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billionaire hedge fund manager ray dalio recently admitted to the world that he owns some bitcoin now he hasn't disclosed how much exactly and i believe it is in his personal capacity not through bridgewater the actual hedge fund now this is a great opportunity to discuss why ray dalio might have made this move since he's been pretty vocal about what he thinks about bitcoin and cryptocurrency in general as an asset class so we're going to unpack that today but before i get into that just want to introduce myself for anyone who's new to the channel my name is jack duffley i'm a 24 year old real estate investor and attorney and on this channel i cover a variety of topics as they relate to investing and personal finance so if you like that sort of content be sure to have a look around the channel and if you like what you see be sure to subscribe anyways here is where dalio let everyone know that he currently owns bitcoin this year we've seen um institutions like yours i mean i don't know whether you guys are actually bought me bitcoin but i certainly know that you're interested in it we've certainly signed up some bitcoin i think bitcoin's greatest risk is its success because as it becomes more right now it's not such a big deal um and you know fighting it is more of a big deal um and that's that's it because it's not that big a deal um as it becomes a bigger deal and more of a threat let's say people want to sell their bonds and they want to buy bitcoin um and they want to do that in a bigger way like buying gold or something in a bigger way um and then there's more transaction they lose control over that and that's an existential risk and also in this interview he mentioned that he'd prefer bitcoin over bonds right now especially those bonds producing negative real yields since you're losing value to inflation and the yield you're getting on that bond doesn't actually make up for the lost value via inflation but that was the announcement he owns bitcoin some bitcoin is what he said we're not sure when exactly he bought it or how much but we know he does like it enough to actually put some money into it so let's search for a clearer why dalio thankfully is very transparent in his thinking especially about monetary policy about the global economy how he thinks about diversification how he approaches investing he writes a ton of content all over the place on bridgewater's site on linkedin and many other places he's very vocal and transparent in that way which is really great for understanding his approach he also has a great book called principles which i have on my desk right here but here's an article he wrote back on january 28th of 2021 this is back when bitcoin i believe was just under 40 000 it was in the high 30 so actually quite similar to where we are today after the recent pullback in bitcoin and many cryptocurrencies but he gives a very measured take on bitcoin as a market giving a lot of comparisons to gold and what the future of that might look like if shares of the gold market are essentially transferred to the bitcoin market so he breaks it down quite a bit in this article and it definitely wanted to go over it and he leads off the article with i believe bitcoin is one hell of an invention to have invented a new type of money via system that is programmed into a computer and it has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment so high praise i must say and it is true it has been hanging around for over a decade and it's been surging lately so the fact that any business or anything that's created can last beyond a decade that's definitely of note and he goes on to say that there aren't many alternative gold-like assets at this time of rising need for them because of all the debt and money creation that are underway and will happen in the future he's very much concerned about rising levels of inflation in the future i definitely recommend checking out his video how the economic machine works he talks about long-term debt cycles and inflation and it's a very interesting video giving his kind of macro perspective on economies how governments will use debts and influence interest rates over the long term and in the short term explaining that long and short-term debt cycle definitely a worthy watch i'll go ahead and include a link in the description and he says that because of what is going on in the world besides there being a growing need for money or storehold of both assets that are limited in supply there's also a growing need for assets that can be privately held because there aren't many of these gold like storehold of wealth assets that can be held in privacy and because the sizes of the markets are relatively small there exists the possibility that bitcoin and its competitors can fill that growing need however to that supply point that bitcoin has a finite supply and that storeheld of wealth assets have a finite supplier at least one that can't be easily manipulated by central banks he says that i should clarify what i said about its supply although bitcoin is limited in supply digital currencies are not limited in supply because new ones have come along and will continue to come along to compete so the supply of bitcoin like assets should and competition will play a role in determining bitcoin and other cryptocurrency prices and i mean look no further than all the alternative coins we've seen out there i've seen huge run-ups and coins that theoretically are completely worthless so you never know what'll happen but i mean come on we're seeing lots of pump schemes trying to pump up random coins that were just created yesterday and then in some cases they're just flat-out fraudulent operations where people steal money from each other so it's definitely a mania right now within the crypto space however once you look past the mania is there something there for the long term and that's kind of what dalio is trying to get at right now and he assumes that better ones will come along and displace this one because that's the way the evolution of everything works new ways of doing things and new things always have and always will replace old ways of doing things and old things since the way bitcoin works is fixed it won't be able to evolve and i presume that a better alternative will be invented and passed by i see that as a risk for those reasons the limited supply argument isn't as true as it might appear it gives an example that if blackberries were in limited supply they still wouldn't be worth much because they're replaced by better things with new competition so limited supply in itself is not inherently valuable if there's a threat of competition which of course and pretty much everything there is however it's very hard to quantify that risk especially in this relatively new space