In this episode, Raoul Pal, former hedge fund manager and founder of Real Vision, discusses his investment philosophy, his transition from traditional finance to crypto, and the power of network effects. He shares his personal journey of moving to Spain, his “meta-narrative” on the quality of life, and why he believes crypto represents a fundamental shift in how we value networks and communities.
Topics: Crypto, Investment Philosophy, Network Effects, Entrepreneurship, Macroeconomics, Real Vision, Web3, NFTs
The Power of Network Effects [00:00]
Raoul Pal: But my big discovery, and why I really started loading up on Ethereum, was another chart, which was a understanding that Metcalfe’s Law was the primary driver of all crypto markets. And in fact, almost all of the tech stocks that we’ve known today. And once you realize that these are basically networks, and once you realize that crypto are networks where you actually own the network. So Facebook is a great network stock, and it works perfectly on a log chart, and it’s an exponential, does all the things as you imagine. You can value it in Metcalfe’s Law terms, but the fundamental difference is shareholders and network users are not aligned. The shareholders make the money, the network users get the utility.
Along comes crypto, you marry the the network user with the owner. Okay, now you’ve got network effects upon network effects. This is like behavioral economics, manner from heaven.
Shaan Puri: It’s like religion meets Metcalfe’s Law, right? It’s like, now I have a, now I’m tribal about the thing.
Raoul Pal: It’s religion meets capitalism. That’s basically what it is, right? So that is incredibly powerful.
Career Transition and Life in Spain [1:16]
Shaan Puri: So for those who don’t know, you basically, you were at Goldman, you started your own hedge fund, and then it seems like you you retired, correct? You retired pretty young. You retired at 36. But I mean, now you’re you have a company now, so you’re not, you know, fully retired and kicked back, but…
Raoul Pal: No, I’ve got four four jobs I’m doing right now, so.
Shaan Puri: Right. But you did have a break in between, correct? So like, I think it was 2004 when you when you sort of retired from the hedge fund, and it was like 2014 or something when you launched, you know, Real Vision. So what was going on in between? Were you doing nothing or you were doing other projects I just don’t know about?
Raoul Pal: No, I was writing Global Macro Investor. But that is a monthly publication. So I don’t know why all of you guys do weekly newsletters or daily newsletters. That’s hard work. So I I wrote monthly. It’s big. It’s like, well, it started off with about 35 pages a month and then due to uh inflation, it gets to um about 130 pages a month now. But I write it in a weekend. So in I was living in Spain, wrote one weekend a month. Sure, I need to monitor markets and talk to people, but it was a part-time job. Um so really what I’d done is kind of opted out of the rat race, moved to the Mediterranean coast of Spain. I was growing fruit and vegetables in my garden and almonds and olives and all of that stuff, living the beach life in Spain, um in the middle of a on the side of a mountain in the middle of a national park, having a great life.
In the end, you start missing intellectual capital, the people around you, because most of the people most of the year round in the beach town in Spain work in a bar or restaurant, or they um or they’re in real estate, which is fine, but you feel very isolated when your world is global macro.
The “Aha” Moment for Crypto [2:54]
Shaan Puri: Totally. So so describe the moment because I think a lot of people listening to this, so just so you I don’t know how much you know about the podcast, but basically the podcast is usually me and Sam who who he’s not here because he’s traveling. He’s actually in Portugal right now. Um we just sort of usually spit we’re both founders. We both recently sold our companies in the last two years. We started the podcast when after we sold because that’s when you have a bunch of time on your hands. And um and it’s usually just spitballing different kind of like business opportunities, market opportunities. And so just stuff that we see that we think could work or is interesting, but we’re not going to go do it ourselves. So this became our outlet to do that. And um and so you get like, we have like, I don’t know, like over a million downloads a month and those what what the people who listen, what they’re doing is um they typically are either like they want to start a business but they don’t, they they have like a good paying job and they’re looking thinking about making the leap, or they they have their own business and this is like they’re doing this while they’re, you know, doing their chores and it’s like, oh, I get to hang out with my buddies who are shooting the shit about business because like, you know, we talk about stuff that they want to talk about. They just don’t maybe have the friends around them that want to talk and nerd out about business all the time. And so we kind of have that same uh thing where you needed that intellectual sparring to uh to feel good.
But the the thing you mentioned, which was like, you know, you sort of won one game, uh you’re doing well in one game, but you decided to exit the rat race. What was that? Would did you have like a kind of come to Jesus moment? What did you have like a was that a long time coming? How did that happen?
