Original Title: The Butterfly Touch

Original Author: Arthur Hayes, Co-founder of BitMEX

Original Translation: BitpushNews

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

AI Optimism

The capital expenditure (CAPEX) supporting AI model training and inference is unprecedented in human civilization. Many believe that this investment in intelligence will create value for humanity unlike all previous technological endeavors. I agree; however, as humans, we always tend to overdo it. In this universe, positive infinity and perfection are unattainable. Therefore, while anticipating a future driven by machine intelligence, we may overbuild.

AI proponents cite nationalism as a justification for massive spending, but patriotism shouldn't come with a price tag... Both the US and China believe AI and technological supremacy are vital for their territories' survival.

Tech giants are also very willing to sell them horror stories: what would happen to this country if the other side achieves machine intelligence hegemony first. Objectively speaking, both leaders have witnessed firsthand how the proliferation of AI and drones can bring victory and are deeply convinced of this. Therefore, they will ensure that the primary economic and military goal is to further build the most efficient machine intelligence within their borders.

In the US, most AI CAPEX so far has come from the operating cash flow of the most profitable software companies. But given the current and future scale of spending, additional financing through credit channels will be needed.

In China, banks are slowing down funding for real estate and shifting to fund the tech industry. In addition to data center-related spending, both the US and China are continuously investing to increase 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 money printing and lending) creates a perfect environment for cryptocurrencies. Tomorrow's fiat units will be far more numerous than today's, and the rate of change is accelerating due to surging AI and electrification spending. As the unit cost of intelligence declines, the complexity of tasks AI can perform increases, meaning computing power consumption grows exponentially; this is the essence of the "Jevons paradox."

Add to this the "Red Queen effect": as competitors improve model efficiency, any single company's AI CAPEX depreciates rapidly. This leads to a race of further increasing spending to create better models to beat rivals, simultaneously rendering thousands of billions (soon trillions) of dollars invested by competitors obsolete. Therefore, unless hindered by exogenous market events, AI CAPEX spending will expand indefinitely.

When Will This Party End?

I believe two events will occur almost simultaneously and change people's perception of the necessity of spending trillions on AI.

Market Indigestion: A massive and financially irresponsible AI-related IPO or mega-merger that the market cannot absorb. This will sober the market from its frenzy, and people will begin to question whether machine intelligence is really worth that much money.

Political Shift: The 2028 U.S. presidential election. The rising prices of raw materials, labor, and especially electricity due to massive AI construction are unpopular in many regions. Furthermore, 90% of Americans do not hold significant stock portfolios and cannot benefit from soaring stock prices. Politically, it is very easy to campaign on an anti-AI, pro-human labor, inflation-fighting platform.

But for now, liquidity in the US dollar and Chinese yuan will continue to rise. Bitcoin and cryptocurrencies will benefit.

Every Country for Itself

Trump bombed Iran, caring little about the impact of the war on the global economy. Or perhaps he does care, but the assumption of a quick victory in this year's "special military operation" has proven overly optimistic. The US has God-given cheap energy (fossil fuels) and fertile farmland. Things might get more expensive, but even with a partial closure of the Strait of Hormuz, Americans won't starve—unless politicians decide to spend money on Fallujah instead of food stamps.

But the people of Europe, Africa, and most of Asia are not so lucky. Unfortunately, the political elites in these countries mistakenly believe that US politicians, when deciding whether to start another war threatening the flow of basic commodities, will consider their lack of food and energy. Trusting the US, these countries stored their surpluses in US dollar financial assets instead of building pipelines, trade routes, or stockpiling necessities.

Marco Papic of BCA Research put it best:

"The entire planet—literally—is wired together for US hegemony... Why is Germany's defense insufficient against Russia? Because... the US. Why do most Gulf states have almost no energy transport infrastructure bypassing the Strait of Hormuz? Because... the US. Why is global manufacturing concentrated in China? Because... the US."

Unable to access fertilizer or fuel, the investment decisions of these countries will undergo a drastic change. When you can't get food and energy due to a war you're not involved in, holding US Treasuries or S&P 500 ETFs becomes meaningless. To compensate for these deficiencies, sovereign nations will marginally liquidate dollar assets in the future, investing instead in infrastructure, defense, and physical commodities.

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

"Bad" Australia: Sells US Treasuries to buy aviation fuel.

"Good" Australia: Borrows dollars from the Fed to buy aviation fuel.

If the US market needs more impetus to offset sovereign selling, regulations can be relaxed to allow banks to hold more US Treasuries and stocks. The easing of eSLR (Enhanced Supplementary Leverage Ratio) capital requirements is a move in this direction.

Since the establishment of the petrodollar system in the 1970s, parking surplus savings in dollar assets was "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" is here to stay. This is a structural trend that will last for decades. This means monetary policymakers must maintain accommodative financial conditions to fill the gap left by foreigners shifting savings into physical infrastructure rather than "illusory dollar financial assets."

Higher for 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 real and perceived necessity. This is why Bitcoin has outperformed other major risk assets like gold and US tech stocks since February 28th.

Bitcoin bottomed around $60,000 earlier this year. Backed by trillions of yet-to-be-created US dollars and Chinese yuan, a return to $126,000 seems all but certain. Many skeptics refuse to participate in this cycle 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 currency debasement. But it will demonstrate extreme sensitivity to fiat liquidity expansion. I expect the rally to intensify, becoming explosive when it breaks $90,000 and many call option sellers are forced to cover.

I don't know how high Bitcoin can go, but I will set Maelstrom's portfolio risk to maximum unless something drastically changes. By the November midterm elections, US political attitudes towards AI and inflation could turn very hostile, which might be a small hiccup during the rally.

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

It's time to play with Shitcoins. Besides our heavy positions in Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite is $NEAR. My next article will explain our thesis: how the "privacy narrative" combined with "Near Intents" will generate positive cash flow for the protocol. This will completely reverse the token's lackluster price performance and create a massive catch-up opportunity, propelling it quickly back to its all-time highs from years ago.

This is a bull market; close your eyes and hit the buy button. There will be a time to sell, but that time is not now. Don't mess it up. Let's go crazy.

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