Bitcoin’s Greatest Risk

Dear Rich Lifer,

If you ask this billionaire investor if he prefers owning U.S. government bonds to one of the world’s most volatile assets right now, he’d flat out tell you “no.”

Ray Dalio, founder of Bridgewater Associates recently sat down with CoinDesk to do an interview for the crypto website’s Consensus 2021 virtual conference.

In the interview released last Monday, Dalio shared his views on cash and bonds and hinted at where he believes the economy is headed over the next five years.

Today we unpack some of Dalio’s comments to understand why he won’t touch bonds with a ten-foot pole, the cons of holding cash… 

And how he — along with many of Wall Street’s biggest investors — changed his mind about cryptocurrencies. 

Cash Remains Trash

Not long ago, Dalio told CNBC’s Squawk Box at the World Economic Forum in Davos, Switzerland that “cash is trash” and those holding cash were “going to feel pretty stupid” for missing the market’s run-up. 

The irony of those two statements is that Bridgewater’s main macro fund, the Pure Alpha II fund, lost 12.6% last year. Over the course of 2020, Dalio lost over $12 billion. 

Not a great look when many of his peers were able to successfully call the bottom and ride the recovery. 

But, Dalio doesn’t seem too concerned and is doubling-down on his previous comments around cash being trash. His main argument centers around inflation.

There are two types of inflation, says Dalio. One caused by supply and demand, where labor demand is high and capacity is low, forcing prices up; and monetary inflation due to a devaluation of the currency.

As money gets pumped into the economy, it intertwines with these two types of inflation.

“We will have a hell of a lot of demand because we put all that money in cash all over the place,” said Dalio. 

And with the money supply increasing, yields are falling to new lows as investors buy up bonds and real estate. 

“It’ll change the amount that’s in the hands of individuals, and so on,” he said, “and that’ll move on because cash is trash. I mean, I’d say that because it’ll have that negative real return.”

Dalio views the second type of inflation as having the most impact. “As those prices rise — like a bond — their future expected returns go down,” he said. 

“As they come closer to the interest rate … then there’s no longer the incentive to buy those things. And you could have trouble. It becomes very difficult to tighten monetary policy, because the whole thing falls apart. Everything’s interest rate-sensitive.”

This leads to more money printing and could lead to assets like cash and bonds having negative real returns despite the increases. 

“Bitcoin’s Greatest Risk Is Its Success”

If cash is still trash then where is Dalio putting his money? 

With the U.S. dollar on the verge of devaluation and China threatening the world’s reserve currency — more on that below — Bitcoin, with its gold-like properties, looks increasingly attractive as a savings vehicle, said Dalio. 

“Personally, I’d rather have Bitcoin than a bond” in an inflationary scenario, said Dalio. “I have some Bitcoin,” he said.  

This is the first time the billionaire has publicly stated he owns any of the cryptocurrency, which is shocking since it was as recent as November he expressed skepticism around digital currencies as a whole. 

What changed? 

“There exists the possibility that bitcoin and its competitors can fill that growing need” for an alternative store of value, he said. 

Dalio is not a full-bore crypto bull. But the fact he so casually stated he owns “some” Bitcoin is the closest thing to an endorsement we’ve seen from him to date. 

Nonetheless, he reiterated his concern that governments could still crack down on Bitcoin’s owners if it ever seriously becomes competition to the U.S. dollar. 

Dalio cautioned: “Bitcoin’s greatest risk is its success.” 

China a Serious Threat 

As the dollar begins its descent, China’s renminbi is starting to fill the void thanks to fiscal stimulus and foreign investments since the start of the pandemic. 

“In 2015, only 2% of Chinese markets were open to foreigners. Now it’s over 60% [but] if you look at the relative pricing, and so on, it’s a whole different story because they’re not doing quantitative easing,” said Dalio. “They still have an attractive bond market. They have attractive capital markets that are more open. And as they’re more open, big investors – institutional investors, central banks, and so on – view themselves as underweighted there,” meaning their holdings in China are insufficient, relative to the returns they can generate.

These foreign investments can translate to added strength to the Chinese renminbi. 

“When you buy a Chinese financial asset, like buying an American financial asset, you have to buy their currency. So it’s supportive to their currency and it’s also supportive to their assets,” said Dalio. 

China gains the capacity to bill and lend in its currency when there are capital inflows. 

“China has been very reticent to do that [so as] not to disrupt the system. But you’re seeing more of the internationalization of the renminbi. It has appeal for borrowers and lenders. That dynamic is really following the same arc of monetary systems and empires pattern.”

“Don’t Confuse the Real Economy With the Financial Economy” 

This last point, Dalio made very clear. He said a homeowner may feel richer because the price of his house has soared, but he’s still living in the same house.

“The world is going to change at an incredibly fast pace,” said Dalio. “Whoever wins the technology race wins it all economically and militarily. That’s what the next five years look like.”

As inflation looms and the Biden administration continues pumping money into the system, the threat of currency collapse becomes more and more real every day. Dalio doesn’t believe going all-cash is the answer and investing in crypto has its shortcomings. 

Nevertheless, it seems like staying invested in hard assets whether that be crypto, gold, or real estate could be your safest bet right now. 

To a richer life,

The Rich Life Roadmap Team 

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