18 September 2020

Building Blocks magazine: Why Bitcoin Now?

Yara Ainsworth

Yara Ainsworth

Head of Marketing und Communications bei Crypto Finance AG

Über den Autor

Mike Novogratz and Raoul Pal on ‘the single greatest brand’ of the last ten years. This is the first in a series by Laura Shin for her podcast Unchained.

This podcast interview aired on 30 June 2020 and was hosted by Laura Shin. It is the first in a series titled ‘Why Bitcoin Now’, which takes a deeper dive into bitcoin and the history of money in relation to the macroeconomic environment and coronavirus crisis. Here, Laura interviews the founder Mike Novogratz, CEO and Chairman of Galaxy Digital, and Raoul Pal, founder and CEO of Global Macro Investor and Real Vision Group. She asks them about where they think bitcoin is going amidst the macro uncertainty and global crisis caused by the coronavirus pandemic. You can also listen to the complete episode of the Unchained podcast and others in the Why Bitcoin Now series here.

This article is from our newest magazine Building Blocks – Crypto asset developments in the wake of COVID-19, launched this month.

Would you like to read the full magazine? Please sign up for your digital copy of Building Blocks magazine in the form at the bottom of the page.

Why Bitcoin Now?

Laura Shin: The price of bitcoin is close to where it was before the coronavirus pandemic. Why do you think that is?

Mike Novogratz: Prior to the pandemic, there was a lot of leverage in the market, which came mostly out of Asia. There was this mystery rally and I didn’t understand why. And then we had a big deleveraging when the coronavirus crisis struck, which saw bitcoin drop down to below USD 5,000.

Since then the tenor of the buyer has changed. The amount of phone calls that we are receiving has also changed. The overall excitement surrounding bitcoin has changed. It is mostly because we now have a perfect macro backdrop to sell the scarcity story about bitcoin.

Subsequently, we are seeing new buyers. It is now seen as the new asset class to hold. Bitcoin is being perceived as the new digital gold. For instance, hedge fund manager Paul Tudor Jones is purchasing it, which represents the first major hedge fund to add bitcoin to their portfolio.

Raoul Pal: I agree with Mike. It is the gift of the macro story behind bitcoin that investors are after. I also think the disruption to the financial system is now becoming much more apparent because you see the fragilities of what exists. I think it is the perfect time and place to enter the market. Its price is yet to break out, but this teaches you that patience is needed in the bitcoin world.

I’m getting emails and phone calls every day from hedge funds asking how do I buy bitcoin, how do I get it into my fund and how do I get involved? So bitcoin is definitely growing in importance across the investment industry.

Laura Shin: Why did bitcoin fall alongside the major financial markets on 12 March if it is meant to be a safe haven?

Mike Novogratz: It is very easy to understand why it fell. The Vix soared to over 80 for 5-8 days in a row. That has only happened once in my whole career. When you have so much uncertainty, people naturally run for cash. Cash is their first instinct as a safe haven.

When it comes to leverage, you could buy bitcoin on Arthur Hayes’ exchange with 100-to-1 leverage. I don’t think many people do this because a position at 100- to-1 leverage would not last very long. Yet, because crypto assets are unregulated and a lot of the big futures exchanges are offshore, you get so much more leverage than you would get on traditional equities and fixed income.

If you think about it, if I wanted to buy Goldman Sachs shares as a retail participant, the most I can get is 2-to-1 leverage, while with crypto assets, I can get 30-to-1, 20- to-1 and 50-to-1.
When you have a lot of leverage and you have uncertainty, usually the price gets hit very hard, like it did for bitcoin.

Raoul Pal: I would add that because bitcoin is also in retail hands, that leverage works very quickly against it. The other reason why I think bitcoin has not really risen is because of yield enhancements. Bitcoin holders are receiving positive yields from storing bitcoin, and one of the strategies in bitcoin is selling upside volatility.

Subsequently, there is a lot of call selling and this kind of gamma hedging stops the price of bitcoin from breaking out. Once you start breaking key price levels, everybody starts liquidating these short call positions and this creates a huge run upwards. I think there is very heavy delta and gamma hedging, which is causing this behaviour.

Mike Novogratz: When bitcoin breaks USD 10,000 it will reach USD 14,000 much faster than people expect.

This is an adoption story. If bitcoin was easier to buy its price would be a lot higher. We have worked with a few hedge funds who are buying it. Due diligence for their funds is a two to four week process as they are going into crypto assets for the first time.

