The Outlook | Raoul Pal 1-On-1 With Keith McCullough

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looking so uh forward to this because a it's rare that that somebody that i have a tremendous amount of respect for that's been in the business for a long time makes a you know makes a big you know big bet uh if we can call that or a big investment um but secondly i mean you know you could forget more on the way to the bathroom i think on on the topic of crypto eth ethereum et cetera so i wanted to spend some time we often spend time and you've been so um so courteous with that and giving me an opportunity to explain my process on real vision i'll i'll be uh eternally grateful for that uh but i want to know about yours you know this is um this i'm i'm long these things i wake up in the morning uh well i wake up in the morning like i always do but you know i try to put them within my framework and yeah yeah you can get pretty uncomfortable pretty quickly with the volatility or at least i do that doesn't really shake me but i want to get into that later first i want to just start with if you can start with your framework and your process and how this came to be such a huge position or a huge bet so i kind of figured out a long time ago as we all have that there's a debt issue with the world and that you know when lehman went bust and things like that happened nobody knew who owned what and somebody introduced me to blockchain back in 2012 and bitcoin and i thought you know what this could be the answer to all of this so i started investing back then and i wrote probably the first macro paper on valuing bitcoin back in 2013 and i basically looked at it in the stock to flow model versus gold and i thought you know with gold at 1300 bucks at the time bitcoin could be worth as much as a million dollars which sounded crazy because it was at 200 then and um i bought it and i held it for a few years and then sold it in the rally in 2017 and then it had been on my radar screen as things are evolving hey there hedge nation or if you're not part of hedgehog thanks for watching hedgehog on youtube if you haven't already make sure to click on the button below there subscribe to our youtube page you can also follow the link in the description to our website to get even more great investing content then i'd always said that the next financial crisis the answer to any crisis is now printing up more money and therefore crypto and macro were going to meet at the next crisis and it was going to dawn on a lot of people that this limited supply digital asset had true value to create a new financial system and had a store of value property even though it was extremely and remains extremely volatile so 2020 comes along um and march comes along and it sells off hard and i realize that this is the opportunity i've been waiting for so i kind of started pounding the table and i put at that time i was still involved i had a you know had a fantastic bet in bonds that you and i had spoken to euro dollar futures stuff like that i was long dollars you know all the usual kind of macro stuff going into that and you and i had spoken i think in bed or early march pretty much about the same opportunity set that we saw but crypto started becoming a bigger position because what i did is i started looking at the chart of bitcoin against other assets and i'm like holy it's gonna break out versus everything so if this is the time and us macro guys love a fast trending volatile market because that's where we make our money you know the real money is made in bear markets for us we grind it out in bull markets so i see this see the opportunity and i start building my position much more because i'm thinking well i don't need to end goal they don't need to own bonds i don't need to earn equities at any time anything just this asset so that was that got me to about september 2020 and then i noticed people attacking me when i started saying uh ethereum looks interesting i thought that's interesting they're attacking me for liking something else just like if i went to you and said oh i like you know canadian bonds versus us bonds you go how dare you you can't talk about canadian book it's like it's ridiculous so anyway so so when people start doing that to me i will go and do the work on it and figure out are they right or or is there some crowd illogic going on so i started looking at ethereum yeah it looks interesting you know i always start with the charts my way of framing what the market's been doing and how it feels and the psychology and then i start doing work on something called metcalfe's law and that is basically a way of analyzing these networks whether it's mobile phone networks the internet amazon facebook when you look at the number of nodes on the network and the interconnection of the nodes the more of those two things the more valuable it is so i plotted out kind of active wallets and a few other things and did a nice regression line on it and it was perfect fit with price and i'm like oh my god so then i started looking at bitcoin and ethereum and all of the other assets digital assets and they're all the same i'm not okay so this is the narratives that are around about store of value and and um whatever it may be the the um the internet computer all of this those narratives are driving those communities but the reality is they were being driven by metcalfe's law and they were all the same thing once i understood that i could now understand the space where i could start looking for network adoption effects and the moment i opened those eyes i realized that ethereum had a much larger faster network adoption than bitcoin was having and i actually started switching my portfolio again everybody hated me for it i then started buying a bunch of other coins tokens stuff i didn't really know a lot about so i just took a small weighting like 20 percent and of my portfolio which is now 100 crypto and has been for quite a while now since maybe may last year um and so i bought a basket saying i'm an idiot i don't really understand any of this stuff but i want to see how it trades yeah and and then starting then you start to figure out okay what are the macro bets within this space that i want to take where is this future going then we have d5 nfts all of these things explode over the last 12 months and you're seeing adoption explode so my framework is built around metcalfe's law adoption understanding this is community driven it actually charts pretty well as well and i i personally can't short-term trade it it's too extremely volatile assets are good for really short-term super short-term traders but i'm not that guy you know my time horizon is three months to 18 months so i just stuck it on and left it and i've done nothing with it all i've done is add um and you know i've tweaked it around a bit moving some assets around and i noticed there's also there seems to be some sort of human behavior that goes on in the space where it trades very similar so ethereum is basically trading exactly the same as bitcoin 2017 and it's been doing that for a whole over a year now and bitcoin itself looks exactly like bitcoin 2013. so it seems to be some crowd psychology whatever dynamics that's that's driving it and that's not going to persist forever as as you and i know these things can be passing correlations but it works right now and it would suggest along with a lot of other work with you know how many coins are in wallets and what's going on that we should see explosive price action to your end and in fact when we look at the ethereum price overlaid with um with bitcoin 2017 this sell-off you know it this was in the chart a year ago and it would say well it would sell off in early november and then it takes off and it explodes into year end so it's been weirdly easy to trade with a long-term time horizon and you and i know that things that are easy to trade don't last that long um but it has been