WBD317 Audio Transcription

What Traditional Investors Think of Bitcoin with Raoul Pal

Interview date: Friday 5th March

Note: the following is a transcription of my interview with Raoul Pal. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to Raoul Pal, macroeconomist and co-founder & CEO of Real Vision. We discuss the differences between retail and institutional investors, what a $1 trillion market cap means, volatility and market cycles.

“Here we’ve actually got a broadening, diversifying, deepening market which looks perfect technically, has a good roadmap, has good seasonality. If you can’t find conviction here, you’re never going to find it. This is the perfect storm for bitcoin.”

— Raoul Pal

Interview Transcription

Peter McCormack: What's up Raoul, how are you doing, man?  Good to see you.

Raoul Pal: I'm great, how's things?  How's Bedford, the home of global crypto?

Peter McCormack: Yes, it's great.  I've been hopping around the islands of Bedford.  Actually, I haven't really, have I, at all.  I've been stuck in this house, mate, for nearly a year now.  It is what it is.  I have looked at moving to Cayman, is it possible?  Maybe at some point, might need to, be quicker to move.

Raoul Pal: It's easy, you just need to call me up and I'll give you directions of what you need to do.

Peter McCormack: Look, it's a definite consideration with Bitcoin doing what it is and do you know what, you've got a beach near you so, look, I am doing it.  How are you, man?  Are you well?

Raoul Pal: Yeah, I'm very good actually, no complaints.  No complaints at all.

Peter McCormack: Well listen, look, we've got a lot to talk about, a lot of Bitcoin stuff to talk about; I'm not going to get into the other stuff, not even our bet.  But I think a really interesting starting point, a good question is that you're obviously a very experienced trader, somebody's who's very experienced in the markets, got a long background in study and economics and such; yet you're right now, it's very clear, especially from your Twitter a long time ago, you still put a lot of other stuff out there; you're like fully in now.  You're like a proper in-there bitcoiner, it seems to be taking up a lot of your headspace, a lot of your thinking.  Is that a fair observation?

Raoul Pal: Yeah, and there's two reasons for that, Peter.  Firstly, at the simple level, it's massively interesting.  There's a huge new world being built in front of our eyes and we didn't get really get a chance of doing that in the financial world before, because it was always happening at Silicon Valley or somewhere cool, and we were kind of left out on the side, but this is happening to us; massive disruption that came out of that whitepaper and changed the world.

In my macro guise it's like no other asset is even close to performing like Bitcoin does.  So, it's almost, "What's the point?"  I know you're supposed to have portfolio diversification and all of that stuff, but sometimes when a macro bet is so clear, so big, so obvious, you've just got to do it.  I feel guilty because people; say, "Well, can't you write about currencies?"  I'm like, "Nothing's really going on".  It goes up a few percent, down a few percent; Bitcoin meanwhile is up 100% so that's the reality, and I have talked about this as it's like a super massive black hole, it just sucks in everybody because the performance is so dramatic.

The story, the narrative and the future is optimistic.  Most of us in finance are bored of being pessimistic about central banks and pessimistic about governments and manipulation of markets and all of that, and here's a whole new world for us to be optimistic about.

Peter McCormack: It feels like a shift in a number of dynamics as well.  I think the story of WallStreetbets over the last two weeks is part of that story.  Even though they're dGen traders and they're probably more interested in a Doge pump than Bitcoin, but that itself a lot of people have referred to recently; I've heard at least four people now refer to it as the biggest hedge fund in the world, but it's a decentralised hedge fund. 

It just feels like there's this convergence of Bitcoin, social media technology and people realising that actually the power shift if starting to happen now, and that we're all becoming independent, but at the same time as a collective we have a lot more power.  Are you feeling that?

Raoul Pal: Don't forget we set up Real mission for this exact reason; we realised that coming out of 2008 and 2012 in Europe, everyone lost faith in the banks, everyone lost faith in financial media; and so it used to be a centralised world where the power to run your money was concentrated in the hands of a few.  We thought about this and thought, "This has to change"; how can you trust somebody you barely know with your life savings?  You have to play a part in it.  And, that's the democratisation of financial intelligence.  We thought, "We need to give the same information, level the playing field for everybody"; Bitcoin is that in a whole asset class. 

You're dead right, this WallStreetBets is really about people taking responsibility.  They will make mistakes, they will learn things on route, but it's the power of the crowd, of people; that's social media now.  You and I are on Twitter not because we just like laughing around on it, but we actually learn.  We are there to interact with people and learn.  This is the same thing with WallStreetBets, and it's the same thing with the Bitcoin community; it's a place that starts with the ground up and not the top down, and that's a huge change and refreshing for all of us.

Peter McCormack: Another thing that's refreshing, which again is an alignment between WallStreetBets and Bitcoin is, we often talk about the Bitcoin ledger being open and transparent and I know your experience on it is pseudonymous, but one of the really interesting things I've found about the WallStreetBet situation is that so much of Wall Street is opaque.  I've this last week only learned about prime brokers and clearing and rehypothecation of shares.  I've heard about it but I've only started to learn a little bit more about how that actually works.  So, much of it is opaque.  We're aware there's a lot of manipulation and I'm sure there are a lot of rich billionaires up in the Hamptons planning their next big short together; whatever's going on is pretty opaque.