There are also a new set of buyers due to enter the market. The financial advisor community for instance, is huge. It represents the bulk of the wealth in the US and Europe. This market is not owned by Gen Z or Millennials, but rather by Gen X and Baby Boomers.

They do not have Breadwallets or Coinbase wallets or Venmo apps. So, getting the financial advisors to feel comfortable so you can sell bitcoin to them is a process at Galaxy that we are working hard on. It is being promoted in a big way, not just with us, with others as well. So, I think in the next few months, you’re going to see a lot of financial advisors putting their clients into this.

Raoul Pal: To add to what Mike said, everyone has their eye on bitcoin. If the price rises, everyone gets informed and has to get involved, and that has reached an institutional level now.

So, the more the market goes up, the more they can justify it to their trustees and more people get involved. So I think we are at that tipping point of a virtuous cycle that can continue for a while, but we just need to get through the current levels first. I think essentially every institution’s retained asset accounts (RAA) are short upside calls. Many investors want to get in, but they are waiting for the price for confirmation.

Laura Shin: What is it that is driving those decision makers? And what is it about bitcoin that makes them think that this is the investment to make now during the time of the coronavirus?

Mike Novogratz: I think we need to think bigger. Take for instance gold! If you want to buy gold, there are 16 different ways to do it. It is very easy. You can just buy an ETF. So there is no adoption curve with gold, while with bitcoin there still is.

Only a small portion of institutional investors participate in bitcoin, but as adoption grows, the upside could rise considerably versus gold.

The other point to mention is that holding bitcoin is a bet that it will disrupt central banks. So the fact that real institutions are now prepared to hold bitcoin for you goes slightly against the spirit of crypto – it was supposed to be about getting away from those institutions.

Having these trusted institutions keeping someone’s bitcoin safe is shocking. It is almost comical when you consider the initial story that bitcoin was going to disrupt the banking system, yet I can still keep it at JP Morgan. So I think the first goal is more about disrupting central banks as fiat currencies continue to be printed like toilet paper.

Raoul Pal: Yes exactly. We have never gone through so much central banking uncertainty. None of us has lived through monetary printing of this magnitude. So, it is very natural to question what this means. It could mean bitcoin is becoming a call option on what this could mean. In a large investment portfolio, it would be a very small bet that could end up with a large payoff if disruption at the central bank level with fiat currency takes place.

Laura Shin: Do you think retail investors have the disposable income for speculative investments during the current economic climate?

Mike Novogratz: Here is an interesting statistic that will blow your mind: disposable income in the United States is going to be 4-5% higher that it was in 2019.

That sounds crazy with such a high unemployment rate. Yet disposable income is increasing because the US government is giving out stimulus checks. Unemployment insurance has also increased by USD 600 dollars a week: what was USD 12 an hour in unemployment insurance is now USD 25 an hour. That is USD 50,000 a year! So it’s not bad to be on unemployment insurance right now while we pump the economy full of liquidity.

A lot of that liquidity is now finding its way to the US stock market: Robinhood accounts are pushing stocks up and we are seeing bubble-like behaviour in a lot of stocks. Some of this liquidity is now finding its way into crypto markets.

Coinbase CEO Brian Armstrong recently posted how many 1,200-dollar bitcoin orders he had received versus a normal day. It was great because USD 1,200 is the value of a US government stimulus check.

There is a lot of liquidity in the system, and some of it is finding its way in.

Percentag of buys/deposits that are exactly the same size as the 1,200 USD stimulus check. Source: Brian Armstrong, Co-founder and CEO at Coinbase

Mike Novogratz: The other point I would mention about bitcoin and crypto is that it has always been about systems change. Covid-19 exposed the raw inequities present in the US, which has created a lot of tension.

We are seeing riots in the streets. This is not just the Black Lives Matter Movement. This is a revolution of spirit that is saying, „We have financial inequality, racial inequality, healthcare inequality, and we want systems change”.

People are protesting in strength for systems change, and so while it does not bear a direct correlation with the price of crypto or bitcoin, it bears the same macro spirit.

What we are entering is one of the most difficult US elections in our recent history. This is going to lead to more tension, dislocation, and possibly some real wacky outcomes, all of which will provide a tailwind for bitcoin.

