What I Think of Bitcoin

JANUARY 28, 2021

RAY DALIO

© 2021 Bridgewater Associates, LP

I
am writing this to clarify what I think of Bitcoin. Please pay attention to
what I am saying here and not what those in the media are saying I said
because this is reliable. I am finding that those who want to promote
Bitcoin (which is most people) are characterizing it one way while those
who are against it (which are a few scared souls cowering in a corner)
are characterizing it another way. As with most things I comment on, the
reality has pros and cons and I am trying to be as accurate as possible to
communicate what I understand these to be.
To reiterate, as I am not a Bitcoin/cryptocurrency expert, I believe my views are not valuable enough to be
relied on so I shouldn’t put them out. I know how much one needs to know in order to have a valuable opinion
in the markets, so I wouldn’t bet on my own views. Still, people demand my non-expert assessment of Bitcoin
and clarifications in my own words are better than distortions in the media so here it goes, presented with
the warning not to rely on it. The only thing I ask of you is that you read what I wrote here rather than pay
attention to the sound bites in the media.

I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is
programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as
both a type of money and a storehold of wealth is an amazing accomplishment. That, like creating the existing
credit-based monetary system, is of course a type of alchemy—i.e., making money out of little or nothing. It, like
the making of credit that made bankers rich starting with the Medicis around 1350, is making its inventors and
those who got in on it early very rich and has the potential to make many more people very rich and to disrupt
the existing monetary system. Those who have built it and supported the dream of making this new kind of
money a reality have done a fabulous job of sustaining that dream and moving Bitcoin (by which I mean it and
its analogous competitors) into being an alternative gold-like asset.

There aren’t many alternative gold-like assets at this time of rising need for them (because of all the debt and
money creations that are underway and will happen in the future). Because of what is going on in the world,
besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is
also a growing need for assets that can be privately held. Because there aren’t many of these gold-like storehold
of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there
exists the possibility that Bitcoin and its competitors can fill that growing need. It seems to me that Bitcoin has
succeeded in crossing the line from being a highly speculative idea that could well not be around in short order
to probably being around and probably having some value in the future. The big questions to me are what can it
realistically be used for and what amount of demand will it have. Since the supply is known, one has to estimate
the demand to estimate its price.

I should clarify what I said about its supply. Although Bitcoin is limited in supply, digital currencies are not
limited in supply because new ones have come along and will continue to come along to compete so the supply
of Bitcoin-like assets should, and competition will, play a role in determining Bitcoin and other cryptocurrency
prices. In fact I assume that better ones will come along and displace this one because that is the way the
evolution of everything works—i.e., new ways of doing things and new things always have and always will
replace old ways of doing things and old things. Since the way Bitcoin works is fixed, it won’t be able to evolve
and I presume that a better alternative will be invented and pass it by. I see that as a risk. For those reasons
the “limited supply” argument isn’t as true as it might appear—e.g., if Blackberries were in limited supply they
still wouldn’t be worth much because they were replaced by competitors that were more advanced. I still don’t
know the answer to why that isn’t a risk, but I would welcome my naïveté being corrected.

At the same time I greatly admire how Bitcoin has stood the test of 10 years of time, not only in this regard but
also in how its technology has been working so well and has not been hacked. Still, to one holding digital/cyber
assets at a time when cyber offense is much more powerful than cyber defense, the cyber risk is a risk that I
can’t ignore. When the Department of Defense can’t protect its systems from being hacked it would be naïve

© 2021 Bridgewater Associates, LP 2

to be totally comfortable that digital assets can’t be hacked, which is one of the advantages of gold-like assets
and is one of the risks of all financial assets. In fact I think that there is a good chance that someday we will
see the financial system, which consists mostly of digits, be shown to be more vulnerable to disruption and/or
to cyber blackmail than is now recognized. By the way, these things are now happening at a growing rate and
can threaten the value of traditional financial assets. I am pointing out to you this warning to take or leave as
you like. While I recognize that Bitcoin can be held offline via “cold storage,” I understand it is difficult to do
and that very few people actually do it. So, by and large, my understanding is that, by Bitcoin being digital and
connected, it is not protected against cyber risks to my satisfaction. I look forward to being corrected.

