space, all of this stuff.

15:06You know, if I'd have said to you 10 years ago, oh, by the way, some private bloke is to be going to mars and he's also going to put up a sat a ring of small satellites of 40 000 satellites and give people wi-fi around the world you would have said that's ridiculous and now starlink is everywhere you know it's like things are moving faster than we can comprehend and these things are all connecting with each other because ai is driving the robots you know if you look at what is a Tesla car, it's a robot with AI. So that's why this acceleration of things, the exponential age is a really, really big deal.

15:48Yeah, it's very exciting. Like you said, there's probably going to be some downsides and maybe the path to that is going to be a bit rough. Once we get going, kind of like what happened in the early 1900s, the automobile, then that led to airplane and yada yada right uh exactly right up speed yeah um now what are you how are you i don't know if you can share this but how are you personally trading the crypto markets right now are you accumulating and hodling for next year for the bitcoin having what's your strategy right now so my strategy so i learned over time so i first started investing in bitcoin 2012 13 I bought it at$200.

16:31And I said, listen, this is a 10-year bet. And I think it's worth... I did a calculation on stock to flow and said, I think I wrote the first ever macro strategy piece on valuing Bitcoin. And that became very well known at the time. I said, listen, this could be worth a million dollars, but let's assume I'm an idiot by 90 % and discount me down to 100 grand. So I said, look, it's a$200 asset that could be worth 100 grand. that's going to be the best investment anybody's ever going to make in their entire lifetime. So I bought it then. And I sold out in 2017 at about$2 ,000, which was much earlier than I should have done.

17:10Because I got confused over the forking and all of this stuff. And I didn't trade my plan, which was, you just hold on. I'd already had a 87 % drawdown. I was like, fine, I don't care. I'm treating it like an option. But then I sold out into that rally and obviously went up another 10x from there. And then I bought back in April 2020, and I probably bought Bitcoin at 6 ,500. And I thought, great entry. And then I've been long ever since. I switched between Bitcoin into ETH, owned some other assets as well. But I look back and on paper, it sounds like I traded well. I sold out in the big rally in 2017, bought the sell-off in 2020.

17:54If I'd have just held my original position, I'd have been five times better off. I'm like, and if I just use that long-term log trend, and every time it gets to the bottom of the log trend, if I'd have just added, I'd have been 25 times better off. So I'm like, okay, we have to think about these long-term trends in a different way, particularly these logarithmic exponential trends. So this time around, I decided I would just do nothing. So I just held everything. And I started buying, adding to ETH and Solana in June, and then again in October, and then again in January. So that's all I've done.

18:36And then I've done a bit of switching as I've started to look, okay, what do I think will outperform the cycle? I bought a bit more Solana versus my ETH, but that's it. So I don't trade. I don't do anything. I used to try having a basket of crypto, but really what you end up with is a bunch of shrapnel in your wallet that you don't care about. So I'm like, listen, I'm just going to keep the focus bets on the things that have the highest probability. Bitcoin, ETH, Solana, I'm pretty comfortable with those bets. I own some some XRP. I own some other bits and pieces. And again, I'm relatively comfortable, but they're less, they're not as big as the other bets.

19:20Now, historically, you mentioned that you're more bullish on ETH due to network adoption and the capabilities of ETH with smart contract technology than you are of Bitcoin. But obviously, you're holding both, you're diversified. Are you still more bullish on ETH for this upcoming cycle? versus Bitcoin, yes. Just generally speaking, all markets follow the same kind of risk curve. So let's say you're coming out of recession. Usually what happens is treasury bonds do well, because interest rates are being cut, that kind of stuff. And then what happens is investors want to take more risk. So they might go into corporate credit, and then junk bonds, and then emerging market junk bonds, that same cycle actually appears in crypto.

20:06It's exactly the same cycle. So what happens is early stage crypto spring, nobody's sure they buy the safest asset Bitcoin outperforms. Then liquidity starts coming into the market, they start getting more comfort, they move out into ETH and some of the other larger caps. And then once liquidity is flowing, everybody's feeling confident it really flows into the into the alts and so that's it that's exactly the process by which i think it works and will continue to work in this cycle too now you mentioned solana and i hold bitcoin ethan salon as well obviously solana had a lot of connections to ftx and sandbag mufried and so forth are you worried about any risk you know as things continue to unfold with FTX with the trial and much more?

20:52Luke Gromenon, Ph.D.: Look, I think we know how much is held by the kind of FTX estate. So it's a no-no. Can you have, much like we've seen with Mt. Gox stuff in Bitcoin, will you see occasional periods of liquidation? Of course. But there's nothing we don't know. But what we do know is there's a lot of activity on Solana. There's a lot of people building. There's some great projects. The speed of Solana is indisputable. And then we've got Fire Dancer coming at the end of the year into next year, which is a complete and utter step change for blockchains. So that takes Solana's potential TPS from 65 ,000 to 1.2 million.