Raoul Pal: Just to add to what Mike is talking about, this is a narrative of fear. People do not understand what is happening, whether it is about fiat money or the systemic social change we are now witnessing. People have automatically started to gravitate towards bitcoin because they are looking for answers. And, bitcoin appears to be the answer that many people have come up with.

I see this even in the office at Real Vision. Today my Chief of Staff told me that she had set up her accounts and were now doing due diligence to get her KYC. So I asked, „Why are you buying?”
She replied, “Well, I just don’t understand what is really going on and I feel like it’s an insurance policy.”

So we are getting to a point where people are starting to understand that it is time to do something.

Laura Shin: I understand that two-thirds of people who receive stimulus were getting more money than their normal salary. But this group of people also tend to have a lot of debt. I just do not know how many of them are going put some of this in bitcoin.

Raoul Pal: I think it is important to know that if you are a Millennial – so you are under the age of 35 – and you look at your 401(k) and your investment opportunities for your retirement savings, you have equity valuations at all-time highs, bond yields at all-time lows, credit yields at all-time lows, and property prices also at very high levels.

You have almost zero opportunity of achieving a positive return over the next ten to 20 years. This is the reality, so how do you save for your future?

This is where crypto offers an opportunity. It represents to Millennials what Baby Boomers achieved with the equity and bond market during their generation: they had record low valuations gifted to them in their thirties and got rich as a consequence.

Millennials are going to accumulate their holdings in crypto in their 401(k)s because it offers them something that has the potential of 50-1 to 100-1 upside.

Mike Novogratz: Laura, imagine we landed here 150 years from now and we were anthropologists and historians. We will look back at the Baby Boomers as the most selfish generation in the history of the planet. I am 34 days a Baby Boomer, although I always tell my kids that I identify as Gen Z.

If you look at what they have taken and the debt they are leaving versus what they put in, this is generational theft on a gargantuan scale. The Baby Boomers are running up astronomical levels of debt that our kids are going to have to pay back one day.

They are not going to be able to pay it back, so the only way you can pay it back is to inflate your way out of your deficit. If you look at the scale of the debt and how fast it is growing, you have got a positive first and a second derivative of the growth of debt. That does not make you feel good if you are in your early twenties or younger. Most of this group do not have economics degrees and they have not actually figured out how to connect the dots. But they intuitively feel it.

Raoul Pal: The key point here is that Millennials and particularly Gen Z grew up understanding that digital assets have value. Mike and I did not know this. It did not make sense to us in the beginning. Digital assets were not something that we grew up with. So the adoption rate from younger people is always going to be faster than for the older generation. Younger people understand digital assets intuitively.

Laura Shin: Do you think retail investors are going to drive the next bitcoin bull market when we have record levels of unemployment?

Mike Novogratz: I think prices are set on the margin, which is where new buyers are entering. My belief is that these new buyers are aged 50 to 80 years. This does not mean 15 to 50 year olds have stopped buying completely. However, bitcoin is a social construct: its price is about how many people you can get to believe in it. Right now, there is an older generation of bitcoin buyers that are entering the market.

Raoul Pal: The key point here is if you take one person aged 30 and one person aged 60, their relative wealth differential has never been larger in all the history of the United States. So, if you bring in one of those 60 year olds, it has an outsized impact on bitcoin because they have much more savings because they are later in their careers and the relative earnings gap has been ridiculously high for a long period of time.

Laura Shin: If the economic fallout from the coronavirus pandemic is dragged out, would this be positive for bitcoin?

Raoul Pal: There are two camps in macro land and everyone will fight until one can claim victory: these are the inflation camp and the deflation camp. The inflation camp is not only about the excess printing and what it does to monetary policy. It’s also about the excess stimulation and how it can create a general rise in prices. However, I don’t believe in this. I believe that the fiat currency value will devalue versus gold and bitcoin, as both will be perceived as better stores of value.

On the other side of the equation, solvency is what I worry about because if you drag a crisis on for a long period of time and everybody’s in a lot of debt, their cashflows are impaired i.e. the economy stagnates and you end up with a solvency crisis. We have not had one of these since the 1930s, so my fear is that there is a risk it could happen.

I think we would have had a better chance if the US economy had shut down and stayed shut down long enough to get the infection rate down below one, before reopening. If this had been done you would not have had such a prolonged event.

I could be completely wrong and everything might be fine. But I don’t have a crystal ball, so the probability of this being a longer event is high. And, if it’s a longer event and cashflows are impaired, either people will go bust or governments will spend more money and print more money.

