Original Title: The Butterfly Touch
Original Author: Arthur Hayes, Co-founder of BitMEX
Original Translation: BitpushNews
Editor's Note: In Arthur Hayes's latest article "The Butterfly Touch," it is expected that the liquidity of the US dollar and the renminbi will continue to rise, and bitcoin and cryptocurrencies will benefit from this.
AI Optimism
Capital expenditure (CAPEX) supporting AI model training and inference has reached unprecedented levels in human history. Many believe that this investment in intelligence will create value for humanity unlike any previous technological advancements. I agree; however, as humans, we always tend to go too far. In this universe, the infinite and the perfect are unattainable. Thus, when anticipating a future driven by machine intelligence, we may end up overbuilding.
AI proponents invoke nationalism as a justification for lavish spending, but patriotism should not come with a price tag... Both the US and China believe that AI and technological hegemony are crucial for the survival of their territories.
Tech moguls are also keen to sell them horror stories: What will happen if the other side gains supremacy in machine intelligence first? Objectively, both leaders have witnessed how the proliferation of AI and drones has led to victory, and they are absolutely convinced of this. Therefore, they will ensure that the primary economic and military goal is to further build the most efficient machine intelligence domestically.
In the US, so far, most AI CAPEX has come from the operating cash flow of the most profitable software companies. However, given the scale of current and future spending, financing will need to be increased through credit channels.
In China, banks are slowing down their funding for real estate and instead funding the tech sector. In addition to expenditures related to data centers, both the US and China continue to invest in increasing power supply.
In other words, central banks are creating more fiat currency and loosening financial conditions.
The combination of political will (to win the AI race) and financial will (to fund construction through money printing and loans) creates a perfect environment for cryptocurrencies. The amount of fiat currency tomorrow will far exceed that of today, and the rate of change is accelerating due to surges in AI and electrification spending. As the unit cost of intelligence decreases, the complexity of tasks performed by AI increases, meaning computational power consumption grows exponentially; this is the essence of the "Jevons Paradox."
Moreover, there is the "Red Queen Effect": As competitors improve the efficiency of their models, the AI CAPEX invested by a company quickly depreciates. This leads to further increased spending to create better models to outcompete rivals, simultaneously making the billions of dollars that competitors invest (soon to reach trillions) outmoded. Therefore, unless hindered by exogenous market events, AI CAPEX spending will expand indefinitely.
When Will This Frenzy End?
I believe there are two events that will occur almost simultaneously and change perspectives on the necessity of spending trillions to build AI.
Market indigestion: A massive and financially irresponsible AI-related IPO or acquisition may emerge, causing the market to be overwhelmed. This could wake the market from its frenzy, prompting people to question whether machine intelligence is truly worth so much money.
Political winds shift: The 2028 US elections. The rise in prices of raw materials, labor, especially electricity, caused by large-scale AI construction is unpopular in many regions. Furthermore, 90% of Americans do not hold substantial stock holdings and cannot benefit from soaring stock prices. Politically, it is very easy to garner votes by opposing AI, focusing on the value of human labor, and curbing inflation.
But at this moment, the liquidity of the US dollar and the renminbi will continue to rise. Bitcoin and cryptocurrencies will benefit from this.
Every Country Sweeps the Snow in Front of Its Own Door
Trump bombed Iran, not caring about the impact of war on the global economy. Or rather, he might care, but the assumption that this year's "special military operation" could swiftly lead to victory has proven to be overly optimistic. The US has been granted cheap energy (fossil fuels) and fertile farmland. Things may become more expensive, but even if the Strait of Hormuz is partially closed, Americans will not go hungry—unless politicians decide to spend money in Fallujah instead of on food stamps.
But the people in Europe, Africa, and most of Asia are not so lucky. Unfortunately, the political elites in these countries mistakenly believe that American politicians will consider their plight of food and energy shortages when deciding whether to initiate another war threatening the flow of essential commodities. These countries have trusted the US, keeping their surpluses in dollar-denominated financial assets rather than building pipelines, trade routes, or stockpiling necessities.
Marco Papic of BCA Research puts it best:
"The entire planet—literally—is connected for the sake of American hegemony... Why is Germany's defense insufficient against Russia? Because... America. Why do most Gulf countries have little energy transport infrastructure avoiding the Strait of Hormuz? Because... America. Why is global manufacturing concentrated in China? Because... America."
Due to the inability to obtain fertilizers or fuel, these countries' investment decisions will undergo drastic changes. When you cannot obtain food and energy due to a war you are not involved in, holding US government bonds or S&P 500 ETFs becomes meaningless. In order to mitigate these shortcomings, sovereign countries will marginally liquidate dollar assets in the future, turning instead to investments in infrastructure, defense, and physical goods.
This poses a problem for the US financial markets, as the proportion of foreign holdings is enormous. 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 responses: encourage the use of dollar swap lines or modify bank regulatory rules.
"Bad" Australia: Selling US bonds to buy jet fuel.
"Good" Australia: Borrowing dollars from the Fed to buy jet fuel.
If the US market requires more impetus to offset the sell-off by sovereign countries, regulations can be loosened to allow banks to hold more US bonds and US stocks. Easing capital requirements related to eSLR (Supplementary Leverage Ratio) is a move in this direction.
Since the establishment of the petrodollar system in the 1970s, keeping surplus savings in dollar assets has been "best practice." But today, holding dollar assets no longer guarantees you a shipment of fertilizer or oil. "Just-in-time" is dead, "just-in-case" lives on. This is a structural trend that will persist for decades. This means that monetary policymakers must maintain a loose financial environment to fill the gap left by foreigners placing savings into physical infrastructure rather than "illusory dollar financial assets."
Higher + Longer
War is inflationary, and the US-Iran conflict is no exception. AI CAPEX and infrastructure construction are excuses for increased lending. Politicians support money printing out of both necessity and perception. This is why bitcoin has outperformed gold and other major risk assets like US tech stocks since February 28.
Bitcoin bottomed out earlier this year at $60,000, backed by trillions of dollars and renminbi yet to be created, and returning to $126,000 is a certainty. Many bears refuse to participate in this round of the market because bitcoin's performance over the past 24 months has lagged behind tech stocks and gold. They do not understand why bitcoin, as a hedge against currency debasement, remains effective. But it will show extreme sensitivity to the expansion of fiat liquidity. I expect the upward momentum to accelerate, and when it surpasses $90,000, many bullish option sellers will be forced to close their positions, making the upward trajectory explosive.
I do not know how high bitcoin can rise, but I will raise the risk in the Maelstrom portfolio to the maximum unless a major change occurs. By the midterm elections in November, the US political attitude towards AI and inflation may become very negative, which could pose a small hurdle in the upward process.
But keep in mind: High oil prices do not harm Trump as much as people imagine. MAGA is destined to lose in California (where energy policies have led to the highest oil prices in the US), but $100 crude oil and the rebuilding of infrastructure in Venezuela and the Middle East will benefit the oil and gas industries in states where Trump's supporters reside. As long as he can put money in the pockets of ordinary Americans, Trump still has time to win reelection. So, go for it babe, S&P 500 heading to 10,000 points!
It is time to play with shitcoins. Apart from our heavy holdings in Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite is $NEAR. My next article will explain our argument: Why the "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 to rapidly reach the historical highs of years ago.
It is a bull market; close your eyes and hit the buy button. There will be a time to sell, but not now. Don't mess this up, let's go crazy together.
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