Raoul Pal’s Recent Explanation of Cryptocurrency Leverage Is the Most Important in History | by Jayden Levitt | October 2022

You must have the entire image.

Source — CC0 Image — Real Vision

Raoul Pal, one of the world’s top business analysts, was one of the few investors to predict the mortgage crisis of 2008-2009.

Pal, who retired at 36 and now lives in the Cayman Islands, knows a thing or two about leverage – and when shit is about to hit the fan.

He now calls our dirty little secret.

Raoul Pal:

“Sex and leverage are two things that drive humans.”

We have all done it. The sex part too.

In finance, leverage is any technique that involves borrowing funds to buy things, hoping that future profits will be many times greater than the cost of borrowing.

Borrowing money brings your future expectations of yourself closer, and that feels good. Everything can be yours, a new Rolex, a designer suit or a luxury car.

You don’t even have to work for it.

We have been borrowing money for 4,000 years, so this idea is not a new phenomenon.

4,000 years ago, merchants gave grain loans to farmers and traders who transported goods between cities.

In ancient Greece and during the Roman Empire, moneylenders based in temples made loans while accepting deposits and effecting foreign exchange.

Raoul Pal believes that we are facing the most important opportunity: a new asset class is emerging, which has not happened in such a short time in the history of humanity.

He believes the cryptocurrency space over the next ten years will be 100 times larger, depending on the speed of the adoption curve.

Pal says humans will be humans; we are all floored and always looking for the fast option, which is caught in the leverage.

He believes in not borrowing and having an income stream to give you more investment options, especially in bear markets.

Pal believes that you should stick to a simple plan and not complicate things too much by using financial borrowing tools such as futures, derivatives, options, or direct borrowing to invest in crypto. change.

He thinks you should keep it as simple as average buying and buying over a long time horizon, like 5-10 years.

Averaging is a strategy that can help you deal with uncertain markets by making automatic purchases at regular intervals.

It also supports your efforts to consistently invest the same amount of money over a period of time, regardless of price.

Using this strategy in a “bear market” can lower your average cost price and reduce the impact of volatility on your portfolio.

Raoul Pal:

Stick to a simple plan. Do not use leverage; stick to a simple average dollar cost plan and think of it as a 5-10 year investment, and your probability of success will be extremely high.

Pal thinks borrowing puts you in a vulnerable position and uses the example of a leveraged cryptocurrency loan, where you get an automatic margin call if you don’t repay the loan.

What is a margin call?

This is a request from your lender, brokerage or bank to increase your equity position when the value of the asset you have borrowed from falls.

You are then required to pay money to increase your equity position or sell assets to repay the loan. In Crypto, margin calls usually happen automatically and are out of your control.

Raoul Pal:

Let’s say you borrowed money to buy Bitcoin; you deposited 50% of the money and borrowed the rest.

During this recent crash, if you had bought the top, you would have been called Margin because Bitcoin fell more than 50%.

Your negative financial situation would have wiped you out.

To make the scenario worse, you missed out on all the benefits when the price of Bitcoin inevitably goes up.

Raoul Pal details his position on leverage during an interview on Impact Theory:

“People use leverage to invest in Crypto, thinking, yeah, I’m going to make a giant investment now and reap bigger profits later.”

“You can make a bigger investment now, but the trade-off is – what if it goes bad? Then you get a margin call or liquidated”.

“The main lesson the markets are teaching us right now is not to use leverage.”

“Every time someone uses leverage in a volatile market, you explode. Then you lose your position and go back to square one.”

Pal still isn’t convinced borrowing against your home is a good move, even though he acknowledges it’s a less volatile asset to operate.

Pal explains that leverage can be acceptable against a house because prices are not very volatile. Once in a while, once in a generation, you get 2008, where people had negative equity, and the banks wanted their money back.

Crypto is very unpredictable in the short term, so using leverage is dangerous.

Raoul Pal: Don’t borrow money to invest in crypto.

Slow and steady always wins the race.

We are going through a period where digital assets are being adopted at the fastest rate in human history, but you still have time.

Raoul Pal:

“I have to impress on you not to use leverage.

If you don’t use leverage, you don’t care about the cryptocurrency going down, and it just means you can buy more units at a lower price.

And when it trades at $500,000, you will have become extremely wealthy.

It’s that simple”.

Pal goes on to say:

“Bezos is rich because he was probably one of the only people in the world who owned Amazon stock early on and never sold it.

Amazon shares fell 95% in 2001/2002 and saw several declines of 60%, still making him the richest man in the world.”

The only painting that matters to Raoul Pal is the adoption painting. It tries to block out media noise as much as possible.

Raoul Pal:

“I choose the only graph that matters to me: the adoption graph.

Is something going on with China and global macro and mining news changing the adoption curve or not?

No.

The relentless rise of technology continues. It would therefore be preferable to cover your ears and not listen to the noise”.

Below is a chart of new wallet address adoption for Bitcoin and Ethereum wallets with non-zero balances.

As you can see, adoption continues to rise even in this down market.

Source — Bianco Research

There are countless opportunities to get into cryptocurrency due to volatility.

Raoul Pal:

“You should expect a 50% correction in a bull market and a 70% correction in a bear market, and over five years you will still have made more money than you can imagine.

So you have to accept these things”.

World-renowned investor Warren Buffett takes a similar stance to Raoul Pal regarding leverage.

“The fastest way for a smart person to fail is to use leverage.

You only have to make a mistake once to be annihilated.

It’s like being Cinderella at the ball, you enjoy wine and food, but sometimes you forget you have to leave at midnight.

This blog leans to one side of the argument.

Partly because I couldn’t find any examples where leverage worked as a long-term strategy for people who aren’t institutional investors with access to large amounts of assets to borrow against.

Using Secured Loans in Cryptocurrency takes the fun out of the whole process. Even if you win money, it’s like a fast and unpredictable game.

Building up slowly and tediously over time and then just holding on usually beats quick successes of large investments.

It’s also more fun.

So I agree with Raoul Pal’s position on leverage in cryptocurrency.

I’ve borrowed money to leverage positions in Crypto, and when it worked, the gains were never big enough to warrant the anxiety of the outcome.

When things go sour, it takes months, even years, to recover.

If you want to learn more about my views on Web3, consider becoming a member. Your membership fee directly supports the writers you read. I will earn a small commission if you sign up using my link CLICK HERE.

This article is for informational purposes only; it should not be considered financial, tax or legal advice. Consult a financial professional before making major financial decisions.