Arthur Hayes' Latest Speech: From AI Deflation to Wartime Inflation, Bullish on Bitcoin Reaching $125,000 by Year-End

Original source: Bitcoin Magazine

Compiled by: Felix, PANews

BitMEX co-founder Arthur Hayes delivered a speech at the Bitcoin 2026 conference. In this speech, Hayes explained why he is bullish on Bitcoin, why Kevin Warsh is not the hawk people fear, and how a banking regulation quietly taking effect on April 1 could unleash trillions of dollars in new credit. Additionally, Hayes put forward a year-end price target of $125,000 for Bitcoin and explained his "wartime money printing" theory that leads to this target.

PANews has compiled this speech, details as follows.

Over the past few days, I've thought deeply about how money printing policies will evolve, and incorporated the development of AI and the situation with the Iran war to arrive at today's speech content. Clearly, my stance has turned more bullish, and I'll explain why.

Of course, we can't ignore the ongoing war. So, before diving into the core argument, I need to establish a few assumptions. First, we won't die from nuclear annihilation; if that happens, any investment becomes meaningless, so let's set that worry aside. Second, the market will treat this event as something of a "short-term" affair, whatever that means. Now it's time to think about money creation and printing, and what that means for Bitcoin.

Every morning, I analyze the actual impact of the war on my portfolio using a chart on Bloomberg. This chart shows the spread between the six-month WTI crude oil futures contract and the front-month contract. I don't care at all about the propaganda wars between Trump and Iran. The only thing I care about is: are enough goods and oil flowing smoothly through the strait? The chart shows improvement, meaning the front-end price is trending towards the back-end. This indicates the situation is bad, but not extremely bad. So I can temporarily ignore it and move on to other things.

Every time I take the stage, I always talk about money printing. Since my last article published about two weeks ago, my thinking has shifted. I believe that in the medium to long term, liquidity will turn positive. Therefore, if we look at the negative side, we find deflation brought about by AI. There's ongoing discussion that many knowledge workers will lose their jobs because efficient and cheap models can handle knowledge work. A few months ago, I wrote an article outlining my expectations for these losses. I think this could lead to hundreds of billions of dollars in losses for the banking system.

As for the Federal Reserve, I'll get to that later. The market is very worried about the Fed Chair nominee, Kevin Warsh. Everyone is speculating whether he is a hawk or a dove. I will objectively analyze his statements. Basically, his statements are neutral, neither beneficial nor harmful to liquidity. Those market participants panicking that Warsh is a super hawkish Fed Chair are misreading the signals. Finally, let's look at commercial bank lending. Why will commercial bank lending increase? Why will the wartime economy in the US and overseas prompt banks to issue more loans to those involved in producing various weapons and related components? Furthermore, changes in bank regulation will allow banks to increase the leverage on their balance sheets.

I've been following this chart since last October. The magenta line represents the Nasdaq index, the gold line represents the Bitcoin price, and the white line represents the US tech stock ETF.

Most people now, at least institutional investors, believe that Bitcoin's price is closely correlated with the Nasdaq, and its performance over the past four or five years has indeed been so. However, since Bitcoin hit an all-time high of $126,000 last October, it has dropped about 50%, while the Nasdaq has remained flat. Big tech stocks have performed okay.

But if you look closely at the tech stocks that have been hit hard, you'll find they are almost all SaaS companies. These companies produce products that AI can now handle for just $10 per month, whereas they previously charged $10,000 or some other absurdly high price. These stocks have been battered. I think this foreshadows a credit tightening event that central banks haven't realized. They aren't printing enough money, and Bitcoin has been affected. This was the pre-war situation. The cut-off date for this chart of mine is February 28th.

Another wish of mine is to fire all my accountants and lawyers. I spend too much money on them. I can't wait for Claude to take over everything. This will have a very bad impact on those who lend to high-income individuals. This is essentially my view on AI becoming the new subprime mortgage crisis and what it could mean for the commercial banking system.

I believe this narrative is why Bitcoin fell from last October to the end of this February, when the US-Iran war started. But since the war began, Bitcoin has outperformed other stocks, surpassing the Nasdaq and SaaS stocks. I think Bitcoin is now focusing on wartime inflation. Now that the US and many other countries have explicitly acknowledged being in a state of war, their defense spending is insufficient, requiring them to print more money to build more bombs. So what changes next?

So, setting AI aside for now, let's talk about the Fed. In January this year, when Kevin Warsh was nominated as Fed Chair, the market panicked. Because since the 2008 financial crisis, he has been critical of the Fed's massive balance sheet and has publicly advocated for shrinking it and cutting rates.

If you've read my articles, you know that I have always argued that the quantity of money is more important than its price. So, I care more about his statements on the balance sheet than where short-term interest rates will go. If the market believes that Warsh's arrival means less dollar liquidity in the market, they will be bearish on Bitcoin and other risk assets. This is the "incoming super hawkish Fed Chair" narrative we've seen in the media recently.

These regulations will restrict how banks can hold assets on their balance sheets and the amount of capital they must hold against them. But I don't think it will be that way. I believe the Fed will essentially transfer reserves, Treasury bonds, and repurchase agreements to the commercial banking system, and achieve this through new bank regulatory rules. These regulations will restrict how banks can hold assets on their balance sheets and the capital they must hold against them. Finally, to understand Warsh's impact on the Fed, the most important thing is to realize he faces a very significant constraint: he must work closely with Treasury Secretary Scott Bessent to ensure that any of his operations on the Fed's balance sheet do not harm Bessent's ability to issue billions of dollars in debt.

