Original author: Arthur Hayes, co-founder of BitMEX

Original article translated by BitpushNews

Editor's Note: In Arthur Hayes' latest article, "The Butterfly Touch," he predicts that liquidity in the US dollar and the Chinese yuan will continue to rise, and that Bitcoin and cryptocurrencies will benefit from this.

AI optimism

The capital expenditure (CAPEX) supporting AI model training and inference is unprecedented in the history of human civilization. Many believe that this investment in intelligence will create value for humanity unlike any previous technological construction. I agree; however, as humans, we tend to overdo it. Infinity and perfection are unattainable in this universe. Therefore, in anticipating a machine-driven future, we may build beyond our means.

AI proponents cite nationalism as a justification for lavish spending, but patriotism should not be priced... Both the US and China believe that AI and technological hegemony are crucial to the survival of their territories.

Tech giants are also eager to sell them horror stories: what will happen to a country if the other side gains dominance in machine intelligence first? Objectively speaking, both leaders have witnessed firsthand how the proliferation of AI and drones can lead to victory and are firmly convinced of this. Therefore, they will ensure that a primary economic and military objective is to further build the most efficient machine intelligence within their borders.

In the US, the majority of AI CAPEX to date has come from the operating cash flow of the most profitable software companies. However, given the scale of current and future spending, additional financing through credit channels is still needed.

In China, banks are slowing down their lending to the real estate sector and shifting their focus to the technology industry. In addition to spending related to data centers, both the US and China are continuing to invest in increasing electricity supply.

In other words, central banks are creating more fiat currency and easing financial conditions.

The combination of political will (to win the AI race) and financial will (to fund construction through printing money and loans) has created the perfect environment for cryptocurrencies. There will be far more fiat currency units tomorrow than today, and the rate of change is accelerating due to soaring spending on AI and electrification. As the cost per unit of intelligence decreases, the complexity of tasks AI performs increases, meaning computing power consumption grows exponentially; this is the essence of the "Jeves Paradox."

Furthermore, there's the "Red Queen effect": as competitors improve model efficiency, a company's AI CAPEX rapidly depreciates. This leads to a race to create better models to beat competitors, while simultaneously rendering competitors' hundreds of billions (and soon trillions) of dollars obsolete. Therefore, unless hindered by exogenous market events, AI CAPEX spending will expand indefinitely.

When will this revelry end?

I believe two events will occur almost simultaneously and change people's perceptions of the necessity of spending trillions of dollars to build AI.

Market overreaction: A massive AI-related IPO or huge acquisition that is financially irresponsible can overwhelm the market. This will bring the market back from its frenzy, and people will begin to question whether machine intelligence is truly worth so much money.

A shift in political winds: the 2028 US presidential election. The rising prices of raw materials, labor, and especially electricity caused by large-scale AI deployments are unwelcome in many regions. Furthermore, 90% of Americans do not hold significant amounts of stock and cannot benefit from soaring stock prices. Politically, it is relatively easy to garner votes by opposing AI, emphasizing the value of human labor, and curbing inflation.

But at this moment, liquidity in both the US dollar and the Chinese yuan will continue to rise. Bitcoin and cryptocurrencies will benefit from this.

Each country should mind its own business.

Trump bombed Iran, showing no concern for the global economic impact of war. Or perhaps he did care, but the assumption that this year's "special military operation" would be swiftly successful has proven overly optimistic. The U.S. possesses God-given cheap energy (fossil fuels) and fertile farmland. Things may become more expensive, but even with the Strait of Hormuz partially closed, Americans won't starve—unless politicians decide to spend money in Fallujah instead of food stamps.

But the people of much of Europe, Africa, and Asia have not been so fortunate. Unfortunately, the political elites of these countries mistakenly believed that American politicians would consider their food and energy shortages when deciding whether to launch another war that threatens the flow of essential goods. Trusting the United States, these countries have stored their surpluses in dollar-denominated financial assets instead of building pipelines, trade routes, or stockpiling necessities.