What actually happened was something that was entirely transparent, a group of traders on WallStreetBets pretty much being very public about what they're doing, what their strategy was and that itself has caused a shitstorm; but actually I think the thing is, if you take a step back and look at it, they were our heroes this last couple of weeks.  Nobody was cheering on Wall Street, nobody was sympathetic to Melvin Capital or Citadel, nobody's really sympathetic to Robinhood.  We've heard about how Robinhood makes its fees, yet we had a group here, it's like this uprising of the small little guy who was able to take them on.  But what they did was transparent and open and for me, it just made me think it's like, let's make everything transparent and open, let's put it all out there.

Raoul Pal: Yeah, I think that's right, but if we go to the deeper thing of rebuilding a financial system from scratch, which is what we're all trying to do here, so much of it is actually unnecessary for us to know.  Why should my uncle in India need to know about custody clearing, all of this stuff?  So our job in this, I think, is to make sure when we build out on Bitcoin, that we make sure that it is accountable and we do not make the mistakes of the previous system.

So, it does give transparency by its definition, exactly as you said, it's how it is constructed that gives that, and we need to make sure that we use it; because humans being humans will create complicated derivative layers over everything and before you know it, we're blowing up a DeFi project in Bitcoin.  Who knows?  So, I remain a little bit cynical because humans are, just generally by nature, gamblers and they always look for the economic advantage and so therefore there's a way of obscuring the reality, but the good thing about blockchain technology is what it can solve here.

So, I am optimistic, I do think it's a seed change and it is going to be more -- stuff like on-chain analysis will allow everybody the same access.  If you're a hedge fund, you know what the short positions are in the prime brokers, however level everybody is.  You do not know on a name-by-name basis, but you know a lot more information.  When you use on-chain analysis it's publicly available for everybody, so you can see what's really going on.  That's really interesting, as you said.  That gives the power back to the little guy and levels the playing field.

Peter McCormack: So, let's talk a little bit more about Bitcoin because it was a great end to the last year and has been a fantastic start to this year.  I myself have been pretty active in Bitcoin now for four years, very busy obviously running a podcast, speaking to a lot of people; but at the same time my real conviction has really started -- I would say the trigger point was COVID lockdowns.

I was still mainly in fiat, I had exposure to Bitcoin, I owned some Bitcoin; but ever since the COVID lockdowns, I've gradually been putting the majority of my personal and business wealth into Bitcoin.  Strangely, even though I've been in Bitcoin for four years, the majority of Bitcoin I have purchased has been over the $10,000 price.  I've been buying increasingly more over the last five to six weeks.  This isn't a FOMO thing, it's not like I'm FOMOing in, I've actually just had more conviction from what has been happening with the likes of Michael Saylor, MicroStrategy, MassMutual, Ruffers, Stone Ridge.  There are all these different institutions now coming in and placing serious bets, and for me that has essentially put this protective moat around Bitcoin now.  Do you feel similar?

Raoul Pal: Yeah, very much so.  So, like you, I've been in Bitcoin.  I've been in and out of Bitcoin since 2013, but I had nothing coming into 2019, and then had a conversation with Dan Tapiero who forced me to get me back in again, start focusing on it and the price was going against it, so it wasn't the right time; but it got me to refocus, thinking, "Okay".

Then, that structural framework from PlanB gave us all something to hold onto, so that gave us something.  Then the price action, it broke out of that wedge and that was like, "Okay, now we've got a structural roadmap, we kind of realise the world's moved forward and we've got price action that confirms it".  Then out of the blue we started hearing about institutions in the space and for me, same thing, because I had a ton of conversations that started with hedge fund managers in their personal accounts saying, "I've got to get some Bitcoin".  Then I'm like, "If it goes in their personal accounts, it'll end up in their funds; they just can't do it yet".

Then you start seeing what Fidelity are doing and BlockFi are doing and a bunch of other people are doing in the space, and you realise they're making institutional access easier.  Okay, that gives me more conviction.  Then you start seeing the announcements come and then offline, I'm getting ridiculous phone calls from ridiculous people telling me ridiculous stuff about what's going on.  I'm like, "Wow, I knew about the New York DIG guys for a while", because I knew a bunch of people involved with them. 

So that gives me the confidence that it's not just, let's say like WallStreetBets, where it was basically a bunch of retail investors trying to maintain price action.  Here we've actually got a broadening, diversifying, deepening market, which looks perfect technically, has a good road map, has good seasonality; it's like "If you can't find conviction here, you're never going to find it".  This is like the perfect storm, positive storm for Bitcoin.

Peter McCormack: One of the things that I keep thinking about though, and it goes round and round in my mind is that, do we have an issue that people will constantly think they're too late and how do we get past that issue?  That's probably the more important question because, when Michael Saylor made his big bet, I think he paid on average around $11,000, $11,500 for his first $450 million, and then bought that extra $600 million or $650 million, and I think that was at around $18,000, maybe it averaged over $20,000; I can't remember.

I kept thinking, "The people will see he did at $11,000, then see what he did it at $20,000, now we're at $30,000 or $35,000".  If we get to $40,000, $50,000, does that become a problem for people because they keep thinking they've missed out; is that a conversation you're having with the investors you talk to?

Raoul Pal: No, because the investors don't look at in those terms.  Price is irrelevant; that's a retail obsession, right.  Penny stocks, they're cheaper.  For institutions it is, what is the adoption; what is the regulation; what is the market cap?  So the more it goes up, the more the market cap makes it available for them to purchase; that is a much bigger deal than price.