it's gonna get much more difficult because there's now nine and a half thousand tokens it's not going to be about a bet about ethereum and bitcoin so in three years time you and i will be talking about lots of different things not the meat taking away from these two assets but they'll be there'll be less price appreciation but the other key thing sorry it's a big soliloquy here but the other key thing is that this is the fastest growth of any technology in all recorded history if metcalfe's law is the number of users using the network and their interconnection well this the internet back in 1997 had 150 million users and was growing at 63 percent a year this has 150 million users in the digital asset space it's growing at 113 a year so it's telling you the price is exponential and once i understood all of this stuff i knew that a lot of macro doesn't make sense i've got two other macro bets on keith one is carbon futures that i think you and i talked about in the past and that's up 100 this year um has been an interesting trade and i had a quick shot at being long the dollar and i closed out yesterday and made a a whopping 4 return that's the difference i mean ethereum's down four percent today alone could it end up four percent down another four percent i don't know but you know it was that was like a six week bet in the euro i nailed it made four percent i'm like really i this is the problem i've got is the the future expected returns in this crypto space because of this adoption and how fast it's all moving means it's the returns of far superior but as you know we'll get downside volatility too and it'll feel like a miserable shitty world for a while as well yeah i mean it's you know depends on what you've defined as your holding period i mean you seem to be quite comfortable being uncomfortable with that and that's just the way markets are what i found very interesting uh there was you you challenged your premise with you know in in i guess september of 2020 with what you and i are very fortunate to have which is direct feedback from whether it be the twitter community or our external community of of content providers and you really battle tested okay why the hell do i own this thing and you have your fundamental premise right but then you said then i had to trade it to see how it worked you know and that that to me is actually not that you and i have to be the same but when people ask me well how are you comfortable being long wheat and being long you know whatever lean hogs or cattle futures you know it's well i just i just trade it and then if it fits within my framework then i get increasingly comfortable being uncomfortable and then i just go with it actually if you look at commodities there's a you know next to the list of the amount of cryptocurrency crypto whatever we wanted to find them as being and i want to get into that you know you can have a pretty long list of things provided that they trade you know the way that you thought they should trade like you said they're getting a little it's getting a little easier i set up an ags hedge fund back in 2007 because that was another great setup yep and i learned the hard way that it's not suitable for me um and the reason being is because it they tend to mean revert so my time horizon was like i had had a structural view that agricultural commodities were going to go higher but the cyclicality was too big and so it didn't work my time horizon your time rice is different to mine so it works much better yes there is an issue sometimes you can get trapped in five limit down days and that's pretty painful um but you can also get trapped in limit updates as well so yeah i found it just didn't work for me i'll trade them from time to time but i found there were less macro but you're more price signal driven by the volatility structure um which is a different way and probably a much better way to trade ags i think than trying to figure out the weather in kansas when you're based in the cayman islands and have no idea because every day is at 90 degrees yeah i don't um i literally spend less and less time as i get older and my hair goes completely gray on the y like i actually don't even give a most of the time it's more the when like when do i buy more uh when is the cycle you know from a quad perspective turning so when is so much more important than y and what i think you said and when can be defined you know i try to define an immediate term intermediate term long term like your this discussion really deals in the intermediate to long term and you can correct me if i'm wrong but you you your time horizon from here on a big move in ethereum is like the next six to nine months so i call that the intermediate term but you're using the long-term tail as i call it to contextualize where that is so let's just you get into that a little bit more i mean cuz you i think you're calling it you've called it a regime shift a regime change asset allocation shift um and and those happen you know across human history as we well know um and so but sometimes um like in 1999 by the time that 150 million users in the internet from 1997 you know became a bubble and then you know it was still a regime chief i'm pretty sure that there were google was still right but um but there was still a period of time of risk that was intolerable for many and and suicidal for most so um how do you think about that this because 1997 if we're and again we don't have to use a perfect that's the danger of analogs but if it is 1997 by the way we've had uh eight straight updates in the s p 500 it hasn't happened since 1997. you know the internet's a pretty damn good analog look is that is that an easy one or is that one that just makes it like easy because it's so obvious and makes it fundamentally true i i think the 1997 analogy just says it's going from here to massive right how it gets there i don't really know i've got some reasonable clarity between now and end of year because there's a seasonality that is pretty observable beyond that it becomes more speculative in nature because we don't really have the full signals i think the adoption by institutions continues and as we all know they tend to do january asset allocation particularly if it's a new asset class hedge funds have a new p l they tend to pile in my guess is this cycle extends a bit further than people expect but there will be a bear market what is that going to look like is that going to look like the last one that we had it's probably a mistake to think that because the players are different maybe it's longer maybe it's shallower maybe it's just choppy or maybe it doesn't do that at all maybe it it just keeps having these sharp corrections down 50 percent and then six months later it's it's at new all-time highs again yeah i just don't know well the what we do know is i mean like recent history like again i i really wanted to give you that whatever it was going to be eight to eight minutes or more to just lay it down on the railway track this is foundationally how i got here because i think you know if you can you don't always have to stay like i have to belong this because of those reasons but it gives people me which i want to know why like on that like what are the you know really the fulcrum points of this guy's view when you take this kind of a position and you said look right at the outset limited supply and it's basically an antique money printing instrument so what we do know is that today central banks if we slow like i think we'll slow down that's just bitcoin that's not the whole space that's just the argument just bitcoin but let's just say like let's say that let's say that uh it happens we get another what i call quad 4. every single time we get a quad 4 us economic slowdown the printing press comes in faster and harder and therefore the corrections in crypto are shorter i mean that to me equities too anything i mean by the way and as you know uh bitcoin