Both of these scenarios are extremely positive for bitcoin and gold, which is why both of us own bitcoin and gold. It’s very rare in macro when both extreme outcomes lead to exactly the same trade.

I also think the Federal Reserve has a few tricks up its sleeve. First, they can let interest rates turn negative. Second, they can print more money. And third, they can do both of the above.

All these options play into the theme of societal unrest, the unfairness and the feeling that you’ve been screwed. The printing by central banks, the feeling that the value of your currency is going down and how your own personal value within the economy has declined, plays into this big, larger, secular and thematic trend that is playing out in front of our eyes.

Mike Novogratz: What’s important to talk about is I don’t want chaos in the streets, I don’t want the dollar to hyperinflate and our currency to become toilet paper. Raoul probably doesn’t want this either even though it would be great for our bitcoin positions.

As the possibility or probability of that increases, people want a greater hedge and more diversity so it can work in a big way without the world falling apart. Is the dollar going to lose its reserve currency status in the next five years? Most likely not.

Raoul Pal: It is also not just about the endgame for the dollar. Bitcoin stands for many different things. It is a call option on the future financial architecture, the rise in digital assets, blockchain, tokenisation, and everything else. And, it is an option, so we could be wrong as Mike was saying. We may not reach an endgame, but at least we do know that massive progress is being made to reach a new architecture for how we operate digitally and on digital value. This is also what makes bitcoin incredibly attractive.

China is considering an Asian stablecoin for trade, while a cryptocurrencies are being considered by Japan, Hong Kong and Korea. Backed by these four future currencies, if you’re Steve Mnuchin, you have to get a dollar stablecoin out there pretty soon before China takes over.

We are going into a Cold War with China and I wish we weren’t. Right now in the US, we have Venmo and a few other cash apps, like Apple Pay, but we do not have a crypto alternative yet.
Libra is coming soon, hopefully by the end of the year, with a stablecoin. Their dollar stablecoin is likely to dominate even other currencies, thanks to already having 2.4 billion users. So, the payments game is going to be huge.

The reason that’s interesting for bitcoin is that at the moment you have a Novi wallet: it is really easy to flip between your digital dollar and bitcoin with this. As we move to digital dollars, everything will be in your phone as opposed to in your pockets.

In China, 90% plus is already all digital. This is the direction of the future and as the US and Europe digitalise their financial situation, our bet is that it is going to be a blockchain base.

This is not with 100% certainty and centralised apps like Venmo are pretty popular. But, their business model does not work very well with interest rates at zero percent. You would be arrogant to think it has to be a decentralised solution that leads the way.

We have seen what India did with mass digitalisation, where you can buy a pint of milk with a fingerprint. You do not need a phone or a wallet, just a fingerprint. The problem is not decentralisation. The point is that the United States and Europe being so far behind.

Laura Shin: I think a lot of people would agree that China wants to make the renminbi more dominant and also reduce the dominance of the US dollar, which is the global reserve currency. They’re piloting their own central bank digital currency the DCEP, and they also have this vast enterprise blockchain project that consists of hundreds of different individual initiatives. Do you think that their efforts will create leverage to reduce the dominance of the US dollar? 

Raoul Pal: They can’t do it by trade alone. The renminbi is not a currency that everybody wants to use yet. The issue is that the dollar is 25% of the world economy, yet it is used in 79.5% of all world currency transactions.

What the Chinese, the Bank of England, and the ECB have talked about, and Mike was just talking about before, is that people are looking at baskets of digital currencies as trading blocks. You could have a dollar weighting that is not 79.5%, but something more reasonable like 40%. This does not spell the death of the dollar or its abandonment.

It is something that allows the system to function because there are not enough dollars. I think this will see a move towards the regionalisation of currencies, creating a much more stable environment.

Libra was an ingenious creation because it has the dollar in it. The original Libra concept has dollars, yen, pounds, euros, yuan, and so on. Therefore, it moves up and down with global GDP, and that’s brilliant for world trade. I think all of this is coming, I don’t think it equates to a mass abandonment of the dollar.

Mike Novogratz: It’s interesting, and represents a system change. So, how do you get to become the reserve currency? You spend 5% of your GDP on the military: whoever has the most powerful navy in the world has always had the reserve currency status for a long period of time. The US spends 5.5% of its GDP on the military, and so in lots of ways, the US paid to be the reserve currency. Consequently, it gets huge benefits from it.

