What if this is the bottom?

Original author: Jeff Park

Original compilation: Block unicorn

Preface

A few days ago, Bitcoin's price quickly dropped to $82,000 and then fell further to around $74,500, influenced by rumors that Kevin Warsh might be nominated as the Federal Reserve Chair. This volatile price action made me realize that even among the most seasoned traders in global macroeconomics, there remains a persistent unease—a wariness towards the contradictory nature of "a hawkish Fed Chair who wants to cut rates." This contradiction itself reflects a duality within the composition of currency devaluation.

The theory behind the currency devaluation trade sounds simple: print money, currency devalues, hard assets appreciate. But this narrative of "cheap money" obscures a more fundamental question that determines Bitcoin's success or failure: what will happen to interest rates?

Most Bitcoin advocates conflate monetary expansion with hard asset appreciation, assuming money automatically flows into scarce stores of value. This view overlooks a crucial mechanism: without understanding the direction of the yield curve, cheap money does not necessarily mean capital flows to hard money. When interest rates fall, duration-sensitive assets, especially those with cash flows, become more attractive, creating powerful competition for attention and capital against Bitcoin. This suggests the path from currency devaluation to Bitcoin dominance is not linear but depends on whether the current financial system continues to function or collapses entirely.

In other words, Bitcoin is a devaluation bet with a Risk Premium Duration.

This is the distinction I've written about before between "Negative Rho Bitcoin" and "Positive Rho Bitcoin," representing two radically different theses requiring opposite market conditions to play out.

Understanding Rho: Interest Rate Sensitivity

In options terminology, Rho measures sensitivity to changes in interest rates. Applied to Bitcoin, it reveals two distinct paths:

"Negative Rho Bitcoin" performs better when interest rates are falling. This embodies the continuity thesis, albeit in a more extreme form: the current financial system persists, central banks maintain credibility, and lower rates (potentially even negative) make "risk assets" like Bitcoin more attractive relative to the (potentially negative) opportunity cost of holding cash. Think 2020-2021: Fed rates at zero, real rates deeply negative, Bitcoin soared as the most attractive alternative to cash.

Conversely, "Positive Rho Bitcoin" performs better when interest rates are rising or volatility spikes around the risk-free rate itself. This is the "break" thesis, where foundational assumptions of the financial system are shattered, the concept of a risk-free rate is challenged, and all traditional assets must reprice their cash flows. For an asset like Bitcoin that generates no cash flow, this repricing is minimal, while longer-duration assets suffer catastrophic losses.

Bitcoin's current price, trapped in a directionless range with no clear breakout volatility, perhaps indicates investors are unsure which thesis matters more. And for most Bitcoin maximalists, the answer is unsettling because the concept of inflation, and its close relatives deflation and interest rates, is often profoundly misunderstood.

Two Types of Deflation

Judging which Bitcoin thesis prevails requires distinguishing between two different types of deflation:

Good Deflation occurs when falling prices result from increased productivity. AI-driven automation, supply chain optimization, and manufacturing improvements: these lower costs while increasing output. This deflation (sometimes called supply-side deflation) is compatible with positive real rates and stable financial markets. It favors growth assets over hard money.

Bad Deflation occurs when falling prices result from a credit crunch. This deflation is catastrophic: debt defaults, bank failures, cascading liquidations. This demand-destroying deflation wrecks the Treasury market because it requires negative nominal rates to prevent total collapse. Stanley Druckenmiller's statement that "the way to create deflation is to create an asset bubble" explains how bad deflation destroys duration assets and makes hard money a necessity.

We are currently experiencing good deflation in tech while avoiding bad deflation in credit markets. This is the worst environment for Bitcoin: enough to sustain the appeal of growth assets and maintain Treasury credibility, but not enough to trigger systemic collapse. It's the perfect breeding ground for Bitcoin's profound distrust.

When Cheap Money Doesn't Flow to Hard Money

Currency devaluation (money supply growth outpacing productive output) is happening. As we previously noted, precious metal prices are rising on dollar weakness, reflecting this trend. Both silver and gold prices have surged to all-time highs, confirming the dollar's declining purchasing power against physical goods.