Raoul Pal: My meta-narrative is the game is life itself. The game is not money, the game is quality of life and how you live it. So that was always my objective. So when I was on the tube in London at 5:15 in the morning to get my get to my desk at Goldman before 6:00, the reason I did it is because I knew that the next thing I wanted to do was go and live in the Mediterranean and wanted to have that quality of life. You know, for me, a lot of people think of money as the primary objective. I actually like houses, as you can tell from the house behind me, right? Because this is where I live. This is the quality of life. This is my bank. This is everything. Um and so I like where I live and how I live. That’s why I live in the Caymans, that’s why I lived in Spain. They’re beautiful places and I live a quality of life. So that has always been my journey. But what I wanted to do is I always take steps towards the endgame. I kind of live in the future always in everything that I do. So I always have a vision of my future self or whether that’s future state of financial markets, where I think it’s going, whatever it may be, I’m always well ahead. And so I then can look, it’s much easier to live in the future and look back and say, how do I get here, than stand here today and go, I want to go forward. It’s kind of weird. It’s a psychology thing. And so I had realized that the Mediterranean was this life, and I was my ex-girlfriend when I was at university, um her mother lived in Mallorca in Spain. And I I was there in Mallorca one point, and we were on this small beach eating grilled sardines. There was there was this perfect Mediterranean scene, right? Grilled sardines, somebody’s making a big oil drum on the beach, you got a cold beer, some grilled sardines, and on this little mini peninsula, there’s a bunch of pine trees and palm trees, and there’s this long table of like 30 people, 25 people of different age groups, parents, kids, grandparents, eating paella, the Spanish national dish, on this Sunday, drinking wine, laughing, and I’m like, that is quality of life. And so I kept that in my mind. And so I kind of facilitated it to happen that I would move to Spain.
The “Network Effects” of Crypto [8:10]
Shaan Puri: And you’ve seen a lot of news about institutions buying Bitcoin, whether it’s Tesla or MicroStrategy or Square or, you know, some like, you know, random insurance company buys $100 million worth of Bitcoin. So we’ve kind of heard those. We hear less of that with ETH. Is it just going on under the radar? Is it coming? What’s your sense of that? Because I haven’t I’m in this space and I haven’t heard a ton.
Raoul Pal: It’s happening um below the radar because people keep coming to me saying, when’s this wall of money? I’m like, it doesn’t come as a tidal wave. It comes as a flow. Right? You don’t see it until you look back and go, wow. So I mean, I literally every other day I’m speaking to the world’s largest financial institutions who put me in front of their investment committees and talk them through crypto and how to invest. And the narrative change, it really surprised me. It was always Bitcoin, you know, can we put Bitcoin on our balance sheet? How should we invest in Bitcoin? What’s the diversification? Move very quick to, look, Ethereum feels like it’s a technology play that makes sense with the applications. We can’t we’re interested in DeFi, etc. Then it very quickly became, oh shit, how do we get involved in Web3? Um so it moved very fast, which is why in the NVC got most of the money, um because they saw the broader opportunity. They all came through the the 2020 lens of Bitcoin is the asset and you know, the the Michael Saylor route and even me, you know, in the earlier part of 2020, a lot of people came in that. And then like all of us, they kind of go, oh wow, okay, this is much bigger. So, you know, I’ve started a fund of hedge funds, um which is invest in in crypto hedge funds to allow institutions another way into the market because they don’t really want to buy just ETH or Bitcoin. They want exposure to this $2 trillion asset class that’s going to go to $200 trillion over the next 10, 12, 15 years, whatever the number is. So hedge funds are pretty good for that because they’re their job is to manage the exposure and and to capture the to capture this big move. So, you know, that’s another way that it’s coming in that people don’t see.
The Future of NFTs and Communities [10:50]
Shaan Puri: And you said something about music and I saw you tweeting about music and kind of the future of music royalties or like how anybody can become an A&R, you know, uh person now. Describe what you kind of what what you’re thinking there because I think that’ll be fascinating to a lot of people because music is one of music like art is a great entry point for a lot of people whereas, you know, macro investing is deeper in.