Here is a very simple balance sheet. There are no specific figures because I know this can be a bit complex for some. On the asset side, it includes Treasury bonds, mortgage-backed securities (MBS), and repurchase agreements. These are tools to help people finance purchasing Treasury bonds. On the liability side, it includes bank reserves, the Treasury General Account, government checking accounts, and currency in circulation.

Basically, from 2008 to the present, the Fed has increased its liabilities in the form of bank reserves and purchased assets from the banking system. These assets include Treasury bonds, mortgage-backed securities, and repurchase agreements. When Warsh says the balance sheet is too large, he means the Fed holds too many bonds and wants to shrink it. So, he might sell bonds. But this would cause a huge shock to the market. Alternatively, I think what is currently being hinted at is that he will conduct asset swaps with the US banking system. On the commercial banks' balance sheets, Fed reserves are also considered an asset. About three trillion dollars' worth of these reserves sit on the Fed's balance sheet. Their funding sources include loans, deposits, and shareholder equity. Therefore, for a balance sheet of a certain size, a corresponding amount of equity is required. This is the capital adequacy ratio. So, the Fed and banks need to swap. Banks need to release reserves, reduce their demand for reserves, and replace these reserves with Treasury bonds and repurchase agreements.

This is precisely what the deregulation of the US commercial banking system is driving. So, whenever you hear US government monetary officials talk about deregulation, they mean we want to allow the banking system to absorb all the debt we create and remove it from the Fed's balance sheet.

The ultimate goal is for US commercial banks to take the baton of money creation from the Fed. Their balance sheets will hold Treasury bonds and repurchase agreements, while their liabilities will include deposits and shareholder equity. The key to all this is that the net impact on dollar liquidity is neutral. Nothing is sold, nothing is bought; it's just a swap. In terms of who can hold what, it's purely a regulatory expedient. But ultimately, Warsh can stand up and tell everyone he has successfully shrunk the Fed's balance sheet. But in reality, we as investors, what do we care about in the end? The end result is nothing.

Furthermore, Warsh won't clash with Bessent. Remember that photo they had with Powell's face? Just swap Powell's face for Warsh's. At the end of the day, we've issued $38 trillion in debt, and the government needs funding. The Fed will do its job to ensure an orderly market so people can buy this debt.

Now let's look at spending. This is a chart for the current fiscal year, from October to September of the following year. You can see, from the COVID era through the presidency to the current largest peacetime deficit in US history, the FY2026 deficit is slightly higher than FY2025. Now, the key point in all this is that the US Treasury won't cut spending. Trump hasn't talked about significantly cutting spending. Last year's DOGE initiative is already forgotten. It's all wartime spending now. His new defense budget is 50% higher than before, reaching $1.5 trillion. That doesn't sound like the Treasury or politicians are tightening spending together to allow the Fed to shrink its balance sheet.

Therefore, all the talk about the Fed shrinking its balance sheet doesn't make sense because politicians and their Treasury are constantly increasing the debt load. Here's another chart. Who is buying this debt? Foreigners aren't buying as much debt anymore. I've excluded countries typically used for hedge fund basis trades. You can see that the 25% share of debt held by foreigners has basically remained flat, while the total debt has risen significantly. This means a new, price-insensitive buyer is needed to absorb all this debt, and that buyer is the US commercial banking system.

The banking system can increase its debt holdings because of a new regulation that just took effect on April 1st this year: the Enhanced Supplementary Leverage Ratio (ESLR). This new rule allows banks to hold fewer reserves and other types of assets to support the loans and other items on their balance sheets. This means large banks like JPMorgan Chase and Citibank can issue more Treasury bonds and repo bonds to the market and get rollovers from the Fed. For smaller banks that act as the lending engine of the US economy, they can increase the issuance of construction and industrial loans.

S&P Global estimates that this ESLR balance sheet reduction will generate $1.3 trillion in new loans. So, why would banks have a demand for loans? One criticism from other macroeconomic analysts is that they believe the banking system lacks demand, isn't creating enough loans, or demand is insufficient. But there is an excellent source of demand: the US Department of Defense. They not only put equity into certain transactions but also guarantee offtake production. Seeing that companies have guaranteed customers like the government (which can print money), banks will lend to them. They will also lend to resource extractors mining the critical resources needed to make bombs.

Finally, all AI capital expenditure is now considered a national security issue. Therefore, when a hyperscaler can't finance its debt with free cash flow and turns to the market for funding, they will find large banks with massive balance sheets willing to provide debt support. So, pay close attention to construction and industrial loans; I think you can get weekly data on this from the Fed.

The advantage of bank loans is that their multiplier effect is higher than central bank lending; experience suggests it's about three times. We have observed this empirically. This means about $4 trillion in funds could be created, which is much larger than the credit losses potentially caused by AI taking people's jobs. This is why I am more bullish on Bitcoin.

This liquidity chart bottomed out last November, roughly around the same time Bitcoin bottomed. I think we experienced some shocks and some volatility. Now it's time for a breakout. This is why I believe Bitcoin will continue to rise. I think my year-end target is around $125,000, though the exact number doesn't really matter. Thank you, everyone.