of cryptocurrency so we know that bitcoin has a capped supply but what about demand that's what's much harder to measure here what's the long-term demand of bitcoin going to be he talks about how there's lots of uncertainty with the security issues and privacy issues with bitcoin certainly there are some very strong things associated with it with bitcoin and how you can actually have a public ledger but it's also anonymous and then it's very hard to track things down these are sort of blessings and curses at the same time a lot it's part of the uniqueness of what cryptocurrency can offer but it's still relevant obviously and he's also concerned about a risk of hacking or as he says to one holding digital or cyber assets at a time when cyber offense is much more powerful than cyber defense the cyber risk is a risk that i can't ignore but besides somehow hacking the bitcoin mainframe which doesn't seem very feasible given how everything is decentralized but there's a lot of things we don't really know i'm certainly not a cyber expert in any way but it also mentions how it's pretty difficult to track down things in a cyber attack and that's whether it's with bitcoin or not people can take down a company's mainframe or i mean we just saw it with the gas pipeline in the u.s and then they might demand bitcoin and then you can't really track down that bitcoin other than to some wallet but if it's privatized you can't really see where that money went and you can't really track it down at least not easily take a lot of power to try and get that back so that is a concern it's a blessing and a curse kind of like i was saying earlier you have a lot more privacy components in that things are decentralized you theoretically have less third party risk but at the same time that can be used as a weapon too moving along he also talks about regulatory risk how are governments going to respond to this are they going to ban the use of bitcoin obviously they can't destroy it at least very easily but they can certainly discourage the use of a particular cryptocurrency whether it be outright banning the use of it whether it be taxing it in some way or somehow adding a level of regulatory or legal burden to someone using it that is a risk even if the law isn't that enforceable it will still discourage some people and that's what he's concerned about this is just speaking on the demand side how likely is it that people are going to be using bitcoin in the long term future since that's what he's looking for and he sums it up here i suspect that bitcoin's biggest risk is being successful because if it's successful the government will try to kill it and they have a lot of power to succeed how they could kill bitcoin if they could at all remains to be seen but it is a risk that should be taken into consideration if you're trying to invest in this thing for the long term maybe you discount that particular risk way down then go ahead and do that but that's what dalio's looking at as well so to summarize this supply and demand issue that he's looking at while the supply is known the long-term demand over the relevant long-term time horizon is tough to know largely for the reasons i mentioned for example since i view bitcoin as a gold like alternative asset i asked rebecca patterson who works for bridgewater to do some calculations and see what the value of the private holdings of gold would be and then take some percentage of that and allocate it to bitcoin so basically like transferring a lot of that market cap over to bitcoin rather than using something like gold and it was trying to figure out those situations between 10 20 30 40 or 50 percent of private holdings of gold being shifted to bitcoin to diversify holdings or what if 10 or 20 of those who built bitcoin and got on its wagon wanted to diversify into other assets like gold and stock so the reverse essentially or what if governments wanted to prohibit its use and just he was looking at all these situations that would affect demand and he ultimately comes to the conclusion that it's very uncertain that is why dalio says that bitcoin looks like a long duration option on a highly unknown future that i could put an amount of money in that i wouldn't mind losing about 80 percent of but that's interesting though he doesn't see it as going to zero and i think that goes back to that 10-year time horizon that's already built out we've seen that it has maintained itself through that even though there really aren't a lot of use cases for it yet other than this sort of store of value narrative that we're hearing so he doesn't see it going to zero but he could easily see it going down to 80 percent of what it's at now but for someone who's so keen on diversifying their holdings i'm not surprised that he would include some bitcoin in his portfolio since it is becoming harder and harder to ignore but then again the success is its greatest risk as he mentions now the rest of this article is bridgewater's research going into comparing bitcoin to other markets like gold so it's very interesting and there's a lot of things here i'm going to highlight some but if you want to check out the entire article i'll include a link in the description here's the first one i wanted to start with and that's the bitcoin market cap as a percentage of total gold outstanding and currently it's something at like five percent it's probably changed since then since gold has gone up a bit and bitcoin is about the same where it was now i think gold's up from january it should be so there's probably a little bit of a change here but the point is we're looking at something like four to five percent of the current market cap of privately held gold so measuring the actual privately held amount of gold is hard to measure in itself so this is a bit of a guess but we're just trying to see what this market looks like compared to other markets but clearly if it were to take up 20 30 50 or even more of the privately held gold market then it has a huge tailwind ahead of it so that might be part of an asymmetric batch where the risk is comparatively low compared to the amount of gain that you could have or even if it is high risk the gains are just potentially that much higher it's that's what risk asymmetry generally refers to and to more of the macroeconomic issues that are driving bitcoin and gold for that matter and other commodities during this time and bitcoin may look especially attractive to some investors now for the same reasons that gold has been supported in the last few years neither gold nor bitcoin pay a yield on an outright basis but this matters little when yields on other assets have collapsed and you see these charts here showing the percent of global debt and local currency yielding below one percent so practically return free risk that's a way it's been coined