and ether increasingly trading um on a correlated basis to equities now whether or not that holds i don't th that's not really what i want to get into there but i wanted to to get into that that anti-money printing uh generational uh view that could be much more so than just a regime shift you know where where are you at on that so it was 2020 that march to june period that made me reassess my big macro framework because we knew what the central banks would do but they did it harder and faster yep and what we ended up with was the shortest recession in all recorded history and the biggest recession that never happens [Laughter] so what we've done is we've created a reaction function in the central banks to do more because janet and jay will look at each other high five and go we nailed it the world stopped and we only had a two-month recession and the markets recovered pretty quick now we know that the reality of the underlying economy and other things is not so great but for the central banks they're going to do more of this why would they not they're now thinking do we need a business cycle at all but what they're doing if you actually look at it the central bank balance sheets the g the big g4 central bank balance sheets are growing at about 15 a year so i started thinking this through and then thought i know a lot of people use m2 as a way of understanding printing but i just thought i'm just going to use the balance sheets because that's new stuff that we know that they're doing and i know that there's no it's it's not a pure way of flowing into the economy whatever but anyway so i put the smp against the fed balance sheet and all of us have observed that correlation over time and the thing was it kind of told us what we deep down know is the s p has kind of gone nowhere since 2008 it fell in 2008 the money printing came and the s p's basically been going sideways and then i looked at gold and it kind of had even underperformed the thread balance sheet i looked at real estate it was identical to the bed balance sheet yeah i then looked at the nasdaq and it had done better because it had all these network stocks in it and then i looked at bitcoin it was like oh this is a whole different world so there's only one asset that looks like it offset the printing of money so if you know that and you are able to trade it then let's say we go into your quad 4 what are you going to buy right well the highest upside is going to be crypto no i agree with that i agree with that 100 and and and i actually don't want unless you want to get into um the risk management of it all i have my own model i have my own view on that i'll do what i damn well please on that as you know uh but but what i really wanted to get to is this intermediate to longer term view on how this guy that i got a lot of respect for um is is so big in this now maybe just to show what you just said is is is obviously empirically accurate guys can you show i think it's slide 72 in the macro deck we show um not just the u.s balance sheet but we're looking at that 20 trillion uh obviously in global money supply so this is and that's in the last 20 months okay and that that's a very good you know even if you're not you're wrapping it on your own you know stochastic chart right now you're going to see that that's a damn good fit for what's happened to the crypto asset class now we have you also said at the beginning like again just going back to the foundational premise of why you're so big in this you also said look i started looking at this initially in terms of stock to flow versus gold you can stock the flow like 2 trillion against the 20 trillion there or more importantly 2 trillion against the what is it 200 200 250 300 trillion in assets out there um how obvious is that if the answer is always going to be because again they're just going to take share from what you just said dollars treasuries and things that you and i would have gone back to buying so i looked at this and i looked at all the global asset classes so equities about 250 trillion bonds about 200 trillion real estate about 350 trillion derivatives one quadrillion ethics markets about god knows how many quadrillion so i looked at that and thought okay we can see the trend rate of growth of adoption we know that equities are going on the blockchain bonds are going on the blockchain the european central bank is already looking at the french central bank a bunch of others so that's going to happen so bonds and equities go on the blockchain people are already starting to tokenize real estate well this is kind of a super asset now i don't assume it eats all of them it could do in the end because they'll still exist but they'll be basically on the blockchain but if i'm right about crypto then it's currently a two or three trillion dollar asset class and it to be reasonable it should be worth 200 trillion well that's a hundred x keith of an asset class probably in ten years you and i nobody in fact has ever seen that in all recorded history no no and that makes and what i like about it why you say you're all in is because i can be a total idiot pick the wrong thing much like you can do with equities and you've been able to do since the 80s is just pick anything and it goes up and so yeah it's kind of idiot proof now yes like equities there'll be bear markets but if i'm right and we're going from 2 trillion to 200 trillion the entire asset class is going up 200x now it doesn't mean it goes up in price necessary 200x but the opportunity set's going to be enormous yeah so that's why so many of us are focused on it internally i mean if i if i had if i had josh steiner or rob simone who are two of the gurus internally christian drake we got a bunch of guys doing the work so to speak and i'm just trying to catch up to them because i'm like the neophyte as usual but again i'm just like focused on when focused on when and the more you blow this out the more i'm willing to believe that long term what of course you could say is you could say a bunch of these asset classes that you just called out are going to get cut in half next time the u.s economy slows and you know now your reference point is 100 trillion and this going from 2 to 50 or you know whatever it is i don't i don't know keith because they'll print money again yeah so what they're doing is lowering the denominator so optically everything looks fine yeah right we're all it's always a big higher low but there's always like i said a moment of um you know uncomfortable or you know in some cases bankrupting moments for people that are running with leverage now that we have you know you can buy you can lever yourself up pretty pretty um uniquely here with uh crypto obviously um just instead of getting into that i actually want to get into what i'm sure you trigger people with which is and which is okay why now eth instead of btc because if i if if my framework is metcalfe's law and it's all about adoption effects then you want to look for the communities or the tokens that are growing their ecosystem faster right d5 comes along it's all built on eve nfts come along all be built on each the number of new wallet addresses growing is happening faster at each so what you've got is the network is growing faster and therefore the price should be going up faster simple as that i mean once you understand this metcalfestar things actually all pretty easy to understand and you just have to abandon linear charts and use log charts and once you see the log chart you see the trend it's pretty simple it gets to like two standard deviations overbought versus the long-term trend it then corrects for a period of time and you know in on a linear chart it looks horrific everyone goes see you know this crypto's worth nothing but on the log chart just goes down to one or two standard deviations oversold and starts all over again and it's the same that google's done facebook's done apple's done they're all the same