Did you watch Ray Dalio’s video about the changing world order that explains the rise and fall of all the great empires over the past five hundred years? Let's see how it relates to crypto!
His ideas were mostly well-received. However, the crypto community noticed that the Bridgewater Associates founder has overlooked a ground-breaking and revolutionary technology. A technology that could change the way the world economy works. We’re talking, of course, about Bitcoin.
This is why today, we’re diving deep into Dalio’s Big Cycle and examining the ways cryptocurrencies could shatter this theory for good.
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Ray Dalio and His Non-Existent Stance on Crypto
The crypto and blockchain community is perfectly aware of the fact that crypto already plays an important role in the world economy, and in time, it will only become more significant.
Even so, we were not surprised when Ray Dalio failed to mention cryptocurrencies at any point during his Changing World Order video, even though crypto enjoyed a breakout year in 2021.
How crypto’s influence on the world economy could relegate Dalio’s Big Cycle to the trash pile of nice ideas that did not quite pan out? That’s what we are trying to uncover in this article.
But first, we need to quickly cover who Ray Dalio is and what his central ideas are. Moreover, we are going to explore why many people disagree with the idea that a repetitive and predictable cycle that explains world history exists.
Who Is Ray Dalio Anyway?
Ray Dalio is a billionaire investor and hedge fund manager best known for establishing Bridgewater Associates, which is today the largest hedge fund in the world.
Dalio stepped down as CEO of Bridgewater in 2017, and now spends his days working on various philanthropic endeavors and writing books on economics, financial markets, and investing.
In his most recent book, titled The Principles for Dealing With the Changing World Order, Dalio recalls that the events that surprised him most were those that had not happened in his lifetime.
He then claims that if he had studied the past, he would have been able to predict those events. So he examined the rise and fall of empires over several centuries to see if he could find a pattern.
Eventually, during his studies, the billionaire came across a recurring series of events. He states that those accurately foretell the ascents and descents of various empires over time, which he calls the Big Cycle. Let’s take a closer look at this term, crucial for Dalio’s theory.
The Changing World Order
It all starts with a bang…
A new empire wins an immense and dramatic battle, cementing its position on top of the New World Order and marking the beginning of Dalio’s Big Cycle.
No other country wants to challenge this newly victorious regime, and so follows a few decades of peace and prosperity, during which the empire’s citizens enjoy increased education and much-improved living standards.
The empire’s newly educated citizenry become more innovative, inventing new and exciting goods, which grows the country’s economy. Investors are encouraged by what they see, so they bet big on this territory continuing to innovate and grow.
Later, according to Dalio, the empire’s new wealth and investment inevitably lead to a financial bubble. They create a self-reinforcing wealth divide between the factory owners and their workers.
At this point, despite the bubble growing in the background, the empire’s share of global trade eventually surpasses that of all the other countries. Other states are then compelled to accept the hegemonic fiat for trade purposes, making it the global reserve currency.
As other territories stockpile the empire’s fiat as part of their cash reserves, the supreme state accumulates immense wealth in a relatively short space of time. When the empire approaches the summit of its prosperity, foreign citizens start creating cheaper versions of its key exports. It inevitably siphons off some of its trade profits.
By now, the leading country spans the entire world and is financially overstretched, spending far more on maintaining its dominance than it earns from tax revenues. Inevitably, the financial bubble bursts, forcing its central bank to print more money and devalue the currency in circulation.
Much of the population now descends into civil war over who should receive what portion of the declining wealth. The richest citizens sell their holdings and move their wealth abroad, which in turn devalues the national fiat even faster.
And, as the empire slips into a state of deep and irreversible decline, a rival emerges to replace it on top of the world order, and so begins a new Big Cycle.
Where Are We in Dalio’s Big Cycle Today?
Dalio argues that America is an empire slowly seeping into decline and that China is on its way to usurping it as the world’s foremost superpower.
He provides a number of facts to back up his claim, including these points:
- The US government is spending more than it earns from taxes, forcing the Federal Reserve to increase the dollar supply by more than 40% in just two years.