But Bitcoin isn't following precious metals higher because Negative Rho Bitcoin faces a structural headwind: when rates are merely moderate or low, rather than catastrophically collapsing, Bitcoin must compete with other duration assets for capital allocation. And these competitors are staggeringly large.

Bitcoin's Three Existential Competitors

In a moderate-to-low interest rate environment, Bitcoin faces competition from three asset classes that absorb capital that might otherwise flow to hard money:

1. AI & Capital-Intensive Growth (Total Market Cap > $10 Trillion)

AI infrastructure buildout is the most capital-intensive growth opportunity since electrification. Nvidia alone has a market cap exceeding $2 trillion. The broader AI value chain (including semiconductors, data centers, edge computing, and power infrastructure) approaches $10 trillion in market cap, with the even broader AI value chain including software likely being larger.

This is good deflation: prices fall due to productivity gains, not credit contraction. AI promises exponential output growth with falling marginal costs. Why invest in zero-yield Bitcoin when capital can fund productive miracles that create real cash flows? Worse, the AI sector has the most voracious appetite for unlimited capital, and this arms race, rapidly becoming too big to fail, is tied to national security.

In a low-rate environment, growth assets like these, especially with government subsidies, can attract massive inflows because their future cash flows can be discounted at favorable rates. Bitcoin has no cash flows to discount, only scarcity. It's a hard sell when the alternative is funding the infrastructure for AGI.

2. Real Estate (>$45 Trillion in the US alone)

The US residential real estate market is over $45 trillion, and the global real estate market is nearly $350 trillion. When rates fall, mortgage costs decrease, housing becomes more affordable, and prices rise. Furthermore, housing provides rental income and enjoys massive tax advantages.

This is the domain of bad deflation: if housing prices fall due to a credit crunch rather than productivity gains, it signals systemic crisis. But in a low-rate environment, housing remains the primary store of wealth for the middle class. It's physical, leveragable, and socially embedded in ways Bitcoin is not.

3. The US Treasury Market ($27 Trillion)

The US Treasury market remains the world's largest, most liquid pool of capital. With $27 trillion (and growing) in outstanding debt, guaranteed by the Fed and denominated in the global reserve currency. When rates fall, duration extends, and Treasury returns can be substantial.

The key point: true deflation would cause the Treasury market to collapse. Negative nominal rates would become necessary, and the concept of a risk-free benchmark would vanish. But we are far from that. As long as Treasuries offer positive nominal yields and the Fed's backstop credibility holds, they absorb institutional capital Bitcoin can never touch: pension funds, insurance companies, foreign central banks, etc.

The Reality of Zero-Sum

The combined market cap of these three markets (AI growth, real estate, and Treasuries) exceeds $100 trillion. For Bitcoin to succeed in a Negative Rho environment doesn't require all three to collapse, but their attractiveness relative to zero-yield investments must diminish.

This happens in two ways: either rates fall dramatically into negative territory (making the opportunity cost of holding cash so high you must "pay to save"), or these markets begin to collapse (making their cash flows unreliable).

We are seeing neither. Instead, we are in a regime where:

• AI is creating real productivity gains (good deflation, favors growth assets).
• Real estate remains stable with manageable rates (bad deflation contained, favors housing).
• Treasuries offer positive yields with Fed credibility intact (good deflation favors duration assets).

Bitcoin is stuck in the middle, unable to compete with assets that generate cash flows while discount rates remain in the "Goldilocks zone"—not low enough to make zero yield irrelevant, nor high enough to break the system.

Why Kevin Warsh Matters

This brings us to monetary policy architecture. Appointing someone like Kevin Warsh, who has argued that "inflation is a choice," to lead the Fed would signal a fundamental shift away from the post-2008 "low rates for the sake of low rates" paradigm.

This was his message in the summer of 2025:

Warsh represents a new Fed-Treasury accord that acknowledges the moral hazard of Quantitative Easing while paying interest on reserve balances (IORB). This is capital theft disguised as monetary policy. The Fed creates reserves, holds them at the Fed, and pays banks interest on money that never enters the productive economy. It's a subsidy to the financial sector with zero benefit to real economic growth.