Trump is in this kind of post-globalisation era, with “let’s make America great again”, be nationalists, turn our back on globalisation, and it exposes just how powerful the reserve currency is. We are not going to overpay for NATO and keep everybody safe with our 5% GDP military, but we are going to look much more hawkish, and people are going to be less prone to want the dollar as their reserve currency. I think China is a real threat, and I hate thinking that way because I am a globalist at my core. But the US is seeing this now: both parties, which is frustrating, are seeing China more as a threat than an ally.

Laura Shin: Actually, to go back to a comment that Raoul made at the very beginning about how he didn’t think that China could use trade to make the RMB more dominant, I did wonder about these belt-and-road versions of these blockchain initiatives that they’re doing. They’re going into these countries that are developing and have very young populations and that are really going to be the source of global growth probably for the next couple of decades. This combination alone, makes me thoughtful, especially when you look at how the US is dragging its feet with its own.

Raoul Pal: You’re dead right! The problem is that the US is still the largest economy in the world. It’s huge and it has a large share of the world’s wealth. All of those countries, particularly the Islamic countries across the Middle East and around the Indian Ocean have fantastic demographics and low debt. They will all be trading strongly with China. There’s a new world order being built in front of our eyes without question. But you can’t ignore the US, and you can’t ignore Europe within that equation.

Laura Shin: What do you think of Christopher Giancarlo’s digital dollar project and do you think it is something the US might actually do?

Mike Novogratz: I think you’re going to see one or more dollar-based stablecoins really grow in the next six to 24 months. You know, the question is do these assets get held at Bank of New York or do they get held on the Fed balance sheet? I think this is still up for grabs right now. If these assets are held at a bank then that keeps fractional banking alive in some weird way.

If the assets are all held on some other balance sheet one-for-one, you lose fractional banking. So the Fed in this scenario, has to think about how they can really expand the money supply when they need to. It changes the whole dynamics of banking.

Laura Shin: In his proposal, he would keep the structure that we have now using commercial banks in addition to the central bank.

Raoul Pal: Although in general terms, giving the central bank the power to be a bank and be able to put money in and pull money out of people’s pockets, directly becomes too much of a prize.

Laura Shin: What do you mean by too much of a prize, I don’t understand what you’re saying?

Raoul Pal: Governments have the ability to control, incentivise and penalise people directly for using the banking system. If you’re issuing digital currency, you don’t actually need a middleman. The dirty truth is you don’t need a bank apart from leverage and a few other bits and pieces.

Now, can this be sold by a different layer? Probably, but the fact being is that if governments are the ones who directly pay you, they can tax you at source. That’s an incredibly powerful thing. Once you put that little trophy in front of them, they’re going to go straight towards it regardless of what we think because that is the new world we’re heading towards.

Mike Novogratz: When you look what China’s doing, China’s system scares me. They’ve got social responsibility scores based on all kinds of factors. They’re moving from a digital renminbi to a crypto renminbi, like it’s bad enough having a digital renminbi.

They know what you spend your money on, such as a crypto renminbi. Listen, if they don’t like you, if you’re a Uighur sympathiser or if you’re gay and they decide not to like gays that week, they can freeze your money. They know who you are because they’ve already seen what you shopped for, and they can figure out who you are, and so it is this combination of machine-based learning and facial recognition, and having a programmable currency controlled by the state, that’s not decentralised, which is scary.

Raoul Pal: One of the big developments going on is the rise of behavioural economics, so yes it has been around for a long time. But once you apply big data to behavioural economics, what you can do – and Facebook have been masters at it as are Google – is you can have influence over behaviour.

That’s what makes it so powerful. We’ve also learnt that from the gaming system. It’s an incentive-based system based around some sort of perceived benefit and money is the great driver in humans generally. As long as we don’t need food and water, if you can attach a token credit system (i.e. a digital currency to a behavioural economic system or a reward and incentivisation punishment system) then you can control more people, and that is terrifying. But that is the world we’re heading towards.

Laura Shin: I did have Christopher Giancarlo on my show a couple weeks ago to talk about his proposal, and he was saying that in the US, we tend to do public-private partnerships. So he’s really envisioning that his digital dollar proposal would be that, and I believe he is quite allergic to the idea of a centralised digital currency.