Raoul Pal: Correct. So what is the world’s most vibrant communities? It’s sports and it’s culture. That’s fashion, brands, fashion brands more than any others. Um it’s music, it’s art, it’s these things, right? Culture. The big unlock here is if you can tokenize communities, which is now the network owner is the same as the network user. Remember that Facebook example? Right. So now we’ve got pop star and token holder, they’re all now joined in the same network. So now everybody’s incentivized to grow the value of that network. You’ve now made culture an investment. This was not possible. You could take a cultural marker like an Adidas sneaker, but you weren’t making money from Adidas, you had to buy the shares. You had to buy the shares. And there was no connection between the consumers. There was no network of Adidas users. Now, you’re about to create networks amongst these people. So what is the value of LVMH, the fashion company, right? With all of its kind of mega brands that people are passionate about, that are status symbols that humans like we’ve just talked about, love these things. So the same with music, right? We’re all tribal in music. We love different music, we like different bands. So to be part of that network, I could now be a 16-year-old kid and never have to have a job because I happen to get involved in the right and good at finding the next pop star. Or if I buy that social tokens, or I invest in their song IP on NFTs, right? I’m in business. So what this is creating is a system I think is universal basic equity, where culture is the investment. They’re not living in your and I world where they’re building businesses and having to sell them and go through the entrepreneur’s miserable journey. Um they don’t have to do that. They do a different way, which is by using their human instincts about the communities they want to be part of and which networks are going to thrive. And music is so powerful because it’s human emotion. Um and people and it’s it’s a place in time. I remember I’m a huge music fan and, you know, I identify music by its year, what I was doing, what it smelled like, what I heard, who I was hanging out with, I mean everything, right? Music is is one of those anchoring things. So just the ability for musicians to now sell directly and have a direct relationship with their fans via social tokens and NFTs is literally a game changer. I mean, there is no way on earth Snoop Dogg would have been able to sell something in small numbers and make $50 million. He’s just not that big a star. Because record labels, um because 80% of all the economics of selling music gets taken by middlemen. So he’d have to sell a huge sum to do that. Or he’d have to go on tour. And to make $50 million, that’s a big exhausting tour, you know, he’s no spring chicken anymore. These things are, you know, the music industry economics got destroyed by middlemen and it made the artist have to work harder, take more risk with capital, which is like have to go on a massive tour, have to rent arenas and take these trucks. This changes all of that dynamic and the metaverse changed it one stage further.
Shaan Puri: Yeah, like the artist had to create uh scarcity, uh which was basically come to my concert, there’s only X tickets and that’s how you can see me. And then they also created status which was take photos of yourself at this concert and post that online and that’s a big part of the value that you’re going to get out of uh out of coming to this thing. And then now we have a digital version of that, which is and and so when you talk about charts, I’ve seen, you know, I see people like do this all the time on Twitter where they’re like, you know, it’s voodoo magic. They see a chart then they draw this like crazy shape. Oh, clearly this is doing a reverse cyclone pattern and it’s going to go all the way up. And so, are you one of those guys where you actually do the technical analysis and you say, no, the price chart is what I’m looking at or were you looking at other charts?
Raoul Pal: Um both. So, um and I’ll come on to that. So price chart, I think is the best guide of what the asset is doing, what its trend is, how it how people are perceiving it and where it is versus what you might perceive as fair value. So, Okay. You know, you you notice certain characteristics like crypto tends to be exponential in price, so you put on the logarithmic chart, it starts to make sense. You know, you look at things like copper and lumber, they tend to be mean reverting assets because you they get met by excess supply with high high prices lead to excess supply. So right now with oil at 100 bucks, everybody wants to make as much oil as possible, so the price comes down over time. Doesn’t happen with crypto because you can’t. Right. So you need to understand the structure of markets, where the sentiment is, is it overly bearish? Like a day like today, it got overly bearish. And so suddenly you start to see a reversal. So these kind of things are interesting. But my big discovery, and why I really started loading up on Ethereum, was another chart, which was a understanding that Metcalfe’s Law was the primary driver of all crypto markets. And in fact, almost all of the tech stocks that we’ve known today. And once you realize that these are basically networks, and once you realize that crypto are networks where you actually own the network. So Facebook is a great network stock, and it works perfectly on a log chart, and it’s an exponential, does all the things as you imagine. You can value it in Metcalfe’s Law terms, but the fundamental difference is shareholders and network users are not aligned. The shareholders make the money, the network users get the utility. Along comes crypto, you marry the the network user with the owner. Okay, now you’ve got network effects upon network effects. This is like behavioral economics, manner from heaven. Right. It’s like religion meets Metcalfe’s Law, right? It’s like, now I have a, now I’m tribal about the thing. It’s religion meets capitalism. That’s basically what it is, right? So that is incredibly powerful. So I start looking at the fact that Bitcoin and Ethereum charts just at different points when they at the same point in the adoption cycle were remarkably similar. And then it dawned on me, it’s they’re all the bloody same thing. They’re all about adoption. So then, so so if you look at it and if you’re honest with yourself, Ethereum, if you think about Metcalfe’s Law, it’s about the number of users and then the kind of connections between the users and the applications built to create those connections. Well, Bitcoin’s kind of a one-sided one, which is a bunch of people own it as a store of value, like gold. Nothing wrong with that. But there’s not many applications built in it. When you look at Ethereum, it’s like, holy shit. I mean, this is like the internet. Right. That moment is like, okay, this is far superior a bet. Um and so that’s why I took that bet and then I eventually shifted majority into Ethereum and then took other bets in the space to express macro views.
