Bitcoin is the best collateral the world has ever seen, according to Raoul Pal of Global Macro Investor and Real Vision Group.
The Founder/CEO praised the cryptocurrency for its predictability and anti-fragileness as an asset as he pitted it against the government bonds. Treasurys, said Mr. Pal, is a part of a falling monetary system – collateral that gets devalued over time as central banks get accustomed to endless money printing and lower interest rates.
“[Bonds] used to work just fine until the central banks become fearful of allowing the business cycle to run unimpeded,” the analyst wrote in its GMI Monthly.
“Thus, when debt loads became unsustainable, meaning that the weakest borrowers couldn’t get access to enough collateral, instead of the price of collateral rising, thus forcing firms to go bust, central banks began to increase the supply of collateral and reserves [via] quantitative easing.”
Mr. Pal also went after the main reason behind central banks’ switch to bonds as their primary collateral. That is gold.
The analyst said the precious metal is not easy to use because it needs to sit in vaults. Also, gold offers little-to-no means to prove ownership and remains a hard asset when it comes to transferability.
Bitcoin a “Pristine Collateral”
Bitcoin, on the other hand, comes with built-in qualities of the blockchain technology that reduces the risk of who owns what.
Every unit gets anointed to a digital identity, the record of which gets stored on a public ledger. They remain provable by the entire network without needing to rely on an intermediary, such as an auditor.
Mr. Pal added that central banks cannot create more Bitcoin that its pre-define supply cap of 21 million units. That protects the cryptocurrency’s value when collateral shortages (recessions) go up. It forces only strong creditors to gain access to Bitcoin. Meanwhile, it weeds out the bad ones to let the business cycle work as usual.
“Bitcoin is pristine collateral,” the analyst said. “The greatest form of collateral.”
I wrote a very long GMI Monthly this weekend (143 pages, 15,500 words). The core focus was this month on crypto, which I think its the worlds best trade and of which Im irresponsibly long.
— Raoul Pal (@RaoulGMI) August 31, 2020
That Bullish Case
Mr. Pal envisioned Bitcoin as an asset that could trade higher than bonds in the future. That pushed a super bullish case for the cryptocurrency that has already climbed more than 11,000 percent in its lifetime.
The analyst credited the decentralized finance sector for churning out use cases for using Bitcoin as collateral, giving the cryptocurrency its own “yield curve.”
“Its only at the money market phase right now (short-term yield curve), but over time we will establish the time preference for Bitcoin over 30 years or more, just like bonds,” he added.
The statement, meanwhile, drew criticism over Bitcoin’s volatile price moves. Some noted that the central banks’ and governments’ inability to control a decentralized asset would keep them away from using it as collateral.