As an extension of Bitcoin1 being digital are the questions of how private it is and what the government will
allow and not allow it to be. Regarding privacy, it appears that Bitcoin will unlikely be as private as some people
surmise. It is, after all, a public ledger and a material amount of Bitcoin is held in a non-private manner. If the
government (and perhaps hackers) want to see who has what, I doubt that privacy could be protected. Also,
it appears to me that if the government wanted to get rid of its use, most of those who are using it wouldn’t
be able to use it so the demand for it would plunge. Rather than it being far-fetched that the government
would invade the privacy and/or prevent the use of Bitcoin (and its competitors) it seems to me that the more
successful it is the more likely these possibilities would be. Starting with the formation of the first central bank
(the Bank of England in 1694), for good logical reasons governments wanted control over money and they
protected their abilities to have the only monies and credit within their borders. When I a) put myself in the
shoes of government officials, b) see their actions, and c) hear what they say, it is hard for me to imagine that
they would allow Bitcoin (or gold) to be an obviously better choice than the money and credit that they are
producing. I suspect that Bitcoin’s biggest risk is being successful, because if it’s successful, the government
will try to kill it and they have a lot of power to succeed.

As far as the supply/demand picture is concerned, while the supply is known the long-term demand over the
relevant long-term time horizon (because this is a long-duration asset) is tough to know, largely for reasons I
mentioned. For example, since I view Bitcoin as being a gold-like alternative asset, I asked Rebecca Patterson
and others at Bridgewater to do some calculations to calculate what if the value of private holdings of gold
and then take percentages of those holdings and assume they were shifted to Bitcoin to diversify that type of
holding. By way of example, what if 10% or 20% or 30 or 40 or 50% of private holdings of gold were shifted to
Bitcoin to diversify holdings, or what if 10 or 20 percent of those who built Bitcoin and got on its wagon wanted
to diversify into other assets like gold and stocks, or what if the government wanted to prohibit its use, or what
if etc… what would these scenarios look like? They paint a picture that is highly uncertain. (You can read the
full report below). That is why to me Bitcoin looks like a long-duration option on a highly unknown future that
I could put an amount of money in that I wouldn’t mind losing about 80% of.

That is what Bitcoin looks like to this non-expert. I am eager to be corrected and learn more. On the other
hand, believe me when I tell you that I and my colleagues at Bridgewater are intently focusing on alternative
storehold of wealth assets.

1
When I use “Bitcoin” please take that to mean Bitcoin and its analogous competitors.

© 2021 Bridgewater Associates, LP 3

A Look at the Path for Bitcoin If It Is to Become an
Alternative Storehold of Wealth
REBECCA PATTERSON
DINA TSARAPKINA
ROSS TAN
KHIA KURTENBACH

With most central banks around the world acting to depreciate their currencies at a time when bond yields
are already converging to zero, it’s reasonable to look for alternative storeholds of wealth. Bitcoin, by far the
leader among cryptocurrencies, has gotten the lion’s share of attention here as it has skyrocketed in value—
appreciating nearly 200% just since October to more than $40,000 per bitcoin before settling at current prices
around $30,000. Bitcoin offers some attractive attributes, such as limited supply and global exchangeability,
and is evolving quickly. For now, though, we do not see it as a viable storehold of wealth for large institutional
investors, thanks mainly to a high degree of volatility, regulatory uncertainty, and operational constraints.
Rather, we see it as more like buying an option on potential “digital gold”—it has a wide cone of outcomes, with
one path leading to it becoming a true institutionally accepted alternative storehold of wealth.

When we examine Bitcoin, we believe it shares some but not yet all of the qualities we would consider necessary
to act as a storehold of wealth. Certainly, Bitcoin has merit: similar to gold, it cannot be devalued by central bank
printing and its total supply is limited. Further, it is easily portable and exchangeable globally, especially for
individuals. It also has the potential to provide diversification, though to date this is more theoretical than realized.

At the same time, Bitcoin faces challenges that at least for now could slow broader adoption by institutional
investors. We’d highlight three in particular:

• Bitcoin remains an extremely volatile asset, and its future purchasing power remains a fundamentally
speculative proposition. Compared to established storeholds of wealth, such as gold, real estate, or
safe-haven fiat currencies, Bitcoin faces a much wider range of outcomes in terms of its future value.

• Bitcoin still faces meaningful regulatory tail risks and lacks any of the underlying government backing
or deep history that would provide a more fundamental baseline of future demand. While greater
regulation might help Bitcoin gain broader institutional acceptance, it could also trigger selling by some
of its largest existing owners who prioritize a lack of public oversight around the asset.

• While there have been improvements, current levels of liquidity still constitute real structural
challenges to holding Bitcoin for large traditional institutions such as Bridgewater and its clients.