Shaan Puri: Yeah. Uh it’s funny. I I I have 1/10th of the intelligence of you, but I did the exact same pattern. So, you know, I heard about it in 2013, bought a little bit, dabbled, sold during when I, you know, I went I went to a wedding and my aunt was telling me about how great Bitcoin and Ethereum was. I was like, ah, it’s probably a bubble, 2017, 2018. Sold for a nice profit, was patting myself on the back. Uh, you know, in retrospect, worst trade I ever made. Should have just held everything. Um, you know, bought started buying back in uh in 20 20 uh 2019 or 2020, I kind of announced that I’ve uh I had moved 25% of all my liquid net worth into the thing, but that was right before, you know, another another run-up and so that became quickly 50, 60%. And um and you know, peers and some people were telling you you’re crazy. I’m sure you had the same. And same thing, you know, why are you betting on this? Are you just kind of speculating? And I said, no, like basically I spent my whole career studying the power of network effects, right? I’m trying to build marketplaces and social networks in Silicon Valley because I know that a network effect is the most powerful force imaginable. And uh and then I see this chart, this adoption chart of this new money network. It’s like, well, if this if the if the if the social network was worth X, and the information network was worth Y, and then the, you know, the merchant network, which is like, you know, basically Amazon, um was worth, you know, Z, then then this thing is going to be the money network is going to be worth a lot. I can tell you that. And so I was like, I didn’t know much more than that, but I just knew if you can bet early in a in a network effect that’s still going through its kind of like, you know, adoption curve, um you know, you’ll do pretty well. And so that was kind of my my my bet. Um coming from a complete, you know, sort of a different different take, but ended up in sort of the same conclusion. And I remember being impressed that you were talking about network effects because I didn’t really see a lot of people in kind of traditional finance talking about that at all. And I was like, they’re missing the point, you know.
Raoul Pal: I think I was really one of the first people to really start saying, unless you understand network effects, you don’t understand what this is at all. Because everyone was arguing on weird things.
Shaan Puri: Because people people listening maybe don’t know network effects. So so to to define it, network effects just describes this phenomenon where uh let’s just take, you know, a language. If I’m the only person who speaks English, English is not very useful. Same thing with a telephone system. If I’m the only person with a telephone, it’s not that useful. But now another person gets a telephone or learns English, well, English just got more valuable. And then the more people that learn English, the more valuable English is as a language. And so it’s describes this phenomenon that every participant that joins the network makes the whole network more valuable. So it’s like the opposite of like a popular nightclub where everybody who joins makes the thing sort of, you know, diminishes the popularity over time. Network effects typically describe that they they get more valuable at a square basically as an exponential, not linear.
Raoul Pal: And then if you think about it in other terms, is let’s say, let’s say let’s look at Web3 as a network and a network of engineers, engineering talent, right? This is where where it gets really interesting. Why is it exponential? It’s because there are parts when everybody’s trying to hire Web3 talent, right? We are, every single person I know is, right? And the actual pool of people who are capable of doing it is probably like a thousand. Right. And they’re all multi-millionaires who don’t want jobs. That’s the point. Is their salaries and the demand for them is exponential. The demand for the network of those guys becomes exponential. Over time, there’ll be millions of trained people and it becomes the network effects. The overall space is very valuable, but the opportunity, that ramp, that’s the single most important interesting part of network effects. Right. And the fact that you can own a share of the network. So even when the network flattens out and is now worth, I think $200 trillion dollars for the digital asset space, it’s currently $2 trillion dollars. That’s a 100X in market cap. That’s huge. We’ve never had anything like this before.
Shaan Puri: Right. Like when the when the first when the information network was getting built out, which is just the internet, and it was pretty clear like slowly but surely people were adopting, they were getting online and then stuff was getting built, stuff to do and then everybody who was online made made being online better because you could communicate with them or they might write a blog or whatever. The whole internet was getting better the more people that joined, right? That was a network effect. But you couldn’t invest in the internet. Like you couldn’t just invest in generically the internet. And so you had to pick, you know, certain platforms and even then, how how do you become an let’s say you believed in Amazon or eBay or whatever, you’re only getting a slice of the total internet and even then, they don’t want, you know, the average person could not invest.