Price is a function of that growing market cap, but if you're BlackRock you would not have looked at it until it got to this near $1 trillion market cap; that's the thing.  So it's not at that price because what they're looking for -- nobody thinks when they buy, let's say, the S&P 500 for a portfolio, for a larger portfolio, they're not thinking, "How much is it going to go up; is it too high at this price?"  They think, "What are the portfolio diversification effects; does it help add accreted value; how does it perform over the cycle, meaning numerous cycles?"  All of those things are what they actually look for, because they are looking for portfolio returns.

This is an issue with the space because the space still thinks of it in retail terms, so I think that structure will change.  But again, Michael Saylor and the corporate treasurers don't think of it in price terms, they think of it, "What does it do to the balance sheet of my corporation to offset other issues that I have with currency balances and treasury ownings and bond ownings and stuff like that?"  So that is not a price conversation as such; obviously price is important, but it's more overall.

Peter McCormack: That's interesting, that market cap point.  So do you believe there's potentially a wall of money that comes in when Bitcoin does breach the $1 trillion market cap?

Raoul Pal: Yes, I think that's what we're seeing, is front running the size of the market cap, because at $1 trillion it becomes a serious asset.  At $10 trillion it's gold, in terms of asset size, so that deepens and makes a broader market and allows more participants into it.  So, if you think of the more conservative pension funds, well they can't take it seriously because they still think they have career risk; but when it's a $10 trillion asset, it's not going to get regulated to zero because $10 trillion is owned by individuals and pension plans and corporations and everything.  So, it's these kinds of things that actually drive them.

Peter McCormack: What kinds of things are holding people back at the moment in the conversations that you're having?

Raoul Pal: Time.  It just takes them time to onboard, so the conversations I get from family offices and institutions, I spoke to a big conservative asset management firm, I spoke to their Hong Kong office and they're thinking through Bitcoin.  So, I've given them the asset allocation paper that we commissioned at RealVision.  I said, "Here's that", they said, "That's exactly what we need.  Now, can you present to this group?" so I presented to that group and then it's, "Can you now present to the senior managers?"; presented to the senior managers.  Then they need to write it all up, then if they say, "Yes, we're going to do it.  How?"

Now, we can start with futures which is what BlackRock are doing, because if it's cash-settled futures I don't need to worry about the bearer asset elements, so that works.  But after that, when they want to own Bitcoin, they need to get an entire new back-office infrastructure.  How do you price it?  Nobody has consistent pricing, nobody -- what times does it close and open?  All of the things that they need just for their risk models aren't normal, so all of this needs to be built out and they need to get the approval from the trustees.  So, this shit can take two months to get to buying futures; it can take nine months to get to actually buying Bitcoin and custodying it with somebody.

Peter McCormack: Wow, that's really interesting.

Raoul Pal: If you think about it, you're in charge of your mum's pension plan and everybody like her.  What you then have to do is justify that it's safe and it's secured properly and you've done all your due diligence.  That's a lot of work because it can't be, "Yeah, look, trust me".  It's not Michael Saylor; you don't own the company basically, or have all the voting rights.  You have to appease millions of policy holders, so you've got a massive legal liability; so you have to do all the work.

Peter McCormack: Yeah, no, it makes sense, but also it makes sense in another way in that the wall of money didn't happen straight after Michael Saylor, but we're now starting to see it trickle through.  Like every week, we hear of another company and another company.  That side of it's really interesting. 

Another thing that I was told is interesting, I don't understand the detail, you probably will but somebody said to me, one of the most significant purchases of Bitcoin over the last few months was MassMutual, being an insurance firm.  Have you looked much into that and have you observed that as being slightly different from other treasuries?

Raoul Pal: Yeah, super important.  That is very important, because who owns massive treasury style cash balances and long term liabilities is insurance companies and assurance companies.  This is exactly the kind of asset that they need, it's almost perfect for them because they have these long-term cash flows and they sit on tons of bonds, tons of different currency exposures and they need to model out the risks of that.

Bitcoin actually works really well.  There's not many instruments in the money market side of things that looks anything like this because bonds, you're going to get no real capital appreciation, you don't get any interest; so how do you manage a massive pool of cash?  Bitcoin becomes really interesting for them, so that's just a start.  Once we start to see more of those, I think the whole insurance industry is going to start putting this on their balance sheet.  It makes total sense.

Peter McCormack: The same person about MassMutual also said to me, he said, "The thing is about the Bitcoin on their balance sheet, it would likely be the last thing they would ever sell".

Raoul Pal: Most insurance companies don't sell stuff.  What they do is they build a portfolio and then draw down as necessary, and so that would be just a weighted amount.  So again, people really misunderstand what people do here.  An insurance company manages a big pool of assets and then you make a claim because you've crashed your car, let's say.  Okay, so it comes out of the pool.  So, they're not going to go, "Peter's crashed his car, shall I sell my German bunds?"  No, they have an asset allocation.  So what they do is just release some of the cash and they have cash buffers for that.

I don't think that changes a lot.  It's going to be the guy who runs the asset allocator, the CIO, making the decisions of, do we tweak our Bitcoin position by 15 basis points and reduce our German bunds by 10 basis points, regardless of all the claims being made or whatever it may be, if it's life insurance or anything else.  So again, it doesn't work in that way.

Peter McCormack: Interesting, so we saw Ruffers announce a couple of days ago that they'd sold off part of their Bitcoin for about $600 million.  I was slightly disappointed.  I thought that was a quick trade, but I kind of understand.  What was your read on that?