A Warsh-led Fed might emphasize:

• Higher structural rates to prevent financial repression
• Reduced balance sheet intervention (no more massive QE)
• Enhanced coordination with Treasury on debt management
• Re-evaluating the IORB mechanism and its fiscal cost

This sounds terrible for Negative Rho Bitcoin: moderate rates, less liquidity, more orthodox monetary policy. And it might be (though I suspect the neutral rate is still below current levels, Warsh would likely agree, and we should expect rate cuts, but perhaps not near zero).

But it's extremely bullish for Positive Rho Bitcoin because it accelerates the reckoning. If you believe the debt growth trajectory is unsustainable, if you believe fiscal dominance will eventually override monetary orthodoxy, if you believe the risk-free rate will ultimately prove fictional, then you want Warsh. You want the pretense stripped away. You want markets to face reality, not kick the can for another decade. You want risk priced by industrial policy, not monetary policy.

The Positive Rho Scenario

Bitcoin's Positive Rho means the foundational assumptions of the financial system break. Not a gradual decline, but a rupture. This means:

The risk-free rate becomes unreliable. This could be due to a sovereign debt crisis, Fed-Treasury conflict, or reserve currency fragmentation. When the benchmark for pricing all assets loses credibility, traditional valuation models collapse.

Duration assets suffer catastrophic repricing. If discount rates spike or currency debasement accelerates, long-dated cash flows become nearly worthless. Over $100 trillion in duration-intensive assets (Treasuries, investment-grade bonds, dividend stocks) would experience the most violent repricing event since the 1970s.

Bitcoin's lack of cash flow becomes an advantage. It has no earnings expectations, no coupons to be debased, no yield curve to anchor market expectations. Bitcoin doesn't need to reprice against a broken benchmark because it was never priced against one to begin with. It just needs to remain scarce while everything else is proven to be surplus or unreliable.

In this scenario, precious metals are the first step in the crisis, and Bitcoin is the aftermath. The spot currency debasement we see in commodities today converges with the yield curve debasement of tomorrow. Milton Friedman's dichotomy (monetary expansion causing inflation and becoming the dominant factor in asset pricing) merges into a unified force.

Ideological Insight

Returning to our earlier framework: metal prices tell you spot debasement is happening; Bitcoin will tell you when the yield curve itself ruptures.

The signs are already there: the insane K-shaped economy is leading to ruin, and socialism is surging precisely because Bitcoin's three capital competitors are threatening the global middle class: housing affordability, AI-driven income inequality, and the asset-labor income gap are all existential threats to Bitcoin. And all three are nearing a tipping point where society rejects the failed social contract of financial and labor debasement, and something fundamental changes.

And this is where Fed ideology begins to matter. A Fed Chair who truly understands that monetary policy does not exist in a vacuum, but works hand-in-hand with the Treasury to shape national industrial capacity, capital formation, and global competitiveness, will not pursue low rates at all costs. This is the worldview before Volcker, before QE: interest rates as a strategic tool, not a sedative. Capital pricing should serve productive growth, not subsidize financial abstraction.

This posture makes the "awkward middle" less stable because trillion-dollar questions become unavoidable: will the Fed revert to financial repression, driving rates near zero to sustain asset prices and fiscal solvency, re-igniting the Negative Rho Bitcoin thesis? Or will debt, geopolitics, and industrial reality force the Fed to confront the fiction of the risk-free rate itself, finally triggering the Positive Rho Bitcoin scenario?

This convergence is the regime change: Rho becomes the leading indicator (and dollar weakness the lagging indicator) because deflation has explanatory power.

Bitcoin's true moment arrives when the manufactured "forever" itself fails, when coordination replaces pretense, and the benchmark for pricing everything is finally revealed as entirely political, not an unsustainable forever.

Honestly, I don't know if this is truly the bottom, and of course, no one can truly claim to know (though technical analysts will always try). But one thing I do know is that historically, bottoms almost always coincide with a fundamental shift in market mechanics that fundamentally reshapes investor behavior and expectations. It's often imperceptible in the moment but obvious in hindsight. So, if you tell me that in hindsight, this marked the arrival of a new world order with the most innovative Fed Chair ever, weaponizing the Treasury to reshape the social contract of "central bank interdependence," then I can't think of a more poetic, exhilarating, and satisfying omen for the final liftoff to come.