Raoul Pal: And that to me, it feels like NFTs right now. We want to all get involved in NFTs. You have no idea what’s going to win. I mean, I mean, you don’t have the ability to go on every Discord. So it’s bandwidth constrained. We all are in this space. We know it’s huge. We all know it’s huge. We also know it’s a bubble. We also know tons of this is going to zero. Um that fit What’s interesting about this Only ETH gives you the gives you the action of of NFTs. That’s the kind of, you know, that that kind of makes sense, like owning Oracle did a pretty good job of capturing the internet. Right. And so you’ve been now kind of following this and so what what what what is what is a viewpoint you had about crypto that you have changed your mind on or you what you believed before, now you realize it’s sort of wrong and you you think about it in different ways. Is there any has it been anything as this kind of, you know, it’s kind of like this rapidly evolving thing. You’re sort of like defogging this like brand new world. You know, so, you know, maybe some mental picture, you some mental framework you had before hasn’t really held up and maybe something different has happened. Can you think of an example of that?
Raoul Pal: Well, my views on Bitcoin changed um significantly. I don’t think, you know, no less of it as an asset, but I thought about it in network terms and the community and I thought the community is not attracting new people. And the job of a network is to attract new participants. And if the network was actively rejecting people, I thought it was going to underperform. Um which was surprising to me because I was very bullish on Bitcoin first because I thought, look, it’s going to have a larger place. And what’s happened is almost immediately, and it made me change my mind, is the institutions started going, well, I actually don’t like this space. And they started buying ETH. And that was so that’s that’s new. I haven’t really heard that. So tell me about because you’re connected to all these folks, right? Like you know Yeah. Hedge fund guys, CIOs, what you know a bunch of different people in that world. They don’t want to own an asset where everyone’s shouting, have fun, stay poor at each other and putting laser eyes. Right. It makes them look fucking stupid and irresponsible with their money. Well, ETH feels like it’s a technology play. Yes, it’s amusing because everyone’s saying GM to each other and all of this stuff, but it’s not at war. While Bitcoin was at war with every other network, because, you know, that’s what networks do, you know, religions go to war with each other for the same reason, right? They’re exactly the same principles. Um so, you know, it’s the same reason Russia and NATO. I mean, it’s they’re all the same. They’re all networks fighting each other for the robustness of their own network. I get it. So that that that whole process of seeing institutions getting turned off by it was a was a big deal to me. I just thought, yeah, I don’t like this either. So that was one thing. Um I’m trying to think Well, on that point, you you’ve seen a lot of news about institutions buying Bitcoin, whether it’s Tesla or MicroStrategy or Square or, you know, some like, you know, random insurance company buys $100 million worth of Bitcoin. So we’ve kind of heard those. We hear less of that with ETH. Is it just going on under the radar? Is it coming? What’s your sense of that? Because I haven’t I’m in this space and I haven’t heard a ton. It’s happening um below the radar because people keep coming to me saying, when’s this wall of money? I’m like, it doesn’t come as a tidal wave. It comes as a flow. Right? You don’t see it until you look back and go, wow. So I mean, I literally every other day I’m speaking to the world’s largest financial institutions who put me in front of their investment committees and talk them through crypto and how to invest. And the narrative change, it really surprised me. It was always Bitcoin, you know, can we put Bitcoin on our balance sheet? How should we invest in Bitcoin? What’s the diversification? Move very quick to, look, Ethereum feels like it’s a technology play that makes sense with the applications. We can’t we’re interested in DeFi, etc. Then it very quickly became, oh shit, how do we get involved in Web3? Um so it moved very fast, which is why in the NVC got most of the money, um because they saw the broader opportunity. They all came through the the 2020 lens of Bitcoin is the asset and you know, the the Michael Saylor route and even me, you know, in the earlier part of 2020, a lot of people came in that. And then like all of us, they kind of go, oh wow, okay, this is much bigger. So, you know, I’ve started a fund of hedge funds, um which is invest in in crypto hedge funds to allow institutions another way into the market because they don’t really want to buy just ETH or Bitcoin. They want exposure to this $2 trillion asset class that’s going to go to $200 trillion over the next 10, 12, 15 years, whatever the number is. So hedge funds are pretty good for that because they’re their job is to manage the exposure and and to capture the to capture this big move. So, you know, that’s another way that it’s coming in that people don’t see.
The Future of Music Royalties [40:05]
Shaan Puri: And you said something about music and I saw you tweeting about music and kind of the future of music royalties or like how anybody can become an A&R, you know, uh person now. Describe what you kind of what what you’re thinking there because I think that’ll be fascinating to a lot of people because music is one of music like art is a great entry point for a lot of people whereas, you know, macro investing is deeper in.