© 2021 Bridgewater Associates, LP 4

Looking ahead, it’s reasonable to expect the infrastructure around Bitcoin and cryptocurrencies more generally
will continue to evolve and mature. In addition, the new paradigm that we are living in, with many government
bonds no longer offering the same return or diversification characteristics and currencies facing greater risk of
depreciation, could propel development of alternative storeholds of wealth faster than might otherwise have
been the case. At this point, though, we want to be balanced in our outlook given the number of factors that will
shape Bitcoin’s future—which, for now at least, we would not predict with confidence.
Bitcoin Market Cap as % of Total Gold Outstanding
5.0%
4.5%
While Bitcoin's market cap has 4.0%
soared recently, it remains a
small fraction of the total amount 3.5%
of gold outstanding (~$13 tln,
including jewelry and misc) 3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2016 2017 2018 2019 2020 2021

The rest of this research provides thoughts on Bitcoin from three perspectives:

• Its place among cryptocurrencies and factors driving its recent rally,

• Attributes that support a case for Bitcoin to become a storehold of wealth, and

• Questions and challenges for Bitcoin in thinking about its future.

We appreciate that there is a lot of detail here. For those who just want the highlights, we would recommend
skimming the bolded text and taking note of the exhibits.

© 2021 Bridgewater Associates, LP 5

Bitcoin’s Dramatic Rally Is Reigniting Discussion Around Its Viability as a
Storehold of Wealth
After seeing its price surge by 400% in 2020, Bitcoin is once again attracting attention, fueled in no small part
by what many perceive to be its potential to serve as “digital gold”—an alternative store of value and potential
inflation hedge for portfolios. While there are a multitude of cryptocurrencies out there now, we are focusing
on Bitcoin as it has dominant market- and mind-share around the discussion of a potential “digital gold.”

In the previous 2017 rally, while Bitcoin still enjoyed a heavy amount of direct speculative interest, it saw
lower returns and its share of the total cryptocurrency market fell sharply, as a large portion of the overall
speculative fervor was captured by a wave of ICOs (initial coin offerings), where speculators bought into new
cryptocurrency tokens offered by infant companies promising revolutionary new decentralized technologies
and business models. In contrast, in the recent run-up through 2019 and up to the end of 2020, Bitcoin
outperformed other cryptocurrencies, with its market share now back to its highest levels since early 2017.
The growing interest in the idea of Bitcoin as a “digital gold” seems, based on conversations we have had with
leading cryptocurrency market participants and service providers, to be a key driver of these trends.

Share of Total Market Outstanding

Bitcoin Ethereum Other Major Cryptocurrencies ex-Stablecoins
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2016 2017 2018 2019 2020 2021

Monthly Prices Indexed to Jan '17 Monthly Prices Indexed to Jan '19
Bitcoin Ethereum Ripple Litecoin
14,000% 900%

12,000% Bitcoin playing

700% larger role among
10,000% cryptocurrencies
in latest rally
8,000% 500%
6,000%

4,000% 300%

2,000%
100%
0%

-2,000% -100%
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20

© 2021 Bridgewater Associates, LP 6

Finite Supply Makes Bitcoin Especially Attractive at a Time When Central Banks
Are Printing Aggressively
Similar to gold, Bitcoin has limited usage as a medium for directly exchanging goods and services. Also
like gold, however, Bitcoin offers stable and limited issuance that cannot be devalued by central bank
printing. Bitcoin has a hard-coded total supply of 21 million bitcoins, with an issuance rate that automatically
halves every few years. It is this feature of Bitcoin that has mainly driven the “digital gold” narrative. As shown
below, while Bitcoin’s issuance rate for its first couple of years was initially much higher, its rate of supply
growth is now lower than gold’s.

Increase in Total Supply as % Current Supply

Gold BTC
4.0%

3.5% 90% of the total

Bitcoin supply
3.0% (21 million
coins) has
2.5%
already been
2.0% mined, and the
mining rate will
1.5% continue to slow
such that the
1.0% total will never
be reached
0.5%

0.0%
2010 2012 2014 2016 2018 2020

Bitcoin may look especially attractive to some investors now for the same reasons that gold has been
supported in the last few years. Neither gold nor Bitcoin pay a yield on an outright basis, but this
matters little when yields on other assets have collapsed. And gold is one of the few assets that can do well
in stagflation, an outcome likely enough that it should be considered and planned for. Moreover, in the context
of high and potentially rising levels of external and internal conflict, gold has the added benefit of not being
tied to the outcomes of any one country. If one were to truly accept the idea of Bitcoin as “digital gold,” you
could imagine a conceptually similar case being made for Bitcoin too.