now you're getting basically nothing back for loaning your money to a municipality to a government or whatever and then the u.s real yield is actually negative at the moment because of the amount of inflation we're seeing compared to the actual yield you're getting on many bonds so if your real yield is negative then holding something like bitcoin or gold that preserves its value even though it's not paying you yield that's still better than negative a zero percent yield will be better than a negative one or two percent real yield the question is whether or not those assets can preserve their value and what's tricky about bitcoin is we're not really sure what the inherent sort of trendline value is since it's so volatile even over just this last few months it went from 60 grand all the way down to 30 grand and now it's back up towards 40 grand and what is the price per coin that is really indicative of its sort of intrinsic inherent value if it has any at least with something like gold or other metals you can kind of get a general idea of where it should be around and it could certainly fluctuate in the short term but over the long term it tends to follow a pretty steady line because it has a sort of agreed upon value i guess is the best way to put it bitcoin we're not really sure what that is we're still getting new adopters we're still missing a lot of large institutional players so there could be a lot of ways to go to actually get to that actual intrinsic sort of baseline value is what i'm calling it and because of that volatility it's hard to tell whether bitcoin is actually a good diversification tool versus other asset classes since it remains unclear if bitcoin will provide diversification when portfolios need it most and they compare bitcoin to gold over the last um just about seven years since 2014.
you can see that the correlation between bitcoin and gold has changed over the years since again we're trying to find where bitcoin's actual value is and until that happens and you get a little bit more stability in the market it's going gonna be hard to determine how closely assets are correlated or at least until we have a much larger track history with bitcoin since gold's been around forever and part of that is because there's a lot of speculation going on there's a lot of short-term turnover which they illustrate in this graph that's total bitcoin turnover versus gold so the average daily amount notice how there's hardly any turnover in gold as a percentage of its total market cap but there's a massive amount of turnover comparatively in bitcoin since there's a lot of people who are trading right now we're trying to make a short-term profit versus gold it's usually a very much buy and hold buy and forget sort of asset since people understand what it is they're buying or at least they should be and compared to bitcoin where people are speculating a lot more they're looking for that short term profit and that probably explains why you have so much more daily turnover with goals you know you're probably going to get some stability and hopefully some inflation protection that's the whole appeal of buying it in the first place with bitcoin you don't really know what you're getting and in many cases people are buying a short-term play on the asset they're trying to make a short-term trade and that's why you see such a massive difference between the total turnover and a day between bitcoin and gold and they do mention the speculative interest in bitcoin in recent months and even in the months after this article was written i'm sure they could keep saying the same thing since you saw a lot of volatility in bitcoin after that too but they summarize it with the strong discounting of future rapid price appreciation broad bullish sentiment and rising leverage are all indications of bubble risk though as we've written before bubble dynamics can persist for extended periods and if you just look at the rolling monthly volatility of returns you can compare it to gold us equities and us bonds the volatility isn't even close to what those other assets are at it's much much higher but that to me is a result of trying to figure out what this thing's actually worth you have a lot of people who are just in it for the short term and you have some people in it for the long term trying to wait out to figure out what that sort of baseline value is it's going to possibly take a very very long time to get there and that baseline value might be much much lower than it is now even zero in a worst case scenario you never really know and especially with a new asset class like this again relatively new it's been 10 years so you got some track record there but there is a chance that the market goes way south from here for the long term too and here's a quick chart summarizing some of the situations that they were going over with transferring the private gold market into bitcoin or percentages of that market so you can see if it got up to 50 of the privately hold gold market that'd be something like 85 000 per coin right now we're at around 40 000 as of the filming in this video it's been on a roller coaster in the last week or two and this would be real return since it's not factoring in inflation or anything like that it's just what would happen if today we just moved all that money over from a different asset into bitcoin and the status quo case they mentioned here is that bitcoin's market cap is around 20 of gold's privately held market cap so it would be something like where it is now so if it goes below or above that that's kind of the baseline we're working with around 20 of the gold market cap and that's privately held gold as i mentioned so that's the big news ray dalio owns bitcoin we don't know how much exactly he hasn't elaborated but he did admit that he does own some an understanding where he sees the tail wins with bitcoin compared to the risks that he's also seeing it does make sense that he did put some money into it the man of diversification ray dalio is i can't seem surprised he put at least some money into this asset class since again there are some significant tailwinds even if there are significant risks as well the bottom line is dalio is always looking for a hedge against a collapsing u.s currency or really other fiat currencies throughout the world and this potentially is a great way to do it and he's going to add it into his portfolio whether it's in a significant way we'll see i doubt it's going to be that significant but at least attractive enough to add some of it to his portfolio anyways that's all i've got for today if you like this video please like it since i would help the channel out a lot and if you like this sort of content about investing in personal finance then definitely subscribe since 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