Raoul Pal: Correct. So what is the world’s most vibrant communities? It’s sports and it’s culture. That’s fashion, brands, fashion brands more than any others. Um it’s music, it’s art, it’s these things, right? Culture. The big unlock here is if you can tokenize communities, which is now the network owner is the same as the network user. Remember that Facebook example? Right. So now we’ve got pop star and token holder, they’re all now joined in the same network. So now everybody’s incentivized to grow the value of that network. You’ve now made culture an investment. This was not possible. You could take a cultural marker like an Adidas sneaker, but you weren’t making money from Adidas, you had to buy the shares. You had to buy the shares. And there was no connection between the consumers. There was no network of Adidas users. Now, you’re about to create networks amongst these people. So what is the value of LVMH, the fashion company, right? With all of its kind of mega brands that people are passionate about, that are status symbols that humans like we’ve just talked about, love these things. So the same with music, right? We’re all tribal in music. We love different music, we like different bands. So to be part of that network, I could now be a 16-year-old kid and never have to have a job because I happen to get involved in the right and good at finding the next pop star. Or if I buy that social tokens, or I invest in their song IP on NFTs, right? I’m in business. So what this is creating is a system I think is universal basic equity, where culture is the investment. They’re not living in your and I world where they’re building businesses and having to sell them and go through the entrepreneur’s miserable journey. Um they don’t have to do that. They do a different way, which is by using their human instincts about the communities they want to be part of and which networks are going to thrive. And music is so powerful because it’s human emotion. Um and people and it’s it’s a place in time. I remember I’m a huge music fan and, you know, I identify music by its year, what I was doing, what it smelled like, what I heard, who I was hanging out with, I mean everything, right? Music is is one of those anchoring things. So just the ability for musicians to now sell directly and have a direct relationship with their fans via social tokens and NFTs is literally a game changer. I mean, there is no way on earth Snoop Dogg would have been able to sell something in small numbers and make $50 million. He’s just not that big a star. Because record labels, um because 80% of all the economics of selling music gets taken by middlemen. So he’d have to sell a huge sum to do that. Or he’d have to go on tour. And to make $50 million, that’s a big exhausting tour, you know, he’s no spring chicken anymore. These things are, you know, the music industry economics got destroyed by middlemen and it made the artist have to work harder, take more risk with capital, which is like have to go on a massive tour, have to rent arenas and take these trucks. This changes all of that dynamic and the metaverse changed it one stage further.
Shaan Puri: Yeah, like the artist had to create uh scarcity, uh which was basically come to my concert, there’s only X tickets and that’s how you can see me. And then they also created status which was take photos of yourself at this concert and post that online and that’s a big part of the value that you’re going to get out of uh out of coming to this thing. And then now we have a digital version of that, which is and and so when you talk about charts, I’ve seen, you know, I see people like do this all the time on Twitter where they’re like, you know, it’s voodoo magic. They see a chart then they draw this like crazy shape. Oh, clearly this is doing a reverse cyclone pattern and it’s going to go all the way up. And so, are you one of those guys where you actually do the technical analysis and you say, no, the price chart is what I’m looking at or were you looking at other charts?
Raoul Pal: Um both. So, um and I’ll come on to that. So price chart, I think is the best guide of what the asset is doing, what its trend is, how it how people are perceiving it and where it is versus what you might perceive as fair value. So, Okay. You know, you you notice certain characteristics like crypto tends to be exponential in price, so you put on the logarithmic chart, it starts to make sense. You know, you look at things like copper and lumber, they tend to be mean reverting assets because you they get met by excess supply with high high prices lead to excess supply. So right now with oil at 100 bucks, everybody wants to make as much oil as possible, so the price comes down over time. Doesn’t happen with crypto because you can’t. Right. So you need to understand the structure of markets, where the sentiment is, is it overly bearish? Like a day like today, it got overly bearish. And so suddenly you start to see a reversal. So these kind of things are interesting. But my big discovery, and why I really started loading up on Ethereum, was another chart, which was a understanding that Metcalfe’s Law was the primary driver of all crypto markets. And in fact, almost all of the tech stocks that we’ve known today. And once you realize that these are basically networks, and once you realize that crypto are networks where you actually own the network. So Facebook is a great network stock, and it works perfectly on a log chart, and it’s an exponential, does all the things as you imagine. You can value it in Metcalfe’s Law terms, but the fundamental difference is shareholders and network users are not aligned. The shareholders make the money, the network users get the utility. Along comes crypto, you marry the the network user with the owner. Okay, now you’ve got network effects upon network effects. This is like behavioral economics, manner from heaven. Right. It’s like religion meets Metcalfe’s Law, right? It’s like, now I have a, now I’m tribal about the thing. It’s religion meets capitalism. That’s basically what it is, right? So that is incredibly powerful. So I start looking at the fact that Bitcoin and Ethereum charts just at different points when they at the same point in the adoption cycle were remarkably similar. And then it dawned on me, it’s they’re all the bloody same thing. They’re all about adoption. So then, so so if you look at it and if you’re honest with yourself, Ethereum, if you think about Metcalfe’s Law, it’s about the number of users and then the kind of connections between the users and the applications built to create those connections. Well, Bitcoin’s kind of a one-sided one, which is a bunch of people own it as a store of value, like gold. Nothing wrong with that. But there’s not many applications built in it. When you look at Ethereum, it’s like, holy shit. I mean, this is like the internet. Right. That moment is like, okay, this is far superior a bet. Um and so that’s why I took that bet and then I eventually shifted majority into Ethereum and then took other bets in the space to express macro views.