Percent of Global Debt in Local Currency Yielding Below 1% USA Real Yield
100% 5%
90%
4%
80%
70% 3%

60%
2%
50%
1%
40%
30% 0%
20%
-1%
10%
0% -2%
10 12 14 16 18 20 20 30 40 50 60 70 80 90 00 10 20

© 2021 Bridgewater Associates, LP 7

Bitcoin Is Globally Accessible and Easily Portable-Useful Attributes for a
Storehold of Wealth
Of course, mere scarcity is not sufficient in and of itself to drive demand for an asset and sustain it as a viable
store of value. Indeed, there are other cryptocurrencies that may have similar features to Bitcoin and could
also conceptually compete as an alternative “digital gold.” However, Bitcoin’s relatively longer history, much
larger size, and wider awareness and acceptance have given it a clear advantage, at least so far. For instance,
Bitcoin has significantly outperformed Bitcoin Cash, Litecoin, and Monero—other major cryptocurrencies
with similar technical features to Bitcoin in terms of having a fixed total supply and an emphasis on ideas
of “sound money.” There has also been a strong rise in the use of stablecoins, collateralized cryptocurrency
tokens which are pegged, mostly to the dollar. However, stablecoins, by nature of being pegged, are not really
an alternative storehold of wealth—instead they are just a new form of digital dollars.

Finally, beyond being able to retain its purchasing power through time, a good storehold of wealth also
needs to be easily exchangeable and accessible (both now and in the future). Compared to some other
traditional storeholds of wealth such as gold, art, and real estate, Bitcoin is much more easily exchangeable,
especially for individual holders. Indeed, given its digital nature, Bitcoin might be the most portable
storehold of wealth, much more so than physical cash. And, in terms of its geographic reach, with the global
proliferation of Bitcoin exchange services, you can relatively easily cash out Bitcoin in most places around the
world, although it is still much easier to convert USD into local currencies (apart from capital controls).

Countries with X# of Bitcoin ATMS

1–9

10–24

80+ countries have at least 1 Bitcoin ATM

25–49

50–99

100+

0 10 20 30 40 50 60
Source: CoinATMRadar

Crypto Volume by Region

Crypto to Fiat Volume Share (12mma) Japan Europe Hong Kong Other
USD EUR JPY Other US South Korea China
100% 1.0 Note that China
was a big player
pre-2017; however,
80% given that Chinese
onshore exchanges
Largest share of were notorious
crypto inflows 60%
for fake volume
and outflows 0.5 and many
are in USD, but participants were
40%
trading is global accessing through
non-conventional
20% channels, these
volumes are hard
to identify and not
0% 0.0 shown on the chart.
12 14 16 18 20 12 14 16 18 20
Source: Coinmetrics

© 2021 Bridgewater Associates, LP 8

It Remains Unclear If Bitcoin Will Provide Diversification When Portfolios
Need It Most
With just over a decade in existence, there is not enough evidence to credibly conclude that Bitcoin, like
gold, will reliably offer portfolio diversification in the future. That said, we have still looked at available
data to see how Bitcoin would have worked both to hedge against inflation and to offset portfolio drawdowns.
As shown below, this year, Bitcoin has generally appreciated alongside rising inflation expectations, but its
longer-term historical relationships with inflation and gold have been relatively weak.

Rolling Correlation of Bitcoin to Gold and Inflation Expectations

BEI Gold
30%

Correlations with gold and inflation expectations

have not been consistent thus far 20%

10%

0%

-10%

-20%

-30%

-40%
2014 2015 2016 2017 2018 2019 2020 2021

Separately, the charts below show how gold has reliably acted over time to support returns during periods when
60/40 portfolios were otherwise suffering drawdowns. We have zoomed in to overlay Bitcoin’s performance
in similar drawdown periods since its inception in 2009. We hesitate to draw any firm conclusions with such
a small sample size and given how quickly the cryptocurrency world is evolving. So far, Bitcoin’s ability to
offer some diversification benefit seems more theoretical than realized.

Gold and Bitcoin Returns During 60/40 Drawdowns (Global, USD Hedged)
Bitcoin Returns Gold Returns 60/40 Drawdowns
Since 1920 Since 2000
100% 200%

75% 150%
It’s early to
Gold has reliably 50% 100% conclude
supported returns whether Bitcoin
when portfolios will provide
were otherwise 25% 50% the same degree
suffering of diversification
drawdowns 0% 0% benefit in the
future
-25% -50%

-50% -100%
20 30 40 50 60 70 80 90 00 10 20 00 03 06 09 12 15 18 21

© 2021 Bridgewater Associates, LP 9

Bitcoin Institutional Acceptance Slowed by Volatility, Regulatory Uncertainty,
and Still-Immature Infrastructure
If a fundamental purpose of a storehold of wealth is to preserve or increase one’s purchasing power
over time, we think Bitcoin feels more like an option—it remains a highly volatile and speculative
asset. Compared to established stores of value, Bitcoin is not yet widely used as a savings vehicle or
reserve asset, with no meaningful participation yet by governments or the largest global institutional
allocators. Even looking at the recent increase in private institutional participation, a large share still appears
to be using Bitcoin for shorter-term speculative trading, rather than as an actual longer-term savings vehicle.