- America suffers from ferocious infighting about wealth inequality.
- The country is also involved in numerous external conflicts, and Dalio is especially concerned about the one “happening between China and the United States.”
So now that we have covered what the Big Cycle is and which stage we are in now, let’s take a quick look at some of the reasons why Dalio could be mistaken.
Dalio’s Fatalism and Fallacies
#1 It’s All a Bit Fatalist
Dalio’s idea that civilizations are destined to swing like a pendulum between war and peace or prosperity and poverty is not original. Nor is it remarkably accurate.
To suggest that any great empire must eventually fall because of an unbreakable cycle is more or less implying that it does not control its economy. Instead, fate or some other supernatural force (like the Big Cycle) does.
If Dalio is correct, the empire’s legislators, central bankers, and citizens are not really controlling their society. They are merely hamsters running on a wheel, imagining they are in control of their world.
However, most people would agree that a civilization’s fortune is not decided by fate and that a society armed with thousands of years of history can stop itself from repeating the mistakes of previous civilizations.
#2 China’s Got Problems Too
The fall of one civilization and the rise of another are crucial elements of Dalio’s Big Cycle, and the empire Dalio believes will usurp America is, of course, China.
However, despite the Celestial Empire’s admirable economic performance, there are a number of compelling reasons to think that it will not lead the new world order. For instance, because of its one-child policy, China doesn’t have the infrastructure to care for its aging population, which many predict will quieten its roaring economy.
Even if China does overtake the US as the dominant superpower, we should not just assume that countries around the world will start building yuan reserves and selling dollars overnight, especially when you consider China’s dubious human rights record.
Lastly, and perhaps most importantly, there’s the fact that China is an authoritarian state led by just one man: Xi Jinping. That is a huge problem because, while China seems politically stable now, we have to wonder: what happens when Xi Jinping dies?
There are plenty of reasons to think that China’s rise to the top of the world order is by no means guaranteed. But if this giant is not going to replace the US as the world’s number one superpower, who will? And if the red flag will not substitute the Stars and Stripes, would Dalio’s Big Cycle be broken?
But the most glaring flaw in that theory is that Dalio overlooked the most revolutionary technology of a generation: crypto.
How Could Crypto Disrupt Dalio’s Big Cycle?
Dalio claims that for an empire to reach and then stay on top of the world order, its national fiat must be accepted and used as the global reserve currency. This is because the world leader can borrow money at a far lower cost than any other country, which helps it to grow its economy faster than it otherwise could.
Today, America receives an estimated financial benefit of at least $100 billion per year because of the dollar’s global reserve status. This itself is more than the GDP of Slovakia.
Dalio suggests that, as America slips into decline, China will probably take the top spot, and the yuan is, therefore, the obvious candidate to replace the dollar.
But what if the yuan was not the next global reserve currency? What if our next reserve currency was not a fiat currency at all?
If Bitcoin were the next global reserve currency, could any country build an empire in the way that the Netherlands, Britain, and America did? Probably not.
So wouldn’t that mean the end of Dalio’s Big Cycle?
Could Bitcoin Become the World’s Reserve Currency?
If you think using Bitcoin as the next reserve currency sounds suspicious or even crazy, you should know that there’s a worldwide movement of people dedicated to promoting the idea. One of them is Brian Armstrong, Coinbase’s CEO.
Armstrong’s opinion alone probably won’t convince you, so let’s look at some of the reasons why more and more people think that Bitcoin really could be the next global reserve currency.
Firstly, cryptocurrencies are now more deeply embedded in the global economy than most people predicted they ever would be. As time goes by, they will only become a more essential element of the world’s core economic infrastructure.
Secondly, numerous large and influential financial institutions like Wells Fargo and JP Morgan are registering Bitcoin funds and advising their clients on crypto investments, which will certainly lead to more institutional demand over time.
And lastly, do you remember when El Salvador became the first country to make Bitcoin legal tender last year? Well, just a few weeks ago, an autonomous region in Portugal called Madeira also adopted Bitcoin as a de facto legal tender.