Shaan Puri: Yeah. Uh it’s funny. I I I have 1/10th of the intelligence of you, but I did the exact same pattern. So, you know, I heard about it in 2013, bought a little bit, dabbled, sold during when I, you know, I went I went to a wedding and my aunt was telling me about how great Bitcoin and Ethereum was. I was like, ah, it’s probably a bubble, 2017, 2018. Sold for a nice profit, was patting myself on the back. Uh, you know, in retrospect, worst trade I ever made. Should have just held everything. Um, you know, bought started buying back in uh in 20 20 uh 2019 or 2020, I kind of announced that I’ve uh I had moved 25% of all my liquid net worth into the thing, but that was right before, you know, another another run-up and so that became quickly 50, 60%. And um and you know, peers and some people were telling you you’re crazy. I’m sure you had the same. And same thing, you know, why are you betting on this? Are you just kind of speculating? And I said, no, like basically I spent my whole career studying the power of network effects, right? I’m trying to build marketplaces and social networks in Silicon Valley because I know that a network effect is the most powerful force imaginable. And uh and then I see this chart, this adoption chart of this new money network. It’s like, well, if this if the if the if the social network was worth X, and the information network was worth Y, and then the, you know, the merchant network, which is like, you know, basically Amazon, um was worth, you know, Z, then then this thing is going to be the money network is going to be worth a lot. I can tell you that. And so I was like, I didn’t know much more than that, but I just knew if you can bet early in a in a network effect that’s still going through its kind of like, you know, adoption curve, um you know, you’ll do pretty well. And so that was kind of my my my bet. Um coming from a complete, you know, sort of a different different take, but ended up in sort of the same conclusion. And I remember being impressed that you were talking about network effects because I didn’t really see a lot of people in kind of traditional finance talking about that at all. And I was like, they’re missing the point, you know.
Raoul Pal: I think I was really one of the first people to really start saying, unless you understand network effects, you don’t understand what this is at all. Because everyone was arguing on weird things.
Shaan Puri: Because people people listening maybe don’t know network effects. So so to to define it, network effects just describes this phenomenon where uh let’s just take, you know, a language. If I’m the only person who speaks English, English is not very useful. Same thing with a telephone system. If I’m the only person with a telephone, it’s not that useful. But now another person gets a telephone or learns English, well, English just got more valuable. And then the more people that learn English, the more valuable English is as a language. And so it’s describes this phenomenon that every participant that joins the network makes the whole network more valuable. So it’s like the opposite of like a popular nightclub where everybody who joins makes the thing sort of, you know, diminishes the popularity over time. Network effects typically describe that they they get more valuable at a square basically as an exponential, not linear.
Raoul Pal: And then if you think about it in other terms, is let’s say, let’s say let’s look at Web3 as a network and a network of engineers, engineering talent, right? This is where where it gets really interesting. Why is it exponential? It’s because there are parts when everybody’s trying to hire Web3 talent, right? We are, every single person I know is, right? And the actual pool of people who are capable of doing it is probably like a thousand. Right. And they’re all multi-millionaires who don’t want jobs. That’s the point. Is their salaries and the demand for them is exponential. The demand for the network of those guys becomes exponential. Over time, there’ll be millions of trained people and it becomes the network effects. The overall space is very valuable, but the opportunity, that ramp, that’s the single most important interesting part of network effects. Right. And the fact that you can own a share of the network. So even when the network flattens out and is now worth, I think $200 trillion dollars for the digital asset space, it’s currently $2 trillion dollars. That’s a 100X in market cap. That’s huge. We’ve never had anything like this before.