yeah it's not it i mean it's it's it's it's you know when we start to look at total these you know if you put it in the language of equity only people it's like okay i have these network stocks here's the tam over time i nailed it yeah i mean there i don't i mean i don't think that there's any reasonable person that allocates assets under you know under any regime shift or not that would would be able to disagree with that um so it's interesting i mean so basically when you say 100 to 300 percent upside or much more upside from bitcoin from here it's just that it's happening on a bit of a lag to it it's like imagine if facebook is growing faster than twitter in terms of number of users and the activity facebook share price is going to go out more 100 so i use that even though twitter maybe everyone may be larger it doesn't matter what we're looking for you and i are there to make profit so we want to back the fastest horse yeah that's an excellent framework that's excellent like sorry to interrupt but the um at least i've only done it once in 25 minutes but the you know the when when we try to explain to the old old wall hedge fund manager the the cemetery of people that have shorted expensive stocks because they're expensive we always say look in particular when you're in quad one or two when it's a pro growth environment cyclically you know expensive gets more expensive because the growth rates relative to the alternatives are accelerating both absolutely and relatively therefore the multiple i quite literally say can be anything it's going to be higher i like it because it's expensive so that's like you're you're you're at least when you're saying it this way i'm finally at a point now where i could put what you think well that's exactly so if you think of what you your model intuitively does it ignores valuation right it's essentially momentum in one way shape or form all network stops a momentum in one way shape or form so you ignore value well the valuation can be this metcalfe's law but basically it's a momentum play built on around network growth the same as it is for facebook same as it is for tesla and so you can own tesla and everybody will shout at you you're an idiot but it doesn't matter because the network effect of tesla is growing or in your case the momentum remains in place yep i mean people uh momentum works both ways um and as we've proven through the back tests of all of market history again when the economic momentum is at your back and that can be if growth slowing it's at the back of treasuries um or in gold for that matter if you have an economic stagflation or it could be you know pro-growth stocks you know or networks i mean this is um i i i'm i'm accepting this you know not finally i'm long i've been long this stuff i've just been trying to quite because the issue is the issue is keith and you've seen this as you walk into the space say i'm kind of interested yep i'm going to see if i can use my framework everyone attacks you because you don't beli that's bitcoin not ethereum not the other networks it's basically bitcoin because you've come in and you don't really care about their philosophy or the structure of how they think about it or their their notion of hard money versus other things that's okay they can have their reason for owning it but you have a different reason and you have a different time horizon and they don't like it i think the space the broader space is more accepting well i think that that um i mean that's that's the problem with everything right now people can't actually have a real conversation like this where there is a back and forth trying to empathize with and understand the other person's view you know i don't want to go off you know ideologically or politically on that but that also presents a great opportunity because it presents a great opportunity for guys like us that have built content platforms that are meant to engage in civil and objective debate i mean that is um that's a great thing that you built riley and so when you really look at it i mean um you know the real vision content platform you know i that's that's why we can have this conversation that's why i can actually learn on the fly here like i'd like like i think i like to try to in life and and end up maybe i didn't i didn't have to believe what you said like i didn't know what you're gonna say um but i listened and and that's where i'm at on that now on the um because i think you've said okay like look there's we have we've we've put out the metcalfe's law we put out okay the addressable uh market caps of everything that ticks we we agree on obviously money printing and uh the limited supply nature of crypto now you have millennials that are the ones that don't want to hear from somebody like me that does risk management um you might say well that's how millennials are you know because they don't i think you've said actually i'm sure that you said this because it's coming to mind it's they're not like boomers um and my dog's name boomer so be careful with this one no and nor should they be i did a video that became i don't know one of the biggest videos i've ever done it's like two and a half three million views called the retirement crisis yep it's on youtube and one of the things i said is listen if you are a 30-year-old millennial you're pretty right now because the expected future returns out of equities with all-time record high valuations and the boomers needing to sell them over time same with real estate same with bond yields your ability to generate the same kind of wealth that your parent generated the baby boomers is precisely zero and i actually said you've got one chance and that chance is crypto because you can take risk at your age because you've got nothing to lose right so we all know there's two times to take risk one is when you've got nothing to lose and one is when you've when you can when you can afford to do it so when you've got nothing to lose that was march 2020 into september they've been given a check 1200 bucks not going to change their life they're stuck at home they don't need to spend it so they go on robin hood and they discover call options brilliant and guess what it worked and suddenly 86 million millennials got financialized all at the same point but they're risk takers they understand crypto they understand risk-taking from gaming it's very different we were taught different things and the parents of the boomers were the silent generation um and they were much more risk-averse because of the back of two world wars so now we've got a group that have never seen stuff like that before who are who have a lower wealth of their age than any previous generation in history and they've seen an opportunity so they're going to swing from the fences and that's changed the structure of the option market makes me laugh because everyone's like the option market's crazy look at this complete exponential um use of auction options this is a bubble no you've just bought 86 million millennials and probably i don't have 50 million 70 million gen z into the investing base and give them robin hood options and they can't lose more than they put in yeah for it why the hell not we all have to learn the hard way and we also need a few victories and that way they might be able to speed up that process because you can lose money pretty quick but you can make some good money quick too and what's really interesting is these people are all coalescing on a platform like reddit and talking about their losses keith our industry is built around excuse my french built around people who don't want to talk about losses because it makes them look weak these guys are laughing at their losses and saying i learned from it yeah that is that is so on the screws man i mean we're running this hedgehog on the prize competition right now and the best part about the coaching sessions is interviewing real human beings that aren't from the