So now that you have just heard a couple of compelling reasons to think that in ten or fifteen years, Bitcoin could well become the world’s reserve currency, we now have to answer the most important question.
Should Bitcoin Be the World’s Reserve Currency?
Bitcoin has loads of technical and design advantages over the paper currencies we use today. Those make the world’s top crypto ideal to use as a reserve coin. Let’s briefly review them.
#1 Bitcoin Is Not Inflationary
Firstly, unlike fiat currencies such as the dollar and the euro, Bitcoin has a fixed supply. This means once all twenty-one million coins are mined, that’s it.
So maybe it is just a matter of time until central banks make the same decision.
#2 Bitcoin Has a Global Reach
No matter which country you live in, or which language you speak. If you have the internet, you can buy Bitcoin. This isn’t true of any fiat currency – even the dollar!
Business owners in every country benefit from Bitcoin because they can both buy and sell their products and services, as well as pay their staff, in a single currency not bound by borders.
So as more countries adopt Bitcoin as legal tender, their businesses will have an easier time operating internationally.
#3 Bitcoin Is Secure From Government Intervention
As you have probably noticed by now, Bitcoin is not controlled by any bank, regulator, or government. In other words, it is decentralized. And while this has some disadvantages – mainly bankers and regulators telling people it is not safe – in the long term, it is really a trump card.
Mainly it is because decentralized currencies, including Bitcoin, can not be manipulated or controlled by any government or bank, which is a problem we often see today.
For instance, some countries deliberately lower the value of their fiat to lower the cost of their exports. The traders are thus given an unearned price advantage over foreign investors that do not manipulate their currencies.
But, as we just said, Bitcoin cannot be manipulated in this way. No government or bank can force more Bitcoins into existence. And those who want to burn Bitcoin will only make everybody else richer!
#4 Bitcoin Is Fair to Everybody
No country benefits more than any other by holding Bitcoin in its reserves or using it as legal tender. And every state uses Bitcoin, no one will take advantage of its currency being the global reserve currency, as the US does today.
The impact here is that if any country takes America’s place on top of the world order, they will have a much tougher time staying ahead of the game than the US has today, or Britain and the Netherlands had before that.
This could seriously flatten the boom and crash curves of Dalio’s Big Cycle, or even render it obsolete.
In fact, as more countries start using Bitcoin as part of their reserves, we might see a cascade of bigger and more developed nations adopting crypto either as legal tender or as part of their reserves as well.
And if every country on earth holds Bitcoin in their reserves, could any state at all convince the others to use their currency instead of Bitcoin? Probably not.
So now you might be wondering: what’s standing in Bitcoin’s way?
Why Might Bitcoin Not Become the Next Reserve Currency?
We all know that Bitcoin is volatile when compared to the fiats in circulation today, mostly because of fickle investor sentiment, inconsistent regulation, and lots of media hype.
Until Bitcoin stabilizes, the biggest economies are unlikely to risk using it for even a fraction of their reserves. However, as its market cap and liquidity increase, and the last Bitcoins are mined by 2040, Bitcoin should become less volatile.
How much less volatile it will be – and whether any central banks will feel confident enough to use it – is not something we can say for sure. But in its relatively short history, Bitcoin has become less volatile as time has gone by.
So before Bitcoin could become the next reserve currency, the network needs to be able to handle significantly more operations. One way to achieve this is to increase Bitcoin’s block size. Another is to implement a layer-2 solution enabling quicker transactions.
The Lightning Network is one of such layer-2 solutions. It uses peer-to-peer payment channels that confirm transactions off-chain, which speeds up the whole process while making it cheaper.
If Lightning or some other layer-2 protocol solves Bitcoin’s slow and expensive transactions, the network could theoretically handle millions per second, making it the cheapest and most efficient currency available anywhere. And thus perfect to use as a reserve currency.
Why Should Ray Dalio Reckon With Bitcoin
Dalio began Changing World Order by explaining that the events which caught him off guard were the ones that had not happened in his lifetime.
But as we have shown, if Dalio and others fail to acknowledge how cryptocurrencies are going to change the world economy forever, they are in for a rude surprise.