Marco Papic of BCA Research put it best:

"The entire planet—literally—is connected for the sake of American hegemony… Why is Germany's defense inadequate against Russia? Because… the United States. Why do most Gulf states have virtually no energy transport infrastructure that bypasses the Strait of Hormuz? Because… the United States. Why is global manufacturing concentrated in China? Because… the United States."

Unable to obtain fertilizer or fuel, these countries' investment decisions will undergo a dramatic shift. Holding US Treasury bonds or S&P 500 ETFs becomes meaningless when you're unable to access food and energy due to a war you're not involved in. To compensate for these deficiencies, sovereign nations will marginalize and liquidate dollar assets, instead investing in infrastructure, defense, and physical commodities.

This is a problem for the US financial markets because of the large proportion of foreign holdings. If left unchecked, the slow liquidation of dollar assets will lead to a market downturn. US Treasury Secretary Bessent and other policymakers understand this. They have two options: encourage the use of dollar swap lines, or amend banking regulations.

"Bad" Australia: Selling US Treasury bonds to buy jet fuel.

"Good" Australia: Borrowing dollars from the Federal Reserve to buy jet fuel.

If the US market needs more momentum to offset sovereign sell-offs, regulations could be relaxed to allow banks to hold more US Treasury bonds and stocks. Relaxing capital requirements related to the eSLR (extra leverage ratio) is one such step in this direction.

Since the petrodollar system was established in the 1970s, storing surpluses in dollar assets has been considered "best practice." But today, holding dollar assets no longer guarantees a shipment of fertilizer or oil. "Just-in-time" is dead; "just-in-case" remains. This is a structural trend that will continue for decades. This means monetary policymakers must maintain accommodative financial conditions to fill the void left by foreigners investing their savings in physical infrastructure rather than in "illusory dollar financial assets."

Higher + Longer

War breeds inflation, and the US-Iran conflict is no exception. AI CAPEX and infrastructure construction serve as pretexts for increased lending. Politicians support money printing out of both practical and perceived necessity. This is why Bitcoin outperformed other major risk assets such as gold and US tech stocks after February 28th.

Bitcoin bottomed out at $60,000 earlier this year, backed by trillions of dollars and yuan yet to be created, making a return to $126,000 a certainty. Many critics refuse to participate in this rally because Bitcoin has underperformed tech stocks and gold over the past 24 months. They don't understand why Bitcoin remains effective as a hedge against excessive money printing. But it will demonstrate extreme sensitivity to expansions in fiat currency liquidity. I expect the rally to intensify, and the upward trajectory will become explosive when it breaks through $90,000 and many call option sellers are forced to liquidate.

I don't know how high Bitcoin can go, but I'll be setting my Maelstrom portfolio risk to the highest level unless something drastic changes. The US political climate regarding AI and inflation could become very hostile by the November midterm elections, which could be a minor hurdle in the upward trend.

But remember: high oil prices aren't hurting Trump as much as people think. MAGA is destined to lose in California (where energy policies result in the highest oil prices in the nation), but $100 oil and infrastructure rebuilding in Venezuela and the Middle East will benefit the oil and gas industries in states with Trump supporters. As long as money gets into the pockets of ordinary Americans, Trump still has time to win re-election. So, go for it, baby, S&P 500 to 10,000!

It's time to get into altcoins. Besides our already heavily invested Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite is $NEAR. My next post will explain our argument: why a "privacy narrative" combined with "Near Intents" will create positive cash flow for the protocol. This will completely reverse the token's sluggish price performance and create a huge catch-up opportunity, propelling it quickly towards its multi-year-old all-time high.

It's a bull market now; close your eyes and press the buy button. There will be opportunities to sell, but definitely not now. Don't mess it up, let's go crazy together.

iShares Bitcoin Trust fell 8.1%, while iShares Ethereum Trust fell 16.1%.

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