Raoul Pal: Again, I know a lot of the story about this.  Essentially, they got a lot of flak because they're quite a conservative asset management firm.  They got a lot of flak so what they did is, their $600 million had doubled, so they just said, "Fine, we'll just put the original bet, take it out, we're now in for nothing, you can't complain".  So, it's nothing to do with they don't believe it, it wasn't a trade, it was like, "Listen we're early, we're one of the first firms to do this, we understand that people are a little bit not sure about it.  So what we'll do, we'll be in the trade for free", so that's all it was and, again, pretty clever I think.

Peter McCormack: That's pretty smart when you explain it that way.  Going back to this point of MassMutual perhaps never really wanting to sell their Bitcoin and being one of the assets they don't want to sell, if more companies are adopting their treasury and starting to feel like that position, that's going to force the scarcity issue; because I was to have a conversation with Jamie from Hut 8 Mining. 

We had this conversation where we both hold Bitcoin on the balance sheet.  Obviously, they have significantly more than mine but that aside, holding Bitcoin on my balance sheet has doubled my capital position this year, which is fantastic, but it puts me into the position whereby over the next two, three years, if I need capital, I'm not going to sell the Bitcoin; I'm going to borrow against that Bitcoin because I don't want to sell it.

It gets to this interesting position that, as people start to hold their Bitcoin they start to realise, "I don't want to let go of this.  I can leverage this to borrow and that's a much better position to be in".

Raoul Pal: Yeah but again, if you're an institution and Bitcoin goes up, so let's say it's a 5% weight in your portfolio; let's say Bitcoin triples, it's now a 15% weight in your portfolio.  You're now overweighted.  What you are actually going to do is sell your Bitcoin.

Peter McCormack: I see, I see.

Raoul Pal: Again, very different to you and I holding it versus the asset allocation.  That is going to bring volatility down because as you rightly say right now, there are no sellers.  So, anybody comes into the market the price gaps up, then there's a bit of retail leverage that gets stopped out in small sales, because it's quite illiquid at the marginal price; but what's going to happen is these institutions are going to be buying and selling on a monthly and quarterly basis.  They'll be buying into dips, they're be selling into rallies to keep their allocation in line and what's going to happen is Bitcoin is going to go from this 70-vol beast to 60 vol, to 50 vol, to 40 vol.  If you get to a world where Bitcoin is the reserve asset, then it's going to be a 5 vol.

Peter McCormack: Okay, so reducing the volatility in some ways obviously I think it's a good thing, but that's an interesting thing because I don't think a lot of people have thought about it like that.  Do you think that might shift the pattern of the four-year halving cycle, where we have these 80% drawdowns; do you think we could get away from that because of this?

Raoul Pal: Yes, but not this cycle.  The reason being is you keep posting pictures of Lambos and I start thinking about something, work I want to do in my house, whatever it is, right.  We want to cash our crypto tokens in for lifestyle tokens.  We are all value investors now, and when the value is so out of whack that you think, "I could sell some of that and buy a new house" and the value to you is so extreme that even though there's more upside there, it's become so cheap in Bitcoin terms; so you sell your Bitcoin.

What usually happen is if we look at the last cycle it went from $200 up to $20,000.  I don't know what the average weighted entry price for most people was, but it was somewhere two-thirds of the way up that rally.  So, what happens eventually, people start going, " I want to buy a car [or] I want to go on holiday", whatever it is.  So, you start selling some and it feeds on itself, "I need to get my car, I don't want this to go down any further because I planned for that". 

We all have hopes and dreams so it is actually a human behavioural cycle based on where we perceive there to be value and it turns into, "Oh shit, it's now become risk.  I thought I was rich and now I'm going to be less rich".  But once the institutions come in properly into this space, that goes away because of that asset allocation where they tend to be buying the sell offs, it tends to be less driven by this kind of stuff, because they tend to be sellers on the way up and buyers on the way down; and that changes that dynamic.

I think we're not going to be deep enough markets by the time we get to that next tipping point because honestly if it's up at $250,000 by the end of the year, most people want to take some profits and do something with it.  I know again it's against the philosophy of Bitcoin that this is the new future, but we live in the real world.  We've got bills to pay, we've got hopes and dreams and my personal hopes and dreams is not about the financial system; my personal hopes and dreams is about the situation I live in and how my family lives.  You bought your dad a car, it's all the same thing. 

So, that's why that cycle exists and it's because it's been driven from the ground up with people with hopes and dreams who are acting like value investors at the peak, "With my Bitcoin, there's real value in property, real value in this", and that's fine.

Peter McCormack: Yeah, interesting that pulled the figure $250,000 out because, probably like you, I get a lot of emails from people who listen to the show, always tend to ask very similar questions.  I'm getting a lot of questions now coming in, "Where do you think the top is?"  Whilst we have a 30% dip, just like 30% dips in 2017, the difference is when you dip 30% from say $2,000 you go to $1,400. When you dip 30% from $40,000 you're going down to $28,000.  The thing about going down to $28,000, if you hold 5 Bitcoin, you've just suddenly dropped a very significant amount; it's like huge.  So I think psychologically, it's a very different situation.

The question I'm being asked most at the moment Raoul is, "Pete, what do you think the top will be?"  We are seeing a range of predictions.  I've seen $288,000 from PlanB, I've seen $400,000, I've even seen a tweetstorm from you, where you talked about it even having the ability -- did you peak at $1.2 million?