old wall and a hundred percent self-effacing giggling laughing mocking themselves on mistakes their former selves etc etc um especially millennials now that's counterintuitive to a boomer just like i don't like millennials or whatever but there's also this generation which has you know less uh you know us up people like that are from gen x that have you know seen this movie before uh twice where it was different this time as regime shift internet 1999 kaboom real estate obviously after that kaboom so we're sir like as neil howe would say keith you're just up yeah you know you got all these issues that's you know and i'm okay with that but it doesn't mean that risk management of asset classes heading into new cyclical economic regimes which is now i'm going back to the to what i you know to what i focus on that doesn't mean it's not going to matter you know i think what you said is that it's going to matter for a shorter period of time but what is it about not having to have learned a lesson yet that could be the problem here i'm not sure there's a problem here because if we get the younger generation to treat this like 401ks that we were forced to do which is bear market bull market just dollar cost average yep that actually works to generate wealth if that assets going from 2 trillion to 200 trillion right you should do very well so you don't need to trade it don't need to do anything and he shouldn't care about the bull bear markets now some people want to trade it there's a lot of leverage in the space not in the u.s so much in asia and it tends to be pretty short-term leverage and what's interesting about crypto leverage is you can't it essentially works like an option because it it gets liquidated so you can't end up with with unlimited losses so it's actually quite interesting um but i think that you know there's going to be periods when we hit the goldilocks point in the economy the central banks aren't printing um and it's that extended mid-cycle period and crypto shouldn't do that well and people will will start to look at other assets and diversify and you know that's what i will do is you know over time i'm 100 crypto now will i remain 100 crypto without question not because i'm out to maximize my returns um and minimize my downside so but if you're young you can just keep dollar costing averaging and you actually want the bear market you actually want if you'd a dollar cost average which none of us did because we're all gen x cynics if we dollar cost averaged the nasdaq um over that sell-off in 2000 we'd have done pretty well but we didn't because we're two miserable old cynics who say well there was a bubble and that taught you all everything didn't teach anybody anything as you said google apple microsoft they did just fine they didn't get to new highs as quickly but if you look back now considering we're talking about dollar cost averaging so you you looked back 15 years later suddenly you've outperformed everything all over again so we need to be careful of our gen x cynicism but i'm as i'm a cycles guy as you are and i will trade the cycles it's as simple as that yeah there's um a great book by adam grant who which you may have not read recently where he just gets you there i'm there i mean the the the three pillars of my framework and one of the biggest ones is behavioral psychology and big shifts like how you have to start thinking you know on a non-linear basis this is quite essentially like again if you try to put where we are today wherever we have the next crack or correction in the same static box of your options yesterday you're going to miss what millennials and a lot of people have just moved forward as their next set of options which is not dissimilar from tech stocks by the way there's always the next there's always the next and i don't have to look back at things that i've always looked back at i mean and that's one question i have on that like social communities um tokens nfts to me that's that next place right where even i have some of those i i'll admit it we own this professional digital professional token team uh that we bought with some professional athletes and i'm like sounds cool you know it goes up every day it's pretty straightforward hedgehog has a community real vision has a community and our communities overlap which is you know why we always enjoy talking to each other and our communities enjoy it when we get together yep those communities once you add a system of money in a community what you're doing is is your you're you're incentivizing everybody in that community to grow that community and to benefit in that community this business model is gigantic and i have spent time speaking to the world's biggest music artists media companies membership clubs everything and everybody goes oh my god i get it now yeah the nfts are just part of this yep so everything is going to tokenize disney will tokenize all of its franchises and disney itself there'll be a disney token and disney will essentially be a digital sovereign state because you've got huge community billions of members you own the disney token so you're now part of that network and you'll probably have the token of let's say the marvel comics or or mickey mouse whatever sub-communities so these are tokens as well and there'll be nfts which are scarce digital assets which we can collect and all of that ends up being into the metaverse which is the kind of the more broadly digitalized world that we live in as opposed to it being you know one game owned by somebody it's actually just this digital world it's not like a game we don't all don't die it's it's actually a game where everybody lives and actually the people that run the game don't get all the money uh it's it's like a josh steiner called it a while ago uh my partner here who who does a lot of our leads our crypto effort with christian drake he wrote this note called the cantolon effect and i think a a big vc guy wrote something similar recently hill wrote about it yesterday yeah who's that sahil bloom okay um but you know it's it's i i saw that in um a headline somewhere but that that canthalon effect is is like you talk about metcalfe's law but the canal effect as well maybe hit on that quickly and then i have one more question then we'll get to other people's questions what we're doing is in the current state of affairs equity holders make the money and everybody else gets monetized this community model means that everybody shares and so you can actually think of this as investment becoming a culture okay so let's say you invest in rihanna rihanna's token and rihanna has another hit album and a massive tour and everybody's talking about her social media her token's going to go up yup you're a fan you're creating videos around it doing content because you're really involved in the community and the more you do maybe you earn more tokens or maybe the token goes up because you're helping the community what you've made is investment in culture culture has now become an investment which it wasn't before you'd have to just buy goods and that was it and you felt good because you're part of that community whether it's you know nike trainers or apple phone whatever it was whatever community you thought you were part of this way you're actually part of that community and you create universal basic equity yes that's a big concept that's a huge because so a gen z or younger can be a can discover a new game which none of you and i will never discover because it's not our generation they'll discover a new game they'll go oh my god this is amazing they will own the tokens in it they'll want to own more tokens in it because they think it's amazing and they will make money that is already happening so this is exactly what my uh well he's 14 years old and again one of the many reasons why i mean i we could have this conversation for five hours unfortunately i got to keep it tighter but the fact of the matter is