First we had the “Dollar Milkshake” theory, and now @Raoul Pal brings us the “Bitcoin Lifeboat” theory. Let’s unpack!.
1. Let’s start with the realization that Central Bank Digital Currencies are coming. It’s no longer a question of if, but a question of when. Raoul predicts 5 years. I am going to say 10, at least here in the US, as I think the Fed will take a measured approach. But CBDC is coming.
2. Now, how does this impact investments? Well as Raoul points, out, once you have a digital currency, where actual individuals have wallets that can accept that digital currency, then you have the power to deposit funds directly into people’s wallets, bypassing banks altogether.
3. This step is a bit more work that Raoul makes it out to be: you need mass distribution of a wallet, in the form of a mobile phone app that can accept transactions, you need the concept of accounts, and KYC, and you need to make sure all these deposits can be used in the economy at large. Even if the government ordered this to happen, the logistics of deploying this are high. A number of blockchain creators (my company included) are talking to the US government about this exact issue, and similar conversations are happening in Europe. It’s very early days.
4. But assuming the tech and consumer usability is figured out (it will be over the next decade), what does this mean for the consumer? It means that the Fed (with perhaps the blessing of the Treasury), will be able to issue funds directly into people’s wallets. It also means that they can impose positive or negative interest rates directly, and do so on a completely individual level. Taxes can be levied, and funds can be frozen.
5. This granular control over digital money will give the Fed a massive new lever over the economy, This can have benefits, but also unintended consequences. It’s hard even thinking through all the possibilities. It also means that transactions will be less private, but without getting into details, it doesn’t exactly mean that every transaction must be fully transparent.
6. This rise of CBDC may mean new laws for stable-coins that compete or enhance CBDC. If the US is in the business of stable-coins, they probably don’t like the idea of Tether, an USD stable coin run by BitFinex out of BVI with unknown sub par backing. On the other hand a JPMorgan money market coin might be completely acceptable. Municipalities would be able to issue directly on this FedChain. As an ex Bond Trader, I see great potential here.
7. One clear impact of CBDC will be a growth in wallet adoption. And from there, people will start looking into digital alternatives, and Bitcoin with its finite supply, will look great. Yes, Bitcoin is slow and expensive, but wrapped versions of Bitcoin (happy to demonstrate this on our own protonchain.com by sending anyone some, are ultra fast and free of fees.
8. As the world discovers BTC, with a finite supply and growing demand, the market cap of BTC could easily expand beyond gold which means 50x from here. BTC ETF’s, hedge fund adoption, and use of BTC in corporate treasury (Square and MicroStrategy) have led the way all point to a massive rally potential ahead.
9. Briefly mentioned by Raoul: ETH and DEFI. Yes, BTC looks great, but without smart contracts, it’s only part of the crypto equation. Other chains and coins address this. Programable crypto payments for apps and shopping carts is critical. Even Libra does not yet have smart contracts. ETH1 is not scalable, and ETH2 is 24+ months from mass deployment. Chains like ours (Proton), Solana, Cardano, EOS, Hedera, etc.. are vying for this space.
10. In this changing world, where CBs start printing digital dollars and euros, goods and services inflation may or may not happen immediately. But asset inflation is bound to happen. Gold, Art, Houses, all will appreciate. And BTC could very well be the best investment of them all.