Raoul Pal: No, I peaked at $1 million but not for this cycle, but it's possible to overshoot.  So, I've just used a regression line and used the trend of the log scale and basically it says, "Somewhere between PlanB and $400,000 is right", but it could actually hyperextend to get as high as it did from trend in 2013, which would give us a $1 million".  So, I think it skewed slightly higher than people expect.  I don't think it gets to $1 million, but we've got institutions coming in; who knows how this dynamic changes.  So, I do think it's interesting. 

The other thing for people to bear in mind is there are a couple of price hurdles that are coming up that people haven't thought through.  The first one is Coinbase's IPO.  If you are an institution who wants to buy Bitcoin and you've got to go through all this rigmarole to try and get it signed off, and Coinbase IPO comes out and it's a $60 billion company, and you can stick a few billion in, it's a good enough proxy for a while.  So, my guess is that's going to take out a lot of demand from institutions in the short term; it's not a long term thing, but it'll absorb quite a lot of demand.

The next big thing after is, I think $100,000 is going to be an issue, because a lot of people got in around $10,000, a lot of people will have made ten times their money and $100,000 is a round number and people think, "Let me take half my chips off the table".  So, I think we might see a longer correction and my guess is and my framework I'm using, and I'm using some seasonal analysis, suggests that we go up to $50,000 into March. 

That works perfectly for the Coinbase IPO, everything calms down because institutional buyers stop piling into Bitcoin futures, they buy a bit of Coinbase first because they can justify it easily because it's just an equity, and then the next run takes us to $100,000 into June, by which case there's going to be a lot of profit-taking.

Peter McCormack: This is why I got another email today, the lady who does the transcriptions for the podcast.  She said, "I've listened to some of your podcasts and now I'm getting FOMO.  I don't know what to do; I want to buy Bitcoin".  My advice to her, like I've said to everyone, is you have to have a really long time horizon, you really have to be thinking five to ten years.  If you start thinking shorter term, you're going to be at risk from the volatility, and I've kind of been there myself, Raoul.

I said at the start of 2019, I was going to give myself ten years, and I've been looking at these price targets and thinking about what might happen in the cycle and knowing whether the top is $100,000, $250,000, $400,000; it's really hard to know, and I almost don't want to play that game.  So, I'm thinking for the sake of four years, I think I'm going to wait for the next cycle, because that's a considerably different place in four years' time and I'm patient.

Raoul Pal: The point you need to think about is what happens in that four years, how much cash do you need, you will take some money off the table and run the rest.  I think most of us will do that.  I don't think most people -- because they now understand what this is.  So, I think people take some off the table at whatever high price you choose, people will scale out, institutions will keep buying further up for the reasons we talked about before, market cap reasons stuff like that, and then I think you are right; a lot of people will just hold a lot more than was held on the last cycle and a lot more than is held on the cycle behind that for those reasons.

But the potential returns each cycle go down as the market cap gets bigger and bigger, because retail cannot drive.  If I sell it to you and there's only in existence, you can drive up the price; if there's two of you bidding for it you can drive up the price.  A lot of retail investors are in, the institutions are coming in, and then it becomes really hard to go from a $5 trillion asset to $10 trillion to $20 trillion, so I think the returns go down over time anyway, and I think we have seen that in the cycles. 

But what is the return from the next cycle peak to the next cycle peak?  I don't know, call it $200,000 to $2 million; who knows?  Another 10X; not many things give you 10X.

Peter McCormack: I guess one interesting point would be that, if we get to the point where Bitcoin does hit a $5 trillion market cap, is there a risk that people are less excited to invest?  It is quite exciting right now, because you have those high figures where people talk about multiple hundreds and thousands; do you think psychologically it potentially loses some steam there and then potentially, we start to see a longer drawdown; what do you think happens at those kind of like $5 trillion market caps?

Raoul Pal: This is a really good question and I can see the community starting to think it through.  It started with stacking sats, but it feels a bit awkward and a bit of a false narrative.  We have to explain to people that the headline price -- you don't have to buy one of these.  It's basically we just have to explain that to the average person, but again don't forget retail is handing the baton onto institutions here, so retail investors will find it hard and we all want retail participation, not because it drives up prices, because we truly believe it's the best thing for them to do to have a chance for their futures, to be able to pay off student loans, or whatever it may be.  So, we all passionately believe it has a real place in people's personal portfolios, whoever they are and however little money they've got.

The institutions will continue to drive that whole thing higher because they understand that price is just a number; it is just a number, we just have to get better as a community.  As you know the thing for me that I've been trying to drive is institutional adoptions, speak the language, and I can tell from you, who haven't come from finance, asking questions and like, okay fascinating, because you're thinking as an individual investor.

We have to now also talk the language of those individual investors and say, "Listen, just because it's $1 million dollars, doesn't mean you can't buy any".  But Robinhood, good or bad, have also fractionalised shares so people are starting to get it.

Peter McCormack: So, when you go and look at your Bloomberg terminal or you go to a website that's full of different prices, commodities, stocks, etc, whenever you see Bitcoin, even me as a bitcoiner, I still look at it as this like weird little rebel thing.  Do you think we ever get to the point where Bitcoin just sits there, alongside gold, silver and people just consider it this commodity that is just alongside them and doesn't give it that kind of like weird little look; do you understand the question I'm asking?

