Ray Dalio: I have some Bitcoin, and the biggest risk of Bitcoin is its success or being targeted by the government

This article is from Bitpush.News, author: Mary Liu.

Ray Dalio, the founder of Bridgewater Associates, has embraced cryptocurrency.

The 71-year-old billionaire stated that the dollar is on the verge of devaluation, similar to the dollar crisis around 1971, while China is threatening the dollar's role as the world's reserve currency. In such an environment, Bitcoin, which has gold-like properties, is becoming increasingly attractive as a savings tool.

Dalio's Bridgewater Associates managed $101.9 billion in assets at the beginning of 2021, making it the largest hedge fund in the world.

He openly stated during a one-hour conversation with CoinDesk's Chief Content Officer Michael J. Casey: "In an inflationary environment, personally, I would rather hold Bitcoin than bonds."

He revealed for the first time: "I have some Bitcoin."

After expressing skepticism about cryptocurrency last November, Dalio's mindset has gradually shifted. He wrote in January: "Bitcoin and its competitors have the potential to meet the growing demand for a store of value."

However, he also reiterated his concerns that governments competing with Bitcoin for the national currency system may suppress its owners, warning that: "The biggest risk of Bitcoin is its success."

Debt Cycle

After the 2008 financial crisis (and in the early days of Bitcoin), Dalio began studying the rise and fall of the three most recent global reserve currencies: the Dutch Guilder, the Pound Sterling, and the Dollar.

He believes that monetary hegemony shifts through three possible simultaneous "cycles": the creation of debt and financial assets; an "internal cohesion conflict cycle" ("As the wealth gap widens and the value gap grows, with the rise of political groups, there will be more conflict"); and the rise of another powerful force to challenge the existing currency.

Whether a currency can withstand such cycles depends on the economic strength behind the global reserve currency.

Dalio stated that the dollar is currently in the middle of the first cycle, where "debt and credit create purchasing power," but these are short-term stimulants and long-term suppressants, as government debt ultimately needs to be repaid.

Dalio said: "All these financial assets are claims on physical assets and services. And when debt becomes very large, problems arise."

Dalio pointed out that this has happened in the U.S. After the Bretton Woods Agreement was reached in 1944, global exchange rates were pegged to the dollar, which was backed by gold. However, in the 1960s, due to the expansion of entitlement programs, federal spending surged, while the U.S. was also increasing its defense spending to combat the Cold War with the Soviet Union and to pay for the rising costs of the Vietnam War.

U.S. President Richard Nixon announced the dollar's departure from the gold standard in 1971. Since then, the dollar has been a "fiat" currency.

Dalio warned that the current situation is now similar to that of 1971: "When you look at the budget and look to the future, we know we will need more money, more debt."

"Do you need to borrow money? You have to print money first. Need more money? Come on, raise taxes, which creates a dynamic cycle. Now, I can continue to introduce what happens in that cycle, possibly capital controls… I painfully discovered in 1971 that this led to rising stock prices. It led to increases in gold, Bitcoin, real estate, and other things because the dollar was really devaluing. This is part of the cycle we are in now."

Inflation is Imminent

The main narrative surrounding Bitcoin and other cryptocurrencies is that they serve as a hedge against inflation, or at least will benefit from fiscal and monetary stimulus.

As governments around the world continue to strive to avoid economic crises by increasing spending, much effort has been made regarding the outlook for inflation. In the 12 months ending in April, the annualized inflation rate in the U.S. was 4.2%, well above the Federal Reserve's long-term target of 2%, although a large part of this is due to comparing this rate with April 2020, when many economies around the world were in a standstill.

Dalio stated that there are two types of inflation: one caused by supply and demand, where high labor demand and low production capacity lead to rising prices; the other is inflation caused by currency devaluation.

As money is continuously injected into the economy, it intertwines the two types of inflation.

"We will have a lot of demand, while the money supply increases, as investors rush to buy bonds and other assets like real estate, yields have dropped to lows. This will change the assets held by individuals, and so on, because cash is wasteful, and it will continue. I mean---because it will bring negative real returns."

Dalio believes that the second type of monetary inflation will ultimately dominate. This could be beneficial for assets like real estate, stocks, and cryptocurrencies, but only to a certain extent.

He said: "As these prices rise like bonds, their future expected returns will decline. When their yields approach interest rates, people will no longer have the motivation to purchase these things, which could lead to trouble. Tightening monetary policy becomes very difficult because the whole picture collapses, and interest rate changes become very sensitive."

He added that central banks will have to resort to more money printing, which could ultimately lead to real negative returns on asset yields, even though nominally they may increase, as seen in the 1970s.

China's Overtaking

Since the onset of the COVID-19 pandemic, China has implemented some fiscal stimulus measures and adopted relatively loose monetary policies to overtake.

Dalio mentioned: "In 2015, only 2% of the Chinese market was open to foreigners. Now it is over 60%. [However] if you look at relative prices and other information, that is a completely different story because they have not done quantitative easing. They still have an attractive bond market and a more attractive open capital market… When you buy Chinese financial assets, just like buying U.S. financial assets, you have to buy their local currency. Therefore, this is not only beneficial for their currency but also for their assets. When there is capital inflow, China will be able to issue notes and lend in its local currency. China has always been very willing to do this, and you will see more internationalization of the renminbi, which is attractive to both borrowers and lenders. This dynamic of development indeed follows the same curve as the monetary system and imperial patterns."

Risks

With the decline of the dollar and the rise of the renminbi, "neutral" cryptocurrencies like Bitcoin have the potential to function like gold has for the past few centuries.

Although Dalio suggests that a diversified portfolio may include Bitcoin, he also mentioned many potential risks: "I think one big concern is that governments have the ability to control almost anything, including Bitcoin or digital currencies. They know where these currencies are and what is happening."

Governments may start to worry about bondholders selling bonds for Bitcoin: "The more value we store in Bitcoin, the more we want to say, 'I would rather have Bitcoin than bonds.' Personally, I would rather have Bitcoin than bonds," Dalio said with a smile, "and the more this happens, the more money flows into Bitcoin instead of credit, and then the government loses control over it."

This situation could lead to those governments cracking down harshly on Bitcoin holders.

Dalio sees technology as the main battleground for competition among countries in the future, stating: "The world will change at an incredible speed… Whoever wins the technology race wins everything, whether economically or militarily… This is what the next five years will look like."