While it is hard to ascertain directly, the charts below show two proxies for the share of Bitcoin used as savings;
specifically, the share of Bitcoin in accumulation accounts, and accounts more than 5 years old. Accumulation
accounts are accounts that have only purchased Bitcoin and not yet sold any, while “last active” coins are a
mix of long-term investors and coins that are likely lost. We see that while long-only players have increased
since 2018, their total share remains small (~15%). And, while a decent chunk of bitcoins has not moved in 5+
years (>20%), the majority of supply still looks to be in active or semi-active circulation (suggestive of more
speculative trading).

Share of BTC in Accumulation Accounts Share of BTC Last Active 5+ Years Ago
30% 25%

25%
20% While some
Bitcoin may be
20% held as long-term
15% savings, evidence
15% so far suggests
this is only a small
10%
part of the overall
10%
market: only
5% about a quarter of
5% bitcoins have not
moved in 5+ years
0% 0% of circulation
09 11 13 15 17 19 21 09 11 13 15 17 19 21
Source: Glassnode

© 2021 Bridgewater Associates, LP 10

Another way we try to ascertain why Bitcoin is held—whether as a storehold of wealth or for more
speculative purposes—is to look at turnover. Bitcoin’s high turnover compared to gold could reflect its
relatively more speculative nature. Turnover as a percent of total outstanding is tiny for gold in comparison to
Bitcoin, in part as central banks around the world hold a large share of total gold supply as a long-term store of
value in their reserves. On the other hand, Bitcoin volumes have exploded in recent years, due to the emergence
of high-frequency traders, a booming derivatives market, and a surge of new coins that trade against Bitcoin.
This, combined with questionable volume data reported by unregulated exchanges, creates the illusion of
increased liquidity. In reality, this liquidity is much more representative of high churn and speculative trading
rather than longer-term risk taking.
Total BTC Turnover vs Gold (Avg Daily, % Amount Outstanding)
BTC Gold
60%

50%

40%

Increased high-frequency trading and poor reporting

standards have led to an explosion of reported 30%
exchange volumes for Bitcoin

20%

10%

0%
2010 2012 2014 2016 2018 2020

Indeed, the speculative interest in Bitcoin in recent months has increasingly exhibited some classic dynamics
of an asset bubble. For example, Bitcoin options are currently pricing a very wide and highly optimistic cone
of outcomes for future returns. Discounting very rapid future price appreciation is classic bubble behavior,
as we have written about in prior research, and further illustrates how highly speculative the Bitcoin market
remains. Further, while this current rally has so far seen less of the frothy, often excessively leveraged, retail
buying that characterized 2017’s cryptocurrency bubble, retail interest in Bitcoin has started surging again.
Rising margin borrowing rates across the main Bitcoin trading platforms also indicate that leveraged buying
is accelerating. The strong discounting of future rapid price appreciation, broad bullish sentiment, and rising
leverage are all indications of bubble risk, though as we have written before, bubble dynamics can persist for
extended periods.

June 2021 Option-Implied BTC Price,

Percentiles Retail Interest in Bitcoin
90th 50th 10th Google Searches for Bitcoin Bitcoin
$100,000 $40,000

$80,000
$30,000
Bitcoin options are Signs of retail
currently pricing $60,000 interest recently
a very wide cone skyrocketing,
of outcomes $20,000 although still
$40,000 below 2017
levels
$10,000
$20,000

$0 $0
Sep-20 Oct-20 Nov-20 Dec-20 15 16 17 18 19 20
Source: Skew.com (left), Google (right)

© 2021 Bridgewater Associates, LP 11

All of the above factors result in Bitcoin’s price volatility being significantly higher than other risky financial
assets, like equities and commodities, let alone traditional storeholds of wealth, like gold. At many points
already in Bitcoin’s short history, a very large share of total bitcoins have been held at a loss. While there
are also times in which the vast majority of bitcoins are held at a profit (as is the case today), sometimes
by a significant amount, it is much more important for a storehold of wealth to confidently mitigate against
downside risks than to possess speculative upside potential. Again, this reflects the option-like characteristics
of Bitcoin today.

Rolling Monthly Volatility of Returns

Gold USA Govt Bonds
USA Equities Bitcoin % BTC Supply Held in Loss
30% 100%
90% While to date
25% Bitcoin has been
80%
more volatile than
Bitcoin is far 70% other storeholds
more volatile 20%
60% of wealth, a
broader range of
15% 50% investors with
40% different goals
10% and greater
30% liquidity could
20% pull vol lower in
5% the future.
10%
0% 0%
15 16 17 18 19 20 21 10 12 14 16 18 20
Source: (right) Glassnode

While Bitcoin’s realized volatility since inception is higher than what most would consider an established
storehold of wealth, we know this could change materially over time. As we have seen in other markets’
evolutions, greater usage by a broader set of investors with different goals and time horizons could pull
volatility lower.