Raoul Pal: It’s not his choice if the market takes it. It’s like when Libra came out. Everyone knew what it meant. If we were to do it, a private currency would have existed now. Satoshi’s idea has grown into this huge ecosystem, and so if you’re thinking of trying to launch a digital central bank currency and assume that it’s going to be a nice, it’s never going to happen because the behavioural incentives are aligned for governments to use it as much as they like.

It’s just like how data that’s within Google and Apple gets used by governments because they want that data. China and Alibaba have a very good relationship because they need that collection of data.

Mike Novogratz: I mean, when you think about it, every single financial transaction goes through the same clearing house. Think about what I just said. Every single penny spent goes through a government clearing house that they then can hook in their AI engines to figure out who is who.

Laura Shin: I just think the US is fundamentally a very different from a place like China, so I don’t know if our government is going to go in the same direction.

Mike Novogratz: Oh, we are heading that way. Look at the way we’re dealing with Covid-19. We like our freedom and I am not wearing a mask.

Laura Shin: Do you believe that Libra is a good counterweight to the DCEP being a first-mover?

Mike Novogratz: I think Libra is very aggressively hoping to launch. I think they are going to try to launch and they will. I also think Congress and the US public are hugely sceptical about Mark Zuckerberg. If Libra was not a Facebook project, I think it would have a much better chance of success.

That said, I’m not going to short him because he makes a fortune on anything he does because Facebook has 2.3 billion users. I do think the dominant form of Libra will be the dollar Libra. In the same way, if you’re in Venezuela and you want 100 dollar bills, you’ll take the dollar Libra if you can get it.

I think it probably has the most chance of success just because it has got the customer base to start with, and they can do things on scale. For all these other places it’s harder. For instance, how do you get people from fiat currency into digital currency the first-time round. So those ramps are the hardest things to figure out, but they do have an army of people that can work on that.

Raoul Pal: And then there is WhatsApp, which is gigantic. The ability to just instantly transfer payments around using WhatsApp will make it the killer app. I mean, they’ve never monetised WhatsApp yet they paid USD 19 billion for it.

It was crazy, but in the end, the killer app is coming, and they know exactly what it is. And, it’s going to be a global payments platform, which is WhatsApp could become.

Laura Shin: How do you think a Democratic president would affect bitcoin?

Raoul Pal: Personally, I don’t think it will hurt the industry. We’re very simple macro guys. We keep telling you the same thing, which is they’re going to print more money and they’re going to spend more money, and that’s only going to be good for bitcoin.

I don’t see a world where this doesn’t happen. Sure, in three or four years’ time, maybe things will change. Maybe there’s some more austerity, but you know we’re looking at that window between here and there and I don’t see that. They’re not going to change the regulation that exists now, so we could all buy it and trade it, so what’s the risk?

Mike Novogratz: I also think right now bitcoin’s biggest competitor isn’t gold – it’s Nasdaq and story stocks. It’s for instance, Beyond Meat or Tesla. You’re making a whole lot of money buying Tesla. It’s going up, even though it trades at some spectacular multiples. You know, it’s a lot like a crypto. It’s a story that people can buy into and it’s a store of value because people can say it’s worth something.

I think if Biden gets elected, he’s going to take the capital gains tax right up to where the income tax is. You’re going have to pay capital gains from 15% to 40%, and the stock markets are going to choke on that. You’re going to see a major sell-off in stocks if the Democrats win. I think perversely, it might hit crypto for a bit. All of a sudden people are going to say I can’t buy stocks, but I can still buy bitcoin because bitcoin is not going to get taxed like that. Well, it will get taxed like that in the end.

Raoul Pal: Those same story stocks are also likely to get regulated. They run the risk that Facebook and Google get broken apart. I think Facebook, if they get Libra off the ground, there’s almost zero chance they can stay together as one company. You can’t have all the world’s data and the world’s currency and the largest messaging application in the world. It’s impossible. So they’re going to get broken up.

Mike Novogratz: And Silicon Valley! The Democrats are coming after Silicon Valley.

Raoul Pal: Yes, and so in that case – I hadn’t thought about it before – in a world of story stocks people are brought into markets who weren’t traditionally involved because the story is the driver. Bitcoin has a really great story, and I understand that Tesla has a great story, but it has got kind of crazy, and they’re all going to get regulated.