that what you just said with you said rihanna right yeah yeah so he's i get in the car like usual we're driving to hockey practice and my 14 year old son starts explaining the exact same thing within this um within this this hockey video game that he's playing and how he's finding different players that people don't really know but their value goes up when they play well and he's betting on them and he starts asking because this this you know during the pandemic we opened his his trading account so all he wants to do is talk about investing in those not buying microsoft and it's it's so it's it's so obvious when you say it that way and watch his risk behavior he will take more risk well he doesn't cause he doesn't even know what risk is but he goes with his knowledge i think like that's what i'm comfortable with but he's but he's taking risk in a game and if you were to look at how he runs his portfolio of assets in that game yeah it'll be quite risky yeah that is what they learn from gaming and they take it to their investing lives and they're practiced at it so we all do what we're practicing we understand so watch this as well it's really fascinating how they take risk versus how you would in the game because his gen x dad both he and two of my four kids have had to go through this with me um at night which is speed monopoly so i show them how they can blow up with leverage and they don't quite get that yet um and maybe it's healthy that people don't think that that can happen because if you are using you know crypto futures and options and you're getting into some liquidity traps that might happen you might learn something but again i think the point is that they keep pushing the envelope to the next place to go which is a place that nobody really knows because we generally you know every generation has this fits quite well actually with neil howe's fourth turning i don't know i mean yeah i you know i'm a huge neil fan i've read that book maybe seven or eight times i read it i read it every six months without fail and every time it's like the guy's a profit yeah this is all part of it yeah you know when you talk about breaking down the into the old institutional infrastructure this is it we're breaking down money the system of value i mean the whole thing the system of sovereign states is changing because we're creating sovereign states online so that book has been really good and you know it's really interesting because a lot of boomers and gen x's who've read that book and yeah they kind of were expecting the world to return to the world that they knew and the madness of change would disappear i'm like no no no neil's explaining to you that the change is going to be gigantic and incomprehensible and the young will see it and we won't and they will be our guide that is that is a hundred percent you you have a uncanny way of summarizing some big man uh big picture um last question that i have before i take other people's questions so the problem with this and not it's not a problem it's it's it's it's what's happening so it's not a problem it's an opportunity um we invite the boomers to this community we invite the institutionalization of this and what i wrote about this morning was hey start paying attention there are patterns here emergent properties and fractal patterns that look very similar to how even oil trades into into options expiration for example we're seeing more institutional hedging because that's what they have to do so when mike saylor says hope.com i'm like uh there's this you invited them in now they have to deal with their which is they'll get tapped on the shoulder if they don't delta hedge and reset their hedges because there's an increasing amount of gen x boomers millennials too a lot of their analysts are millennials that are engaging with this asset class particularly bitcoin um the way that they would anything else is that a good or a bad thing it is just a thing you know who are we to pass judgment as you say what's going to happen is institutions are going to rebalance every quarter yep if it's gone up a lot or gone down a lot they'll be taking opposite flows that actually gives market depth and liquidity as we know it may dampen volatility so over time it lowers the expected future returns because the risk reward if you've got less volatility you're likely to get less upside over time but that's a function of network adoption effects anyway and you see the curve go less exponential over time as there's more adoption so uh you're dead right people are gonna have to get used to it which is why i've kind of made that potential call that this market will probably elongate longer based on this very fact because institutions going into a new asset class will say you know what we're going to do this in 2022. so they've made the decision they've been onboarded by fidelity or coinbase and they've done all their homework and they've had their trustees accept it they've done all their paperwork january is about the time they'll start investing so even though the crypto cycle in the past was more retail driven it's likely to elongate because of institutions and we saw this in the commodity markets in the early 2000s after goldman launched the gsci index products and started getting institutions into commodity index futures and commodities themselves it changed the structure of commodity markets for a while and probably still has them that's for me and anybody who's like you know remotely considering you know my hedge i nation its process etc that's a very good thing because now i'm looking at all the way back to what you started with was and what are what's my fundamental premise how does it trade it's increasingly trading like and i hate it when people hate it when people hate on me on this actually i don't mind uh when i call bitcoin it fits in my commodity bucket and my max asset allocations are derived on historical volatility that that that current realized volatility is really undergoing a regime shift potentially as well which makes it easier like you said it's getting easier to buy the dam dip like right now for example you got a huge implied volatility premium that's ballooned in both eth and bitcoin it's like buy the damn dip today this is like i wouldn't have never said that uh well i never said that before so let's just start with that so we agree on you know again institutionalization can get broader adoption i think is is the point um but the point being keith is here's something interesting for you i'm actually setting up a fund of funds in the crypto space there's only a billion dollars i think of original sourced um investment in the in the crypto hedge funds they're currently the space is worth four billion four billion yeah i think it's like four trillion in hedge funds or more i don't even know what the hedge fund number is these days but there's four billion dollars in crypto hedge funds and a hundred and three trillion of the three billion of that has come from performance yeah so but the space is expanding to nine and a half thousand tokens plus all of the nfts plus the social tokens plus d5 right we can't get our heads around it so the alpha that is going to be generated in the hedge fund space for the next 10 to 15 years is unprecedented because there is not enough capital in the space to bring the alpha down so it is an extraordinary thing again these things i've never seen anything like before well i mean i've never seen i mean the first question by the way if you don't mind is jump into these or i'm going to get into trouble for not asking you other people's questions and it actually has to do with um one of um my colleague josh steiner because he put out this um he showed this model that had bitcoin going to a million so rich is asking like raul is that even possible like a million dollar bitcoin and over what duration um how do you see something like that projected okay so let's go back to my framework