Regulatory Outlook for Bitcoin Highly Uncertain; Creates Two-Way Risk

Perhaps more than anything else, Bitcoin’s future adoption by large institutional investors will hinge
on regulation. Do policy makers create a regulatory environment that helps garner trust in the asset for some
while making it less attractive for others? Do they ban Bitcoin outright? While we do not know how this will
evolve, we do know (a) that it is a growing policy maker focus and (b) that there are different paths that could
be taken.

On the first point, just this month, European Central Bank President Christine Lagarde noted about Bitcoin that:

“It’s a highly speculative asset, which has conducted some funny business and some interesting and totally
reprehensible money laundering activity…There has to be regulations…It’s a matter that needs to be
agreed at a global level, because if there is an escape, that escape will be used.”

Similarly, Janet Yellen, during confirmation hearings in mid-January to be US Treasury Secretary, noted that
“cryptocurrencies are a particular concern” when it comes to terrorism financing: “We really need to examine ways
in which we can curtail their use and make sure that money laundering doesn’t occur through those channels.”

© 2021 Bridgewater Associates, LP 12

There are two main regulatory paths we think are more likely to play out in the year and years ahead.
Either:

• Clamping down on Bitcoin and cryptocurrency usage for fear it could undermine traditional
fiat currencies that cuts off further development of this asset in its current form, or

• Creating a regulatory environment that engenders more trust in the asset longer-term but
could lead to heightened volatility along the way.

Both paths, in our view, suggest the Bitcoin price roller-coaster ride could continue for some time.

We can see an example of the more restrictive path in China. In September 2017, Chinese authorities imposed
a ban on initial coin offerings, a cryptocurrency-based fundraising process, and termed ICOs illegal, triggering
an instant 8% decline in Bitcoin prices. A similar ban seems relatively less likely in the US but is technically
possible. Given that most Bitcoin purchasers rely on wire transfers and bank debit to move money in and out
of Bitcoin exchanges, the US could for all practical purposes make it impossible for US investors to purchase
Bitcoin. Our main concern here would be that if there is a future proliferation of central bank digital currencies
to serve as officially sanctioned digital storeholds of wealth, governments may prefer to limit the competition
posed by Bitcoin as a non-governmental alternative.

Impacts of Regulatory Announcements on Bitcoin’s Price (USD)

$8,000 $46,000
US Treasury Secretary
Janet Yellen warns $41,000
$7,000 about the illicit use of
CHN media reports cryptocurrencies $36,000
CHN govt on potential BTC Bitcoin remains
announces commercial $6,000 sensitive to
$31,000
ban on ICOs trading ban US Treasury regulatory
$5,000 rumored to attempt $26,000 developments,
to track private even those far
crypto wallets $21,000 short of an
$4,000
outright ban
$16,000
$3,000
$11,000

$2,000 $6,000
Aug-17 Sep-17 Oct-17 Nov-17 Sep-20 Nov-20 Jan-21

Even short of an admittedly unlikely full ban, there are still many potential regulatory developments that could
meaningfully hurt Bitcoin’s adoption and market value. The overall US regulatory direction over the past years
could be characterized as one of increased acceptance toward blockchain technology and cryptocurrency in
areas that are viewed as non-threatening and easily regulated, but with notably increased clampdowns against
areas perceived as supporting illicit activity and/or subverting existing regulatory structures.

As an illustration of this dynamic, the Office of the Comptroller of the Currency recently announced that
US banks could use blockchains and stablecoins to conduct payments. In contrast, a month earlier, the US
Treasury proposed rules that would impede the use of self-hosted cryptocurrency wallets and effectively ban
the use of “privacy coins” such as Monero and Zcash.

Given the unregulated “Wild West” landscape out of which the Bitcoin and cryptocurrency world proliferated,
there are other areas at risk of disruptive regulatory action. One of the most notable is the status of the largest
stablecoin, Tether (USDT). Tether is currently under investigation by the CFTC, US Department of Justice, and
New York State Attorney for issuing billions of dollars’ worth of new USDT coins that may not have been fully
backed by actual USD as claimed. If Tether were to be shut down or suffer other major regulatory punishment,
it could crash the value of all cryptocurrencies, including Bitcoin, given how interconnected the liquidity is
across cryptocurrency markets.

© 2021 Bridgewater Associates, LP 13

A second potential path, along which regulation allows for greater adoption of Bitcoin by more risk-averse
institutions, could still lead to major volatility from the largest Bitcoin holders, many of whom were early
adopters identifying strongly with the crypto-anarchic principles of Bitcoin’s pseudonymous founder,
Satoshi Nakamoto. For instance, the initial speculation around the US Treasury’s proposed self-hosted wallet
regulations triggered a meaningful Bitcoin sell-off.

