Rey Dario recently published “What I really think of Bitcoin?”. In this article, he expressed his analysis and views on Bitcoin. This article provides some comments on Dario’s views in this area for the reader’s reference.
Dario’s investment views are not suitable for the average investor
As the 79th richest person in the world by Bloomberg in 2020 and a fund manager with more than $148 billion in funds under management, Ray Dario has his strengths and limitations when it comes to investing. His total capitalization determines that it can only be invested in asset types that have a large market capitalization, high liquidity and are fully compliant.
The current market capitalization and compliance status of Bitcoin is not suitable for Dario as his primary investment product. But this does not mean that the average investor makes the same investment decision based on his view. On the contrary, average investors are able to invest in early-stage but very promising products like Bitcoin, due to the greater freedom and flexibility of their investment decisions.
How to look at Dario’s list of Bitcoin risk factors
Dario cites three risk factors for Bitcoin, volatility, regulatory risk and liquidity. These three factors are the main obstacles that prevent Bridgewater Fund and its clients from investing in Bitcoin. His list of these three factors is completely correct, but he does not analyze the interrelationship between these three factors and the path of how these three factors can be addressed in the future.
The main reason for Bitcoin’s high volatility is that Bitcoin development is still in its early days, so retail user transactions are still the main trading force, and secondly because of the high leverage used in Bitcoin trading.
In terms of liquidity, Bitcoin is still not a mainstream trading product right now, even though its trading volume is increasing year over year. Institutional money has not yet entered into Bitcoin trading, so it is certainly less liquid than commodities and equity-based trading products.
The regulatory risk factor does exist. Dario cites Lagarde and Yellen in this regard in his article. Regulatory cooperation among global financial regulators on Bitcoin and other crypto-digital currencies will certainly happen. The exact regulatory measures cannot be predicted at this point. But from the regulatory measures to date, there are both the U.S. CFTC’s approval of derivatives trading and clearing for Bitcoin back in 2017, the regulatory requirements for self-regulated wallets that the U.S. Treasury Department seeks to introduce by the end of 2020, and the U.S. financial regulation’s clear clarification in early 2021 that its position on stablecoins is to encourage the innovative use of blockchain technology in the financial sector, while also placing great emphasis on the compliance of related innovations.
The views of Lagarde and Yellen clearly represent a position for further regulation of Bitcoin. The candidates for leadership of the SEC, OCC and CFTC, the major financial regulators in the new U.S. administration, are well aware of the use of Bitcoin and blockchain technology and are seeking to develop regulatory measures to regulate and encourage this development. So in general, it appears that the major financial regulatory jurisdictions will hold different positions on Bitcoin regulation, but will certainly work together further to find common ground.
However, in terms of specific policies, the regulatory policies of each jurisdiction are likely to be very different. For example, the U.S. financial regulatory stance on Ripple is clearly different from that of the U.K. and Japan. Currently, the FATF (Financial Action Task Force) is a commonly supported organization for global financial regulatory cooperation in this area. It is expected that future regulatory policy related to Bitcoin will likely be proposed through the FATF as well.
Such a regulatory policy would undoubtedly be more consistent with the existing regulatory policies for commodities and equity products. The enactment of such a regulatory policy would recognize the existence of bitcoin as an asset class, which would facilitate its trading on mainstream trading venues.
Among the possible regulatory policies that global regulation could take on Bitcoin, the probability of a complete ban on Bitcoin is there. But that probability is very small.
There is already trading of Bitcoin-based derivatives in the U.S. market under U.S. financial regulatory approval. Bitcoin-based businesses and service facilities are also being established in the marketplace. Various products based on Bitcoin are also popular in the marketplace. The financial regulatory leaders of the new U.S. government are also taking a positive approach to the development of blockchain and crypto-digital assets. As a result, the chances of a complete ban on Bitcoin, at least in the U.S. market, are almost non-existent.
In summary, among the three factors that Dario mentioned as influencing the Bridgewater Fund’s investment in Bitcoin, I think it’s definitely going to happen that financial regulators are working together on a global scale to further regulate Bitcoin trading. But these regulatory measures will regulate the Bitcoin market and drive Bitcoin to become a mainstream trading product. The liquidity of Bitcoin trading will increase significantly as a result, and volatility will decrease accordingly. This, therefore, favors asset management firms like Bridgewater Funds to start investing in Bitcoin. For the average investor, holding Bitcoin ahead of an institution like Bridgewater has the potential to reap the benefits of this asset appreciation.
Dario underestimates the value of Bitcoin as a store of value
Dario devotes a large part of his paper to analyze the properties of Bitcoin as a store of value. In particular, he compares it to gold. Dario’s views in this regard are consistent with those of Bitcoin’s advocates.
Bitcoin is similar to gold, and better than gold, in terms of being in a fixed amount, not controlled by any institution, highly transportable, easily divisible, and not subject to fracture. Thus, it is ideal for use as a store of value.
However, Dario does not make the fundamental differences between Bitcoin and other crypto-currencies very clear. As the first and leading crypto-digital asset, Bitcoin has an irreplaceable position. And that position is only getting stronger. For an investor, this has a direct impact on the percentage of Bitcoin in their portfolio. If an investor is right about Bitcoin’s position, he or she wIll invest more money in Bitcoin than in other crypto-digital currencies.
Overall, Dario holds a very objective analysis and a very positive opinion of Bitcoin. This is why he plans to create a new fund of alternative cash. For the general public, understanding Dario’s views on this and especially his initiatives in this area will be very helpful in making the right investment decisions.
Article from Gu Yanxi, Founder of Liyan Consulting
Translated by Yang(Mengyan Finance)