Mike Novogratz: Laura, I was on stage in Abu Dhabi right before this whole thing started. I was on with Mohammed Oshia, who owns 70 brands: every major western brand that’s sold in the Middle East. He is the richest man in Kuwait and they put me on stage to talk about brands. I thought to myself, what do I know about brands.

So, I explained that bitcoin might be the single greatest brand created in the last ten years. There is no other brand that came out of nowhere that creates USD 180 billion dollars. It’s known globally in every country, in every village someone talks about bitcoin. It’s got a USD 190 billion market cap, and I hope soon it will reach USD 200 billion and higher, and so it’s interesting. I was thinking what a powerful brand that’s been created.

Raoul Pal: That’s a great observation.

It is a brand. I mean everybody knows it. They know what it stands for now. They don’t fully understand it, but you don’t understand how your Apple iPhone works, so why do you care. The point being is it stands for something and great brands stand for something that you believe in.

Laura Shin: What if a Democratic president tries to break up big tech? There are many in Silicon Valley who say that Web 3.0 is the antidote to big tech’s dominance.

Raoul Pal: We’re seeing it. Novo will know this as well. People at Brave Browser do to. We’ve seen that are launching Voice – all of this social stuff – the whole economics of this world are going to shift.

The economic power is all with Google right now, and the economic power is going to go back to the individual. That is the rebellion that is going on everywhere, so you will be charged for your time and your attention span, as opposed to you getting a product for free and then monetising your attention span.

I think that whole entire shift is coming, and that’s going to be driven by blockchain technology, so I think a whole wave of disruption will hit Silicon Valley. We need to own our security. I don’t want to trust Google with my security. Has anybody asked you how did Google keep everything secure?

There are the largest repository of privately stored information on earth and not one person asked where their servers are kept and what security protocols they have. I want my data and I want it on a secure blockchain.

Mike Novogratz: You know part of the reason I got into crypto in the first place was that it was speculative. Then I met my college roommate Joe Lubin, who is a real firm religious zelate around Web 3.0 and how the Ethereum blockchain or any blockchain can kind of fundamentally change how we structure businesses and our data and everything else.

I still think Web 3.0 is coming. I think the gap between where we are and where we need to be on the technology side is wider than people want it to be. It will not happen in the next year or two or three, but I think in the next three to ten years, you’re going to see more and more of the architecture being robust enough to take a real shot at things.

Listen, it will be a wrestling match. Will bitcoin disrupt gold? I think so, or at least it will add to gold and will it disrupt the dollar. We’ll see. Will the Voice –’s new social experiment – take out Twitter? The probability isn’t high, but it might. These big tech companies are smart and they’re fast and they’re well-funded. They all have a blockchain defence angles, and they’ll use blockchain a little to help them. So it will be a fascinating space to watch.

I think the move that people want, and where history is going, is exactly where Raoul and I said it will go. So I think that fight over what gets disrupted and what doesn’t get disrupted will really be a lot of fun to watch. It will be profitable, there will be great moneymaking opportunities, both on the long and short side.

Look it’s what’s going on in D5 right now, which is a little bit of a mini bubble. It’s really the first thing that’s worked on Ethereum and so now we’ve gone from a USD 500 million ecosystem to a USD 2.5 billion ecosystem in five days.

Laura Shin: Would Ethereum 2.0 get more interest from more traditional financial professionals because it would act as a yield bearing asset?

Mike Novogratz: Each of these things has a story. Bitcoin has this story of being digital gold. Ethereum is trying to become the decentralised platform for D5, for stablecoins, and for lots more things.

I would value it more like I value Facebook: as the social network of Ethereum grows, there are more programmers and businesses that join it, and therefore people using it. I think, therefore, that its value will grow.

Right now, that community is buying it speculatively in the same way the bitcoin community once did. It’s a smaller community. It doesn’t have the institutional framework bitcoin has. You might have a few speculators that will participate, but when I think of bitcoin, I can think of 20 billionaires who made their fortunes outside of bitcoin that are big advocates.

I was on a call with Bill Miller earlier. He is one of the great financial investors of all time and he is a bitcoin guy. Do you know Abigail Johnson – the CEO at Fidelity – she’s a bitcoin guy.

The Ethereum community doesn’t have those outsiders, they have the Joe Lubin’s, the Vitalik’s, and plenty of stupidly smart guys that are unbelievably passionate about what they’re doing, and so it’s a different universe.

