The Butterfly Touch
Original author: Arthur Hayes, co-founder of BitMEX
BitpushNews

Editor’s Note: In Arthur Hayes’ latest article, “The Butterfly Touch,” it is anticipated that U.S. dollar and renminbi liquidity will continue to rise, benefiting Bitcoin and cryptocurrencies.

AI optimism

Capital expenditures (CAPEX) supporting AI model training and inference are unprecedented in human history. Many believe that this investment in intelligence will create value unlike any prior technological infrastructure. I agree; however, as humans, we always tend to overdo it. In this universe, positive infinity and perfection are unattainable. Therefore, when envisioning a future driven by machine intelligence, we may build too much.

AI proponents cite nationalism as a justification for lavish spending, but patriotism should not be priced... Both the United States and China believe that AI and technological dominance are vital to the survival of their domains.

Tech leaders are also eager to sell them horror stories: what would happen to the country if another nation takes the lead in achieving machine intelligence dominance. Objectively speaking, both leaders have personally witnessed how the proliferation of AI and drones has led to victory, and they firmly believe in it. Therefore, they will ensure that the top economic and military priorities are to further build the most efficient machine intelligence within their own borders.

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

In China, banks are slowing funding for real estate and shifting toward funding the technology sector. In addition to spending related to data centers, both the United States and China continue to invest in increasing power supply.

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

The combination of political will (winning the AI race) and financial will (funding construction through money printing and loans) has created a perfect environment for cryptocurrency. Tomorrow’s fiat units will far exceed today’s, and the rate of change is accelerating due to surging spending on AI and electrification. As the unit cost of intelligence decreases and the complexity of AI-executed tasks increases, computational power consumption grows exponentially; this is the essence of Jevons’ Paradox.

Additionally, there is the “Red Queen effect”: as competitors improve model efficiency, a company’s AI CAPEX rapidly depreciates. This triggers a race to increase spending further in order to build better models that outperform rivals, while simultaneously rendering the hundreds of billions (soon to reach trillions) invested by competitors obsolete. Therefore, unless hindered by exogenous market events, AI CAPEX spending will expand indefinitely.

When will this celebration end?

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

Market overextension: Following a massive, financially irresponsible AI-related IPO or mega-acquisition that overwhelms the market, investors will snap out of the frenzy and begin questioning whether machine intelligence is truly worth so much.

Shift in political winds: The 2028 U.S. election. Rising prices for raw materials, labor, and especially electricity due to large-scale AI infrastructure development are unpopular in many regions. Additionally, 90% of Americans do not hold significant stocks and thus cannot benefit from soaring stock prices. Politically, campaigning against AI, emphasizing the value of human labor, and curbing inflation is very easy.

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

Each country sweeps the snow in front of its own door.

Trump bombed Iran with no regard for the impact of war on the global economy. Or perhaps he does care, but the assumption that this year’s “special military operation” would quickly succeed has proven overly optimistic. The United States possesses divinely granted cheap energy (fossil fuels) and fertile farmland. Things may become more expensive, but even if part of the Strait of Hormuz is closed, Americans won’t go hungry—unless politicians decide to spend money on Fallujah instead of food stamps.

But people in most of Europe, Africa, and Asia are not so fortunate. Unfortunately, political elites in these countries wrongly assume that U.S. politicians will take into account their shortages of food and energy when deciding whether to launch another war that threatens the flow of essential goods. Due to their trust in the U.S., these countries have stored their surpluses in U.S. dollar financial assets rather than building pipelines, trade routes, or stockpiling essentials.

As Marco Papic of BCA Research put it best:

The entire planet—literally—is interconnected for the sake of American hegemony... Why is Germany’s defense insufficient against Russia? Because... the United States. Why do most Gulf nations have almost no energy transportation infrastructure that avoids the Strait of Hormuz? Because... the United States. Why is global manufacturing concentrated in China? Because... the United States.

Due to the inability to obtain fertilizers or fuel, these countries’ investment decisions will undergo dramatic changes. When you are deprived of food and energy due to a war you did not participate in, holding U.S. Treasuries or S&P 500 ETFs becomes meaningless. To compensate for these shortcomings, sovereign nations will gradually liquidate their dollar-denominated assets and redirect investments toward infrastructure, defense, and physical commodities.

This is an issue for U.S. financial markets due to the large proportion of foreign holdings. If left unchecked, the gradual liquidation of dollar-denominated assets could lead to market declines. U.S. Treasury Secretary Bessent and other policymakers understand this. They have two potential responses: encouraging the use of dollar swap lines, or revising banking regulatory rules.

The 'bad' Australia: Selling U.S. Treasuries to buy jet fuel.

Australia's "good": Borrowing dollars from the Fed to buy jet fuel.

If the U.S. market needs more momentum to offset sovereign selling, regulations could be eased to allow banks to hold more U.S. Treasuries and U.S. equities. Relaxing capital requirements related to the Supplementary Leverage Ratio (SLR) is a step in this direction.

Since the establishment of the petrodollar system in the 1970s, storing surpluses in dollar assets has been considered best practice. But today, holding dollar assets no longer guarantees you access to a shipload of fertilizer or oil. “Just-in-time” is dead; “just-in-case” endures. This is a structural trend that will last for decades. It means monetary policymakers must maintain an accommodative financial environment to fill the gap left by foreigners shifting their savings from “illusory dollar financial assets” into physical infrastructure.

Higher + Longer

War is inflationary, and the U.S.-Iran conflict is no exception. AI CAPEX and infrastructure spending are being used as excuses to increase lending. Politicians support money printing due to real and perceived necessities. This is why Bitcoin has outperformed other major risk assets, such as gold and U.S. tech stocks, since February 28.

Bitcoin hit a low of $60,000 earlier this year, backed by trillions of dollars and renminbi yet to be created; a return to $126,000 is now inevitable. Many critics have refused to participate in this rally because Bitcoin has underperformed compared to tech stocks and gold over the past 24 months. They fail to understand why Bitcoin remains an effective hedge against currency debasement. Yet it will demonstrate extreme sensitivity to fiat liquidity expansion. I expect the rally to accelerate, and when it breaks above $90,000 and many call option sellers are forced to cover their positions, the upward trajectory will become explosive.

I don’t know how high Bitcoin can go, but I’ll set Maelstrom’s portfolio risk to maximum unless something drastic happens. By the time of the U.S. midterm elections in November, political attitudes toward AI and inflation may turn very hostile, which could be a minor bump in the rally.

But remember: high oil prices don’t hurt Trump as much as people think. MAGA is bound to lose in California (where energy policies have led to the highest oil prices in the nation), but $100 crude and the rebuilding of infrastructure in Venezuela and the Middle East will benefit oil and gas industries in states that support Trump. As long as he can put money into the pockets of ordinary Americans, Trump still has time to win re-election. So go ahead, baby—S&P 500 toward 10,000!

It’s time to play shill coins. Beyond our existing heavy positions in Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite play is $NEAR. My next article will explain our thesis: why combining the “privacy narrative” with “Near Intents” will generate positive cash flow for the protocol—turning around the token’s sluggish price performance and creating a massive catch-up opportunity that could propel it rapidly back to its multi-year all-time highs.

It’s a bull market; close your eyes and hit buy. There will be time to sell, but not now. Don’t mess this up—let’s go wild together.

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