Still, there is a scenario where regulation over the longer term could create some upside worth considering.
Compared to the last bull market in 2017, there looks to be greater efficiency, market liquidity, and sophistication in
trading infrastructure and custodial solutions now, enabling more institutional participation than before. We believe
this is in part thanks to regulatory changes like the acceptance of Bitcoin derivatives on traditional exchanges.

Available in… Applicable to… Instruments

Bitcoin Instruments
2017 2021 Crypto Funds Family Offices Asset Managers compliant with
regulatory
Holding Directly Yes Yes Yes No No requirements have
Derivatives in Crypto Exchanges Yes Yes Yes No No emerged over the
past few years,
Derivatives in Traditional Exchanges No Yes Yes Yes Yes enabling registered
Custodians No Yes Yes Yes Yes investment firms
to participate in
Publicly Traded Passthroughs No Yes Yes Yes No the market with
Traditional ETFs No No Yes Yes Yes fewer barriers

As an outcome of this, recent inflows into Bitcoin have been driven by larger transaction sizes than was the
case in 2017, when smaller retail flows dominated. It is worth noting, though, that the extent of institutional
participation is still mostly at the level of smaller corporates, hedge funds, and family offices, rather than the
larger, traditional institutional allocators, where the market size in relevant instruments remains small.

BTC Spot Holding Breakdown

Lost Coins Wallets Estimated Institutional Holdings as % of BTC Supply
Exchanges Estimated Custody Spot CME Futures
100% 12%
90%
80% 10%

The majority 70% While growing,

8%
of institutional 60% futures are still
holdings are a tiny instrument
50% 6%
custodial, given for gaining
regulatory 40% Bitcoin exposure
requirements. 30% 4% for institutional
players.
20%
2%
10%
0% 0%
13 15 17 19 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
Source: Derived from concepts from Glassnode (right)

In a best-case scenario, a maturation of crypto regulation that provides assurances around Bitcoin and
greater means to access the asset (such as a Bitcoin ETF) could encourage large institutions to increase
their exposure. We wanted to get a sense of what such a shift into Bitcoin might look like—for example, if
investors moved some portion of their gold holdings into the cryptocurrency. The table below, which is meant
only to be illustrative and is clearly very simple, estimates a Bitcoin price if a certain amount of private gold
savings (i.e., not including central banks) were to diversify into Bitcoin. More specifically, in the bottom row in
the table, we assume half of the combined market cap of Bitcoin and privately held gold savings is allocated to
Bitcoin. Combined, that would be roughly $1.6 trillion allocated across all bitcoins that have ever been mined.
Such a shift from gold, diversifying into Bitcoin, could in theory raise the Bitcoin price by at least 160%.

© 2021 Bridgewater Associates, LP 14

 Hypothetical Bitcoin Price if Private Holders Allocate X%
of Current Gold and Bitcoin Holdings to Bitcoin
BTC Share of Current BTC Mkt Cap BTC Price BTC Price Chg Status quo case —
Gold and BTC Holdings (USD, Mln) (Mkt Cap/BTC Supply) Bitcoin’s market cap is
currently just under 20%
20% $632,000 $34,000 10%
of gold’s privately held
30% $948,000 $51,000 60% market cap, so the
Bitcoin price impact of a
40% $1,264,000 $68,000 110%
rise to 20% would be
50% $1,580,000 $85,000 160% very modest
Assumes a combined gold and BTC market cap of $3.2tln, with $2.56tln in private gold holdings, (ETFs,
gold bars) and $0.6tln in BTC holdings, and that BTC supply is equal to the total number of coins mined.
Of course, this calculation assumes there are no issues with liquidity or reflexivity. In reality, our
estimates above could prove conservative, as flows of this size could lead to a supply squeeze and
reflexivity that drives the actual price of Bitcoin even higher. Again, they are meant more to illustrate a
possible dynamic than to suggest any specific forecast. There is clearly much that could influence future
price trends of Bitcoin that we might not yet see. For instance, we do not know at what point central banks
might consider shifting any of their gold exposure to Bitcoin, or how regulators might respond to these
sorts of hypothetical developments in the Bitcoin price.

Structural and Operational Challenges Remain for Large Institutions That

Want to Hold Bitcoin
In addition to these potential future regulatory developments, broader Bitcoin adoption is also
challenged by lack of sufficient regulatory clarity around operational issues and questions around
future resiliency. On the former, while we won’t go into all the details here, to give just one example,
institutions have different and generally higher custody requirements; Bitcoin is a bearer asset (i.e., ownership
is determined by possession of a private key alone), raising safeguarding and insurance considerations for
institutional asset managers. At this point, custody for digital assets is still typically more expensive than
for traditional equities, rules for qualified custodians are still being rolled out by regulatory bodies, and the
current underwriter market for custodial digital asset insurance is limited. That said, an increasing number
of institution-grade custody solutions are slowly being rolled out, and the service and pricing are likely to
continue to develop with more demand.