21:39Okay, that's crazy town. So we've got an already bullish story of a blockchain that survived, right? Much like ETH survived in 2018. It was down 97%. Solana was down 97.5%, very similar. But what's come out the other side is a very strong community, particularly in the developer community, the applications layer and all of that stuff. And Tolly's proven to be a decent, high quality leader and thought leader, been very reasonable, very conciliatory, non-tribal. And I think that's appealing to people. And I see Solana as really one of the only other chains that really is looking at the mass market adoption of cryptocurrency.

22:28Different chains have different purposes i think or narratives but that's solana's and and if the uh fired answer goes well then okay that becomes a a big deal so that's why you know i'm very bullish on that because as you know each wave the the larger tokens do less well each time yeah because they all they have more holders already more is priced in the economic activity just becomes a rate of change game so the rate of change of eth was the big one for the last cycle of the major tokens for this one could it be solana maybe maybe i'm wrong but you know that's that's my idea here of course there'll be tons of others that do 100x i'm just not good enough to figure out what those things are that's too difficult to game so i just play in that very big bucket and just think how do i allocate amongst those um what do you think the narratives will be for the next cycle and i'll give an example in the past it was you know bitcoin to hedge against covet and all the well the money printing that took place in covet in addition to his defy summer do you believe will be ai and the etfs your favorite neighborhood spot grows with square indeed my favorite neighborhood spot has quickly become Todd Snyder in Williamsburg.

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24:34I actually think it's going to be everything, everywhere, all at once. So what I mean by that is I think there's several layers of adoption that is being built by teams right now. One is the finance system, payments, right? We're seeing everybody from all of the payments platforms to stable coins. There's a lot of payments architecture, CBDCs, who's going to go first, India's building, it's out, Singapore's building one, China's building one, the Europeans want to do it, the UK wants to do it. So we know that's coming, that's all on blockchain. And then we're seeing the rise of the institutions building tokenized money market funds, people like Franklin Templeton.

25:26And stuff like Firedance and Solana may be giving opportunities for the finance system to use it in broader ways. So we're seeing the finance system get involved. The finance system itself is going to be investing in the space. So we're seeing pension funds. I just interviewed the guys from Texas Teachers, for example, you know, their investors in the space. They were pioneers. We'll see more of that. I think stablecoins continue to grow. It's a tokenized euro dollar means anybody in any country can get access to dollars so that's a very big deal considering 87 of world traders in us dollars so that continues to grow then i think we see the the further applications of nfts so nfts right now we know is digital art which was the proven use case of that you can create digital scarcity on a blockchain so therefore in an increasingly digital world, not everything goes to zero in value because we can make anything digitally in infinite numbers, including with AI knowledge.

26:32So what we're going to do is create some scarcity. So that was what the art movement was. PFP showed about community in Web3, but NFTs are basically contracts or deeds in the electronic world. So I think that's ticketing. I think that's insurance contracts. I think that's real estate. I think that's a lot of things. I think we'll see more use cases. DeFi itself. We saw the blow up of CeFi. We understand the fragilities of trying to build a CeFi system on an 80-volt asset. In DeFi, I think it splits. I think we get more attention to DeFi, but it splits. One is institutionalized DeFi, which has KYC AML because they can't use it otherwise.

27:18But once they do that and everybody's working on that, then we'll see massive liquidity provisions from the people who already provide liquidity to financial markets, banks, big super funds like Apollo and stuff like that. We'll start providing liquidity and the big hedge funds to the lending markets in crypto via DeFi. So that's the money markets essentially. But we'll also see the more kind of traditional crypto native side of DeFi continuing to develop, you know, the Aves of this world and, you know, the makers and all of that stuff continues. And then the derivative exchanges, DX, DY, Deribit, all of this kind of stuff.

28:00So, and the final part of the equation is I'm seeing still a lot of brands and cultural communities interested. So that's sports, music, fashion, entertainment. And I think all of those will grow into the space once they get through this. Everyone's a little bit insecure about the market right now and nobody's got much money for marketing budget, but I think we'll see the rise of that. So I think all of these come together this time because I think most people did the work in the last cycle. Then the cycle died off, but I think most people have teams, Web3 teams, across all of finance to big brands, and they're ready to activate.

28:44They're just waiting for more liquidity to come back and a bit more certainty so I think the narratives will be broad sure there'll be some breakout narratives the other one is gaming you know that's the other one a lot of people are waiting for is how gaming fits in so there's a lot of narratives coming and I think they'll all come together at the same time which will make it I think a lot of people will have the light bulb moment this time around oh for sure and routes so and we get the monetary printing as well. Right. Yeah. And earlier this year, I don't know what happened, but all of a sudden BlackRock said, we want a Bitcoin spot ETF.

29:19And then that line grew around the block. Then Charles Schwab's Citadel and Fidelity launched an institutional crypto exchange. PayPal launched a stable coin. Was this the year of the tipping point being hit of institutional adoption? Well, people forgot that Larry Fink of BlackRock talked about it in the last cycle too, because they put some stuff on Bitcoin on their website. They had the most ever hits on their website in BlackRock history, that they've been all working on this. Everybody from Golden Sacks to JP Morgan, to BlackRock, to Apollo, to, I mean, you name it, they're all involved. Obviously, Fidelity have been pioneers.