Shaan Puri: Right. Like when the when the first when the information network was getting built out, which is just the internet, and it was pretty clear like slowly but surely people were adopting, they were getting online and then stuff was getting built, stuff to do and then everybody who was online made made being online better because you could communicate with them or they might write a blog or whatever. The whole internet was getting better the more people that joined, right? That was a network effect. But you couldn’t invest in the internet. Like you couldn’t just invest in generically the internet. And so you had to pick, you know, certain platforms and even then, how how do you become an let’s say you believed in Amazon or eBay or whatever, you’re only getting a slice of the total internet and even then, they don’t want, you know, the average person could not invest.
Raoul Pal: And that to me, it feels like NFTs right now. We want to all get involved in NFTs. You have no idea what’s going to win. I mean, I mean, you don’t have the ability to go on every Discord. So it’s bandwidth constrained. We all are in this space. We know it’s huge. We all know it’s huge. We also know it’s a bubble. We also know tons of this is going to zero. Um that fit What’s interesting about this Only ETH gives you the gives you the action of of NFTs. That’s the kind of, you know, that that kind of makes sense, like owning Oracle did a pretty good job of capturing the internet. Right. And so you’ve been now kind of following this and so what what what what is what is a viewpoint you had about crypto that you have changed your mind on or you what you believed before, now you realize it’s sort of wrong and you you think about it in different ways. Is there any has it been anything as this kind of, you know, it’s kind of like this rapidly evolving thing. You’re sort of like defogging this like brand new world. You know, so, you know, maybe some mental picture, you some mental framework you had before hasn’t really held up and maybe something different has happened. Can you think of an example of that?
Raoul Pal: Well, my views on Bitcoin changed um significantly. I don’t think, you know, no less of it as an asset, but I thought about it in network terms and the community and I thought the community is not attracting new people. And the job of a network is to attract new participants. And if the network was actively rejecting people, I thought it was going to underperform. Um which was surprising to me because I was very bullish on Bitcoin first because I thought, look, it’s going to have a larger place. And what’s happened is almost immediately, and it made me change my mind, is the institutions started going, well, I actually don’t like this space. And they started buying ETH. And that was so that’s that’s new. I haven’t really heard that. So tell me about because you’re connected to all these folks, right? Like you know Yeah. Hedge fund guys, CIOs, what you know a bunch of different people in that world. They don’t want to own an asset where everyone’s shouting, have fun, stay poor at each other and putting laser eyes. Right. It makes them look fucking stupid and irresponsible with their money. Well, ETH feels like it’s a technology play. Yes, it’s amusing because everyone’s saying GM to each other and all of this stuff, but it’s not at war. While Bitcoin was at war with every other network, because, you know, that’s what networks do, you know, religions go to war with each other for the same reason, right? They’re exactly the same principles. Um so, you know, it’s the same reason Russia and NATO. I mean, it’s they’re all the same. They’re all networks fighting each other for the robustness of their own network. I get it. So that that that whole process of seeing institutions getting turned off by it was a was a big deal to me. I just thought, yeah, I don’t like this either. So that was one thing. Um I’m trying to think Well, on that point, you you’ve seen a lot of news about institutions buying Bitcoin, whether it’s Tesla or MicroStrategy or Square or, you know, some like, you know, random insurance company buys $100 million worth of Bitcoin. So we’ve kind of heard those. We hear less of that with ETH. Is it just going on under the radar? Is it coming? What’s your sense of that? Because I haven’t I’m in this space and I haven’t heard a ton. It’s happening um below the radar because people keep coming to me saying, when’s this wall of money? I’m like, it doesn’t come as a tidal wave. It comes as a flow. Right? You don’t see it until you look back and go, wow. So I mean, I literally every other day I’m speaking to the world’s largest financial institutions who put me in front of their investment committees and talk them through crypto and how to invest. And the narrative change, it really surprised me. It was always Bitcoin, you know, can we put Bitcoin on our balance sheet? How should we invest in Bitcoin? What’s the diversification? Move very quick to, look, Ethereum feels like it’s a technology play that makes sense with the applications. We can’t we’re interested in DeFi, etc. Then it very quickly became, oh shit, how do we get involved in Web3? Um so it moved very fast, which is why in the NVC got most of the money, um because they saw the broader opportunity. They all came through the the 2020 lens of Bitcoin is the asset and you know, the the Michael Saylor route and even me, you know, in the earlier part of 2020, a lot of people came in that. And then like all of us, they kind of go, oh wow, okay, this is much bigger. So, you know, I’ve started a fund of hedge funds, um which is invest in in crypto hedge funds to allow institutions another way into the market because they don’t really want to buy just ETH or Bitcoin. They want exposure to this $2 trillion asset class that’s going to go to $200 trillion over the next 10, 12, 15 years, whatever the number is. So hedge funds are pretty good for that because they’re their job is to manage the exposure and and to capture the to capture this big move. So, you know, that’s another way that it’s coming in that people don’t see.