network adoption that charts that i've put on twitter many times about the adoption suggests we go from 150 million users to a billion users by 2024. okay we'll be at a million dollars in bitcoin no question so you just get man that does not that that's not a stretch you know no it's not really when you think it in those terms if i said oh the apple phone you know there's 150 million users going to be a billion users is the apple share price gonna go up a lot yeah will it go up 10x from here 20x yeah i mean it's not a big stretch people just forget because they all get trapped in these narrative it's money it's this new thing it's it's not based on anything just forget it it's are people using it and how many people good all right um raul uh from this question is from willy uh rob what do you think and these are ranked questions so i'm just gonna ask someone that are highly ranked rob what do you think is probable that a central bank will quietly try and become the largest holder of btc as a hedge against the failure of their policies i'm already seeing um sovereign wealth funds in the space they haven't made a big play because the space is not deep or liquid enough yet but they're coming and you know and it's the ones with the big dollar reserves the singapores the middle east stuff like that so it is coming so are the central banks going to do it who knows not yet but it's but it will come i think first the next big thing is we're going to hear the story of sovereign wealth funds putting as a long-term asset on their balance sheet whether it's norway abu dhabi saudi singapore and that will usher in the next wave and that then makes it unlikely that the central banks won't start doing it which central banks who the hell knows but somebody like south africa could really do with this because of the volatility of being part of the dollar cycle there's a bit of pain in the ass for them yeah so something that they can have a small allocation to that maybe offsets the dollar cycle helps them um so some of these commodity countries i think it actually makes sense for them um and they'd have to model it out and look at it in their portfolio and see what it does over the cycle for them but it would help this boom bust emerging market cycle that keeps going on all right uh i'm just going to ask you proof of work versus there's a bunch of questions on this proof of work versus proof of stake what's the difference and why is eth better i don't say they're better yeah you know proof of work are big no proof of work bitcoin is hard to do you need these mining rigs complicated maths a lot of energy it is the most robust secure network in the world which is a bitcoin which is why it's amazing proof of stake is you've got tokens and you secure the network by promising it to the network and you get a yield keith if you want to stay and eat you can generate yields now so you've generated a long-term savings market in these things so as you're seeing a lot of the art market is now being priced in each there's a ton of stuff on the internet being priced in eath yeah so you can hold each savings and have pretty much a risk-free return by staking so staking allows it to be faster and kind of adds a bit of flexibility to it and again people don't want bitcoin to be faster or more flexible they just want it to be perfect as it is which is incredibly secure highly distributed network but for ethereum i think it's a game changer because it means that at the end of the cycle i'll probably keep just sunny as he yeah because if i'm getting paid a 10 15 percent yield on it and i know that in due course the cycle will pick up again so over two years two or three years a bear market bit of a sideways market i've picked up another 30 40 well that i mean that that speaks to my uh to my risk management years and you know full cycle return i mean full i mean is this part of it i mean you staking um and this is gonna like any time i start talking like crypto talk flipping is is is that is that one of the is that one first of all is that the right word again the flipping is a bad narrative again it came out of the tribal warfare between bitcoin and ethereum yeah right so you flip out a bitcoin into heath and the flipping is when the market cap of eth is larger than bitcoin okay okay now i think that's going to happen not because i think ethereum is a superior asset because they're two entirely different things right one is a kind of this pristine collateral store of value asset the other one is basically a technology platform this is the fastest growing on earth is that going to be worth more yeah now there is an argument that bitcoin ends up becoming the kind of monetary system for the entire world yeah but i'm not sure i'll be alive when that happens what i'm trying to make is make the best bet that i can do over the next few years and that's what i think the flipping will happen does it happen in this cycle i think it might get there and then maybe that's when the bear market starts when everyone's like see ethereum's king and then everything falls apart again so you know as you know um people need to be very nervous of hubris so we'll just wait and see how it plays out yeah that um i mean again it's it's kind of back to that tribal point but at the same time you have a view and i think it's the at least what resonated most with me within my framework is that relative rate of growth versus bitcoin i mean you want to own the fastest horse in the race not the one that already won x part of the race and is you know they're in kentucky it doesn't mean if your risk appetite is less right you can own bitcoin and you'll do fine right now i'm saying bitcoins going down or anything else it's just i'd rather take more risk at this point in the cycle and be rewarded with higher returns potentially now i i i somehow found my way to kentucky there i'm actually wearing an evan williams um kentucky bourbon distillery shirt when i was trying to figure out i was trying to figure out that whole business of uh former triple crown horses and how you find the next one uh an amazing exercise to watch uh uh but in in in the crypto world what is that next horse like who next to you go bitcoin next to the bitcoin who's the next that you think could be we go back to the framework so we avoid the speculation right we go back to the framework and what we're seeing is solana has network effects it's being used all over the place because it's cheaper and faster than ethereum okay cheaper and faster than ethereum really yep but it's more centralized okay it's not as so again you're going out the risk curve and you're finding solutions for people who need it so solana brilliantly you put it against the chart of ethereum 2017 it's a perfect match i mean it's it's like everything is a fractal in this space so so it's got network effects provable network effects the other one that's got provable network effects but it's earlier is avalanche and the other one is terra luna those ones have provable network effects based around being an alternative to eth and i think that's fine now there are many others that don't have provable network effects that are showing the price action that they do stuff like cardano where there's there's a bunch of owners of the asset retail but not enough activity on chain for me to really think you know what this is this is the next big thing yeah it may be something that's more overpriced i've not really done the work on looking at it that way but i will do at some point if i can build out the full netcast law model on this in fact i'm doing a lecture at mit this afternoon um with the guy who is researching his phd on network effects and metcalfe's law so i'm gonna try and pick his brains on some of this stuff no this is this is awesome man like um if only because i can understand what you're saying and put it in my framework and to me like that's a good thing because it's it stops me from