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Hedge Fund Veteran Explains Why Bitcoin Acts as a "Life Raft"

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One of the few macro investors to predict the 2008 Great Recession, Raoul Pal, thinks Bitcoin will act as a "life raft" amid these unprecedented geopolitical and macroeconomic times.

How Raoul Pal Found Bitcoin

The investor released a 35-minute video on Tuesday outlining why he thinks so. After retiring from hedge fund management at the age of 34, Pal began Real Vision, a financial media company.

Pal explained that he found Bitcoin in the midst of the European Debt Crisis, just years after the Great Recession. At the time, there were fears that the European Union would fall apart as a result of great debt taking over amongst eurozone member states. He encountered Bitcoin after one of his friends told him to look into it.

At the time, in 2012, Bitcoin made sense to Pal. He saw it as a hedge against banking crises, debt crises, and a secular shift in the world called "The Fourth Turning." The Fourth Turning is a theory that suggests every few generations, the world undergoes a serious crisis. The Great Depression and World War II are seen as the latest Fourth Turning.

The Macro Trends that Favor Bitcoin

To Pal, Bitcoin makes even more sense now than it did in 2012, due to a number of macroeconomic shifts taking place. 

It all looks like we are reaching this point. I have said this is where macro, crypto, politics, everything comes into the same big bucket. It is all concentrated and our pure focus right now. We know that Bitcoin plays a part in this.

Raoul Pal, Macro Investor

The first crucial shift the investor mentioned is the rise of central bank digital currencies (CBDCs).

The central banks of China, the European Union, and Canada are amongst many central banks that have taken serious steps towards launching a digital currency in recent months. He thinks the push towards CBDCs will destabilize the U.S. dollar as these new systems will allow companies and governments to bypass the world's traditional reserve currency:

A whole panel including Jay Powell, the Cleveland Fed has written about it and many others. People are talking about it everywhere. The drumbeat is getting louder. They are going towards central bank digital currencies.

The second shift Pal mentioned is the COVID-19 pandemic and the subsequent lockdowns. 

Pal has been a proponent of what he calls an "insolvency crisis," where many companies, individuals, and even governments saddled with debt will become insolvent due to increasing debt loads and deflation. To backstop this crisis, he thinks governments will participate in "enormous fiscal stimulus," even more so than the trillions already seen. 

 "I believe rates will go negative in the US by the end of this COVID recession," Pal stated. "I think it goes on longer than people expect. People are familiar with my unfolding thesis, where I think we go into an insolvency phase as growth doesn't materialize as people expect… Central banks want to be able to give people money directly, direct monetization."

Where Exactly Does Bitcoin Come In?

These two macro shifts work in tandem: by introducing CBDCs, central banks and governments are provided extreme flexibility over taxation, fiscal and monetary stimulus, and the tracking of their citizens' transactions and data.

And that's where Bitcoin comes in. As Pal explained further: 

That is where it is headed. Because for this modern digital world, it is the payment system that we all want, but it is also more importantly, it is the store of value we need. The central banks are going to compete at payments level. That is probably the end of stablecoins. I think the central banks will force those out of the system. Bitcoin as a pristine reserve asset is something different. 

He believes it's logical to think that corporations such as Apple and Microsoft will soon have cash in Bitcoin, while other institutional players increase their exposure to the asset. The entrance of services providers like Fidelity Investments and Kraken Financial will facilitate these institutional investors. 

Retail investors, too, will benefit from growth in Bitcoin. He concluded by stating that as retail investors realize that the stocks they are purchasing are wholly overvalued by traditional measures, they will turn to Bitcoin as they acknowledge the "lopsided risk-reward" ratio of this new asset class. 

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Nick is a writer and analyst who has been following Bitcoin since 2013. When he is not writing, he works on HTC's Bitcoin phone, EXODUS.