Raoul Pal: Yes, it depends.  If it just remains a reserve asset and when it gets full price discovery, it goes to this 5-volatility asset and looks like kind of bonds or gold, but gold's a bit more volatile, but something of that sort, it will just be another line on the Bloomberg screen; everybody analysing what's going to drive the price; do I need to increase my allocation? 

However, there's the other part of this whole equation that you and I really haven't talked about is, what technology gets built on it, so therefore what could be its future value?  So, maybe it always remains this weird hybrid of a call option on technology and a reserve asset at the same time; maybe it does.  I mean Google's been that really.  

So, Google is a search engine that makes advertising revenue, but it has a lot of call options; Amazon has done the same.  AWS was one of the best call options they ever had.  So, it's probably different, it probably ends up looking more like an equity in terms of how it moves around and the kind of narratives that drive it, than a bond that becomes just a macro variable.

Peter McCormack: Have you looked much into any of the technologies being built; is there anything out there exciting new?  I'm obviously very excited about what Jack Mallers is doing with Strike, but have you looked at any others?

Raoul Pal: Yeah, there's another one that most people aren't aware of yet and I will make you an intro to them; Bottlepay, coming out of the UK.

Peter McCormack: I know Bottlepay.

Raoul Pal: Yeah, so Bottlepay, there's a bunch of very famous hedge fund people who are involved in funding that to start and it's basically -- they think it's a superior version to Stirke, Jack Mallers' product.  I know the players involved and these are serious people.  Will these get adoption; you never know.  We've all got a million apps and half of them never got adoption.  We used to use Skype and Viber for our free calls and now we all use WhatsApp and Facetime so you just don't know.

But I think Bottlepay is the one that I've seen that's interesting, because if there are two payments systems, Strike and Bottlepay, we're now starting to see a trend emerging; and somebody will then build another one, and whoever gets adoption gets the adoption, but it means it's coming.

Peter McCormack: I think Strike's very interesting technology.  I know of Bottlepay, they followed me on Twitter the other day so I went to register and I'm in position like 45,000 on their list, so I've asked them to bump me because I'd like to try it out.  My point really on something like Strike is super interesting.  I really like the idea when Jack Mallers talks about the ability just to move money around the world at no cost.  It's fantastic, but it potentially decimates a number of industries which I don't think we should be hugely sympathetic about.

Raoul Pal: I've raised this point before; there is no such thing as no cost, so somebody is the product.  It's the same with Robinhood; there's no cost?  Of course there is a cost.  So, I think it's a little bit disingenuous.  You've got two foreign exchange transactions: pounds to Bitcoin, Bitcoin to dollars, if you're going to send me money, right.  Somebody is taking a turn in that, so we just need to be a little bit careful because we go, "Robinhood they're bad; this is amazing, it's all free".  There is nothing free in this world, everyone needs to work for a living; you just need to figure out how you're paying for it.  But yes, it is amazing.  As an idea and concept, it's fantastic.

Peter McCormack: The point I was going to try and make, Raoul, is that this actually, as a technology, could revolutionise the ability to move money around the world.  We know, certainly if you're living in third-world countries, that it's a bit more difficult.  You have to use something like Western Union, the costs can be high; so this is a technology that can improve things for these people as mobile phones have, etc.  Are there any other industries that you think Bitcoin, the technology, can disrupt?

Raoul Pal: We just don't know what's going to get built on it yet because, to be fair, Bitcoin has been slower to build on its architecture than other platforms.  So we don't yet know what the smart contract future is because, don't forget; if you've already got insurance companies using Bitcoin on their balance sheet, well why would you not potentially use a different layer of the Bitcoin blockchain for your insurance contracts with complex terms? 

Lloyd's of London is a very complicated thing, but maybe you can put them all on the blockchain.  So I think insurance is one of the clear disruptors.  I think gambling probably goes on the blockchain, again because we can make complicated bets.  Like, you and I have got a bet; if you did that on the blockchain, then I know you can't welch out of it.

It becomes really interesting because you can complexities in smart contracts with bets; if this happens if it's sunny on Tuesday and so-and-so does this, then this is the payout; and that applies to all sorts of contractual terms.  So there are a lot of things.  There are supply chains as well from corporations, so it's much bigger than just the finance world.  It's basically the recorded ownership and trust of everything, and that's how big it is.

Peter McCormack: I think the betting one's great.  I had a bet with American HODL and we locked the Bitcoin up in a multisig, two or three multisig.  Obviously we have somebody else, a third party, helping us with that, but he can't get access to that.  You and I have a slight different issue, we don't have to use a multisig because we're reputationally dead if we don't deliver on our bets, but it's looking good for you.

Raoul Pal: We want to have dinner with each other anyway, so it's an incentive!

Peter McCormack: You're up on that bet right now!

Raoul Pal: It's only February; there's plenty of time to play for.

Peter McCormack: I know, I am praying on the futures to destroy it like it did for Bitcoin.  Anyway, moving on from that.  A couple more important questions which some of the more hardcore maxis will care about, kind of more ideological ones. 

We're seeing a lot of corporate entry into Bitcoin, but one of the great things about Bitcoin is it was front-run by retail for the first few years.  A lot of people will be put off by price and will be put off by the unit price, but I think there's a bigger question than that is that, do we risk, or do you think about the fact that if too many companies come into Bitcoin, it becomes too corporatized, that we forget about the basic building blocks and the thing that people really cared about, which is censorship resistance, seizure resistance; do you think we end up focusing too much on the 21 million and not some of the more kind of freedom-driving aspects of Bitcoin?