having to it's one thing to have a regime change in asset classes you know it's another thing to have a regime change in shorter term economic cycles uh it would be entirely another thing for me to not be able to invest in something within the framework i've built for 22 years that's that again it's fractal it's non-linear it seeks um when in a world a hedge fund community that i used to live in that seeks certainty you know watch billions how certain are you how willing are you to go to jail for that certainty like i don't give a about that world anymore all i want to know is that i don't know and what you just said is like it sounds like correct me if i'm wrong just like i drop 500 tickers into a certain model and it can be any country currency whatever it is anything that ticks and i'm perfectly willing to buy or sell anything if again it starts to trend and accelerate you're right i love momentum and it could be anything in this space because anything's anything so here's what i did and people were like what the hell is he doing so dogecoin right this is the mean token that was set up as a joke and became massive yeah my barber owns a shitload of it she's just like talks to me every time every every month i keep it tight i looked at this and thought okay what we've created is a meme a culture that people want to be part of then nobody thinks that doge is like the best asset in the world they know it's a joke and they want to be part of that culture i'm like okay this is powerful because this is what your son will understand so i thought okay so that's one side of metcalfe's law there's a bunch of people using it i'm holding it what happens if somebody finds a use case for it along comes mark cuban and says we're going to accept dallas maps games for merch and then elon starts saying i'm really interested in this it needs to be speeded up and cheapened a bit but you know if i can encourage the community to go back and redevelop and help move it forwards i'm interested i think he'll end up using it in his cars for streaming payments you know as we go into smart cities or whatever format it is so i actually took the punt to say i think there might be use cases because i can see there's a strong community why would you not build a use case on doge why would you not when millions and millions and millions of people own it of course you would so you know that's me going out further on the risk curve saying not all my metcalfe's law attributes are met but i see a probability that we could meet them and if if that's right then the price could go even further well just just the you know to even re you know tighten that into a tighter loop like when we start to observe orient decide and act on these shorter term price moves it's always about probabilities going up or down i i'm assuming like just like i assume in all markets when something's going up or down somebody knows something somebody knew that cuban was going to do that and it started the probability started to rise that it was going to be that and that is really what i think most people in all markets whether it be crypto uh or otherwise macro broadly which i put crypto in there should just accept you don't know anything about the future or other people's plans of it or whether people will believe it and even if they believe it if it will be true or not you can make a lot of money playing probability curves changing that's all we do we are all we're doing is assessing the probabilities we may have a future potential end state in our heads but i'm sorry you and i don't dictate markets it's irrelevant what we think we're just creating a mental map to be able to follow what we're thinking that's okay and you can do it in a model you could do it a mental map just depends how you operate right but the the change in probabilities you know you talk about rates change all the time is the entire game now if you get it right you're basically saying i see a potential future i think the probability is higher than the market is pricing and you capture that but that's the entire game and what i love about that game versus the game you and i you know like i said you're looking pretty pretty young here man yeah but we're we're old dogs playing in a new game and we've been very willing to change as the game changes a lot of old dogs look a lot older than we do because they're not in the game anymore because they couldn't change and i do think that like for me like when i think about this it's it's a wide open net the old dog would call the bank of england his cousin would work there and put that trade in at you nowhere that is a closed network that is for the privileged this mark cuban example or any pick rihanna all the examples my son yeah it's just somebody coming up with an idea it could be anything and guess what the crowd is smarter than the guru every time big time once you educate the crowd which you and i have spent the last the latter part of our the chapter of our lives doing is that well it is you know but you and i both tried to do that for the last 10 years or so and what's happened is and we've proven it by crowd-sourced um the real vision bots which is not actually a part of real vision um yet but it is it's been surveying our community for asset allocation in crypto and traditional macro and they've outperformed the experts and outperformed bitcoin and even their asset allocation because there's no committee that sits down and says how they should do things one day something's in one day something's out it's a weekly asset allocation it's outperformed the crowd is smarter than the individual and people are going to have to get their heads around that in the past keith it was all about who had the information in the past it was the hedge fund manager like me at glg or the guy who's running the sales desk like me at goldman who had all of the information now the crowd has it and they're smarter because they're their own skill sets and experiences so if you add your son's perspective to my perspective to your perspective it's actually better than any one of us individually i love that man and and i i i was on the tip of my tongue i almost said i love you uh i'll take that it's fine well i just said it you know i do i i love the passion you bring to the game i love the fact that people question you know your premise on this position i love the fact that you just pounded a framework right down their throat that was very consistent in turn you always went back to it and you gave somebody like me an opportunity to learn how to you know tangentially or at least consider how to put it in his own that's awesome man i do love that i do love you thank you for thanks for doing this it's good you know as as you and i talked about a lot it's about being open-minded yeah we don't know everything and we're trying to figure this out and when you've got a regime shift then you know again i'll thank neil howe endlessly to the day i die is once you understand that you are in a regime shift then you just wide open everything you say you just go with the i do not know anything i have some understanding of how the world has worked if i can bring this to the new world great if not fine too but don't look back and say it shouldn't be like this it won't be like this you're all idiots the kind of bitter i fear change that's not going to get you anywhere that's going to end you owning gold which has gone sideways for a year well said my man well said we even went over time i hope you don't mind but uh uh it was that that's a that's a real conversation thank you all my thanks very very grateful for rob paul's time [Music] you

Channel: Hedgeye

Views: 4,152

Rating: 4.8135595 out of 5

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day, raoul pal, real vision, global macro investor, investing, bitcoin, ethereum, dogecoin, cryptocurrencies, crypto

Id: ziRGKSo7Mjk

Length: 65min 27sec (3927 seconds)

Published: Thu Nov 18 2021