Even Ripple has its community. They’re trying to become the cross-border payments remittance shop. They’ve got the Ripple army out in Asia. They’ve got a community of people who continue to buy it. It’s a smaller community than bitcoin, and so it’s not that there could only be just one of these coins. I think the other coins also have a purpose for their community. They’ve got to grow that community, and this can start out speculatively. But in the long run, it’s got to be used.

Laura Shin: What I’m really asking is about staking. In particular, do you think that this will become a thing that financial institutions will be interested in doing?

Mike Novogratz: In time, yes. So, I think you’re going to see it first in bitcoin with getting people to invest in mining pools. Getting a return on your bitcoin by taking some of your bitcoin and putting it in a mining pool, and so maybe if you have USD 10.00, you’re going to put USD 7.00 in bitcoin and USD 3.00 in bitcoin mining, and I think you’ll see it there. I think you’re certainly seeing it already in Ethereum, and it’s a good model. I just don’t think that institutions are going to be there this year.

Raoul Pal: I think when you’re dealing with something as complicated as Ethereum, bitcoin, and all its potential possibilities and future outcomes and what you can do with it, as Mike says, the most important thing to understand is the story, and it’s a simple story.

Bitcoin is become a trusted type of reserve currency, and Ethereum is a platform with which to construct a new world. If you think of it in those terms, it’s like gold and silver. Silver is a precious metal, but it’s really an industrial metal too. Bitcoin is the precious metal, Ethereum is the hybrid model, so I think they both have a place, and I think many of the other ecosystems have a place too.

They will find their niches and their communities, and the whole thing will just grow from there on. There’s a Java world, and there’s Linux, and there’s all these other programming languages, all of this exists, and they all talk to each other, and I think that’s fine.

You know, it’s like we’ve got all these different email protocols, and they all work. For instance, I can use my Apple email and you can use Gmail and somebody else can use Outlook.

Laura Shin: Mike mentioned DeFi, and I just wanted to ask have you guys been watching this yield farming activity going on? Do you think that’s sustainable? 

Raoul Pal: Yes.

Mike Novogratz: In the short run, no! In the long run, yes! But I think, you know, you’ve now got crazy levels all of a sudden.

Raoul Pal: I mean you see these outside returns and they don’t exist in the normal world. There’s no such thing as a super normal return that last for long. So, you see these 100% a year returns that people are talking about, yet you haven’t seen the defaults yet. You don’t know what the actual yields are that you get over the cycle.

My guess is that it’s probably too good to be true. Perhaps you will get a 15-20% yield because there are not that many people in it. But it’s not the 100% that’s being talked about. We need to see all the things that go wrong first, so you can see over the cycle. If people are building this 100% return in as an expectation, they’re all going to lose a lot of money.

The reality is that it doesn’t work that way. Some don’t pay. One of these stablecoins won’t hold value, for whatever reason that is and for whatever mechanism that causes it. But that’s okay because it’s really exciting to see innovations like this is coming.

About the interview

Laura Shin – Journalist, Producer, and Host, Unchained & Unconfirmed Podcasts. Laura Shin has been watching the development of the blockchain almost since the publication of the Bitcoin white paper and written about every issue affecting the blockchain. She is currently working on a book about the history of crypto assets, which will be published by PublicAffairs, Hachette. She is one of the first mainstream reporters to cover digital currencies full-time and is a former senior editor for Forbes. She also worked as a reporter for Newsweek, worked at Newsweek, The Wall Street Journal, and The New York Times. She graduated Phi Beta Kappa with Honors from Stanford and holds a Master of Arts from the Columbia University School of Journalism. Watch the Unchained podcast on youtube here.


Michael Novogratz – Founder, CEO, and Chairman of Galaxy Digital. Michael Novogratz is a legendary macro hedge fund manager turned blockchain enthusiast is a born storyteller, serving his audience with humor and charm. His enthusiasm is genuine and contagious and his life story is anything but boring. Before founding Galaxy Digital, he had over 20 years of experience from roles at Fortress and Goldman Sachs.



Raoul Pal – Founder and CEO, Global Macro Investor and Real Vision Group. Before founding Real Vision, a financial media company offering in-depth interviews and research from the world’s best investors, Raoul Pal ran a successful global macro hedge fund, co-managed hedge fund sales at Goldman Sachs, and helped design the BBC TV programme Million Dollar Traders. Raoul lives in the Cayman Islands and also writes for The Global Macro Investor, a highly regarded original research service for professional and elite investors.