Raoul Pal: I think that's inevitable.  With regulation and institutional adoption, it becomes very different; but the community still holds that philosophy true, and that means they will solve this.  So they will create private wallets; they will create all sorts of ways to allow them; because it's open source, so you can build anything you want on top of it. 

We could create a private payments network between you and I that nobody knows about.  So, I don't think it's going away; I think it probably just drives innovation.  It drives innovation because you can't do it in a banking system, so you become illegal the moment you do it in the banking system, once you try and do things, but with Bitcoin it's not because it's nowhere; it's very difficult.  So that is going to breed a lot of innovation in the space, I don't think we even have a clue how much innovation's going to come here.

Peter McCormack: The banking thing's really super interesting Raoul.  So I got rejected for a bank account for the fifth time this week for my business, and it's always a different reason.  I got rejected because I have a business with the name Bitcoin in the title, strangely enough.  I banked with one bank, I was going to say who it was, for nearly 20 years personally; I applied for a business account today and again they rejected me, and they rejected me because they're not doing any accounts for companies that are already running; they're only servicing new companies.  I've really struggled to get a bank account.

I quite like the idea of a wallet which can essentially function as a bank account which allows me to store Bitcoin and pounds in it, just a very simple idea.  Before, I didn't used to think that Bitcoin could bring down the banks, I certainly think a mix of Bitcoin and stablecoins can certainly give a different option to the banks, certainly for someone in my position, but an even more interesting scenario is, of course you saw the announcement from the Bank of England today?

Raoul Pal: Today, I haven't, I was travelling between islands.

Peter McCormack: You've not seen it?  So let me tell you this, give me two seconds; you're going to love this one.  So, "Bank of England announced today that UK banks have been given six months to prepare for the possibility of negative interest rates". 

So, first question, because I've got a few questions for you on this.  I don't know the scope of the audience, but I'm going to assume there's a variety of people.  There might be some people who don't really fully understand how negative interest rates can exist and what that actually means for them.  Could you cover that first then go to my questions?

Raoul Pal: The idea behind negative interest rates is to incentivise capital out of the banking system and savings into the economy to stimulate the economy.  It's usually a sign of low economic growth or falling inflation, so it's an idea of stimulating demand and stopping capital getting poured into the banks.  We've got stuff like M2 falling so the velocity of money falling; it means the money's getting hoarded.

So the idea behind negative interest rates is that also, it has a nice side effect in the fact that everybody is so in debt, it means governments can fund themselves at zero or negative; in fact, you pay them for the privilege.  But that's not that weird.  Actually if you buy gold, you pay a cost; it has a negative carry because you have to pay for storage.  There are many things in this world: if you buy fine art, or if you buy a house in the US or pretty much anywhere, except the Cayman Islands, you have to pay a property tax, an annual tax; so those are costs of carry.  What they're basically saying if you're an investor is yes, you can use our secure asset which is UK gilts in this case, but you're going to pay for that.

Fascinating, what else does it mean?  The big problem is for savings.  The really big problem is for the pension holders because in the end, when you retire, your pension, and in the UK I think it's still law, that a certain amount has to go into fixed income, into bonds, because they pay out over time so you can afford to live until when you die.  The problem is with negative interest rates or zero interest rates, there is no return. 

So it means that for you, if your pension plan had £1 million and you've been paying into it for 60 years, it's now worth £1 million.  If interest rates were 10% a year you get £100,000 a year; fantastic.  If you get zero, okay then you have to start eating your capital.  So let's say your cost is £100,000 a year; so 10 years, you're out of money.  Guess what; you're still 75 years old, pretty spritely, and you've got no money.  That is terrifying.  If they go negative, and considering how many baby boomers there are, there's like 150 million between the US and Europe and the UK, you're going to destroy their future savings.

But, the equity market has compensated for that somewhat and gone up, but really I don't want my mum to be in equities at this point in her retirement cycle; I want her to have a secure income.  So it's really hard and it distorts prices, it distorts risk and it creates unintended consequences.  But the governments can print more money, and it doesn't cost them anything; that's basically the game.

Peter McCormack: Do you think that flow of money is a COVID-related issue?  I've got a guy right now who's doing some work in my daughter's bedroom to have it fixed up and I said to him, "Are you busy at the moment?"  He said, "I've never been busier".  He said, "Everyone's just sat at home, looking at their walls, but they're not spending any money.  You can't go out, you can't go to the pub, you can't go on holiday; all you can really do is do your shopping and buy stuff on Amazon", he said, "A lot of people are saving money".  Do you think this is what's causing it and this is what the Bank of England is trying to do and they're trying to get people to spend that money?

Raoul Pal: That's part of it.  The banks are not lending it out because I've talked about this a lot; there's an insolvency going on it's not happening at multinational corporation level, it's happening at your friend's business down the road level.  People don't want to lend them money.  The banks are sitting on cash, people are sitting on cash because they're nervous, they don't know how this plays out, and they realise they didn't have enough cash; but the actual biggest driver of interest rates is actually demographics because the older you get, the less you spend. 

You bought your dad a car; why?  Well, he's not going to spend his money on it because he's retired, and it's the same thing.  I saw my dad spending 65% over the first seven years of his retirement, and he used to buy a nice bottle of wine and maybe that bottle of wine was €30; not all the time, but that's what he'd drink.  And then he was with his other mates looking, "What's the best wine under €5?"  He was not poor, but he didn't know long he was going to live for.