And for large institutions to hold Bitcoin in their portfolios, there also needs to be sufficient liquidity
for trades to be conducted in size without destabilizing the market. At this point, while Bitcoin is
becoming comparable to some of the markets that Bridgewater trades, it remains small overall despite
its liquidity being at an all-time high. We summarize some comparable markets below. For investors able
to trade the coin directly, the total market capacity is close to 10% the size of the tradable gold market, based
on our assessment of liquidity. For larger asset managers who are only able/willing to access Bitcoin through
traditional venues (i.e., derivatives, equity markets), the market size is even smaller.
Market Capacity Outstanding Cash Volume Derivatives Volume
(Indexed) (USD, Bln) (USD, Bln) (USD, Bln)
USA Equities 130.4 34,629 329 479.1
USA Bonds 100.6 6,175 264 433.6
Gold 11.4 2,894 39 65.7
Silver 3.4 120 8 20.9
Iron Ore 2.0 - - 17.6
Bitcoin 1.0 562 6 1.4
Note: Gold and silver amounts outstanding is bars, coins, recycled, and mining; Bitcoin volumes use a
conservative estimate, attempting to capture flows indicative of real liquidity

© 2021 Bridgewater Associates, LP 15

Below, we show Bitcoin volume from sources we believe are indicative of real liquidity. We see that in these
terms, turnover has mostly been flat despite the apparent boom indicated by reported exchange volumes. Given
this trend, Bitcoin’s fixed quantity, and small (albeit growing) futures market, Bitcoin’s liquidity today is mostly a
function of its price. Despite its recent growth, at its current size, a relatively small number of investors making
small shifts in asset allocations could have a big impact on the Bitcoin market. And while the gold market trumps
Bitcoin in size, the same is true for gold, which is a fraction of the size of US equities.

Volume Comparison (Avg Daily, USD, Bln)

BTC Gold
140

Even with Bitcoin volumes rising 120

(mostly as a result of higher
prices), they remain tiny
compared to gold 100

80

60

40

20

0
2010 2012 2014 2016 2018 2020
Bitcoin volumes use a conservative estimate, attempting to capture flows indicative of real liquidity
Source: Derived from concepts by Coinmetrics

Overall, it’s clear that Bitcoin has features that could make it an attractive storehold of wealth; it also has
proven resilient so far. However, we have to acknowledge that this financial vehicle is only a decade old. In
absolute terms and vis-a-vis established storeholds of wealth such as gold, how will this digital asset fare going
forward? Future challenges may still come from quantum computing, regulatory backlash, or issues we haven’t
even determined yet. Even if none of these materialize, Bitcoin, for now, feels more to us like an option on a
potential storehold of wealth.

© 2021 Bridgewater Associates, LP 16

This research is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only.
There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Additionally, Bridgewater’s actual
investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment
restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before
making any investment decision. This report is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned.

Bridgewater research utilizes data and information from public, private and internal sources, including data from actual Bridgewater trades. Sources
include the Australian Bureau of Statistics, Bloomberg Finance L.P., Capital Economics, CBRE, Inc., CEIC Data Company Ltd., Consensus Economics
Inc., Corelogic, Inc., CoStar Realty Information, Inc., CreditSights, Inc., Dealogic LLC, DTCC Data Repository (U.S.), LLC, Ecoanalitica, EPFR Global,
Eurasia Group Ltd., European Money Markets Institute – EMMI, Evercore ISI, Factset Research Systems, Inc., The Financial Times Limited, GaveKal
Research Ltd., Global Financial Data, Inc., Haver Analytics, Inc., ICE Data Derivatives, IHSMarkit, The Investment Funds Institute of Canada,
International Energy Agency, Lombard Street Research, Mergent, Inc., Metals Focus Ltd, Moody’s Analytics, Inc., MSCI, Inc., National Bureau of
Economic Research, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Renwood Realtytrac, LLC,
Rystad Energy, Inc., S&P Global Market Intelligence Inc., Sentix Gmbh, Spears & Associates, Inc., State Street Bank and Trust Company, Sun Hung
Kai Financial (UK), Refinitiv, Totem Macro, United Nations, US Department of Commerce, Wind Information (Shanghai) Co Ltd, Wood Mackenzie
Limited, World Bureau of Metal Statistics, and World Economic Forum. While we consider information from external sources to be reliable, we do
not assume responsibility for its accuracy.

The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may
have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this
report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.

© 2021 Bridgewater Associates, LP 17