He thought, the worst thing that could happen is to run out of money; that drives a massive shift if the worst thing I can do is run out of money when I'm 80.  That's everybody's worst nightmare, so it drives the level of interest rates, because people have to save the older they get.

Peter McCormack: So, if someone's listening to this Raoul, they've heard your explanation of negative interest rates, they know themselves they've got to either plan for their future or they are retired and they are worried about the impact on their pension, what should people be doing?  I know that's a complicated question and this isn't financial advice, but it's something people have got to think about.

Raoul Pal: Yes, so I will come onto the retirees and people soon to retire; let's look at everybody else.  The thing that you've done and I've done is create an income stream that you're in control of, the best you can, and if you create two income streams, you're more robust.  So you can be your own yield.  It's your time, how much yield do I get for my time, whatever that may be?  You could be a hairdresser, or you could be an ex-advertising exec who's decided to go into podcasting and build a business from it, right.  But, what you're doing is revaluing your time and investing in a new business and getting a return back.  Get a few of those, fantastic.

Then exactly as you've done and I've done over my career is, "Okay, I've now got my income streams, how do I save for the future?"  My view has always been, get that security of an asset first like a house, because then everything that can go wrong, the podcast business could get regulated and you're not allowed to do it; anybody called Peter is not allowed to podcast.  Your business is in tatters but you own your house, so you can just go and work in the pub.  I just like to have security because I've seen too many people and too many of my parents' friends who have the rug pulled halfway through their life, because of some event that they lose their job.

Then if you're young, or even if you're in your 40s or 50s, Bitcoin has a great, great value for you.  And you don't have to allocate as much crazy amounts of liquid net worth as you and I have, but to have 10% in and it goes up tenfold, that's a 100% increase in your liquid net worth.  You're doubling your worth; okay that's really powerful, so I think it really has a value.

Would I tell a pensioner to buy it?  I don't know because it is volatile, and the last thing I want them to be is freaked out if it does have the down-cycle again; because if you're young, down-cycles are a feature, it's not a bug, because you actually want them so you can accumulate more at lower prices, much like you and I did in each cycle.  So, I don't know what to suggest for the older, but maybe DeFi and when that gets better in the Bitcoin world, as BlockFi are doing, is I could say to mum, "You know what; if you stick £100,000 of your pension savings into this, it's going to give you a guaranteed return over time of X%".

They all stop thinking in percent anymore, they're just thinking, "Can I not spend my capital?"  But giving them a yield again, in a negative interest rate world in the UK?  Yeah, I might tell my mum to do that.  So I don't care what happens to Bitcoin, it can go to zero as long as you're getting your yield, so there's some interesting stuff that could develop from here.  The problem is, is the more of the pensioners see that they can get yield again, the more they'll drive down yields like they've just done to the rest of the world, so all the yields compress unfortunately but they've got a chance.

Peter McCormack: We've only got a couple of minutes left Raoul, so a couple of interesting questions to finish with.  A broad first question for you: what are the things you're thinking about right now with regards to Bitcoin over the next year; what are the important things for you?

Raoul Pal: There are a couple of actual things here.  One is the institutional adoption.  I want to see corporations who are larger and more established within the community, someone like Apple, put some on their balance sheet; not the trailblazers, because they're always deemed to be black sheep.  Elon Musk has always been a black sheep, he's the richest man in the world and he's a black sheep, but Jeff Bezos is not a black sheep.  If Amazon or Apple said, that's a different driver.

I would love to see a pension fund do this, a larger pension fund, because as we just talked about, I think there's real value in pension assets in Bitcoin and I think they need to do that; that would be an amazing thing because that will drive lots of adoption.  The other thing is what I'm looking for in this space is ease of consumer use, it's still terrible.  I mean transferring your money out into a wallet and you've got to get these numbers and you've got to store it; I mean it's just shocking.  Where's your thumbprint to do this and a retina scan or whatever it is, but this stuff is terrifying.  It terrifies me because at least if I try and transfer money from my bank to you, and they don't make the payment, I can call up and say, "Where's my bloody payment?".  In this world, it's just gone.

Peter McCormack: I heard a good counter argument to this from Janine, I don't know if you follow Janine, she's a part of Block Digest.  She said, and it actually changed my view because I like a good UX; but she said, "When you have a tricky UX and you know if you make a mistake and you could lose your money, you're a lot more careful".  I think she is right.

Raoul Pal: Yeah, that might apply to somebody with ADD like myself, but it doesn't apply to my mum.  It doesn't apply to my sister-in-law who keeps asking me every day, "Shall I sell my Bitcoin?"  I'm like, "I've told you you're holding onto this for ten years".  It doesn't apply to them.  They're used to a world of useful consumer goods and I don't want to care how I send you the money, I don't want to know about these long string of characters, I don't do that when I sent you an email or we do this zoom call; we just hit it and do it. 

So, that's how I want this world to get to; this awkward clunkiness still has to go.  Once that happens, then I think we have a much broader use case that goes beyond investing, it becomes a utility and that can be really powerful, the network effects get even bigger.

Peter McCormack: Great, listen Raoul, you know I always like talking to you, you always explain these complicated market-based things the way that I can understand it, and hopefully at some point this year, fingers crossed, we'll actually be able to hang out in person, drink some rum and have a steak.

Raoul Pal: Exactly right, I'll look forward to it, my friend.