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," it is anticipated that USD and RMB liquidity will continue to rise, benefiting Bitcoin and cryptocurrencies.

AI Optimism

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

AI proponents cite nationalism as a reason to splurge, but patriotism should not have a price tag... Both the US and China believe AI and technological supremacy are vital for their territories' survival.

Tech moguls are also very willing to sell them horror stories: what will happen to their country if the other side achieves machine intelligence supremacy first. Objectively, both leaders have witnessed firsthand how the proliferation of AI and drones brings victory and are convinced. Therefore, they will ensure 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 comes from the operating cash flow of the most profitable software companies. But given current and future spending levels, financing needs to be increased through credit channels.

In China, banks are slowing down funding for real estate, shifting to the tech industry. Beyond data center-related spending, both US and China are continuously investing to increase electricity supply.

That is, 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) creates a perfect environment for cryptocurrencies. There will be far more fiat units tomorrow than today, and the rate of change is accelerating due to surging AI and electrification spending. As the cost per unit of intelligence declines, the complexity of tasks AI can perform increases, meaning computing power consumption grows exponentially; this is the essence of "Jevons Paradox."

Add to that the "Red Queen Effect": as competitors improve model efficiency, a company's AI CAPEX rapidly depreciates. This leads to a race of further spending to create better models to beat rivals, while simultaneously making rivals' hundreds of billions (soon trillions) of dollars 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, changing people's views on the necessity of spending trillions on AI.

Market Indigestion: A gigantic, financially irresponsible AI-related IPO or mega-merger that the market cannot absorb. This will sober the market from its frenzy, prompting questions about whether machine intelligence is really worth that much money.

Political Shift: The 2028 US election. The rising costs of raw materials, labor, and especially electricity due to massive AI buildout are unpopular in many regions. Moreover, 90% of Americans do not hold significant stock portfolios to benefit from surging stock prices. Politically, it's very easy to campaign on anti-AI platforms, focusing on human labor value, and curbing inflation.

But for now, USD and RMB liquidity will continue to rise. Bitcoin and cryptocurrencies will benefit from this.

Every Country for Itself

Trump bombed Iran, not caring much about the impact on the global economy. Or maybe he does, but assumptions about a quick victory in this year's "special military operation" have 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 people in Europe, Africa, and much of Asia are less fortunate. Unfortunately, political elites in these countries mistakenly believe US politicians will consider their food and energy shortages when deciding whether to start another war threatening essential commodity flows. These countries, trusting the US, stored their surpluses in USD 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 fertilizers or fuel, these countries' investment decisions will drastically 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 is pointless. To compensate for these deficiencies, sovereign nations will marginally liquidate USD assets in the future, investing instead in infrastructure, defense, and physical commodities.

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

"Bad" Australia: Selling US Treasuries to buy jet fuel.

"Good" Australia: Borrowing USD from the Fed to buy jet 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) related capital requirements is a move in this direction.

Since the establishment of the petrodollar system in the 1970s, storing surplus savings in USD assets was "best practice." But today, holding USD assets no longer guarantees you a shipload of fertilizer or oil. "Just-in-time" is dead; "Just-in-case" is here to stay. This is a structural trend lasting decades. It means monetary policymakers must maintain accommodative financial conditions to fill the gap left by foreigners channeling savings into physical infrastructure instead of "illusory USD financial assets."

Higher + Longer

War is inflationary, and the US-Iran conflict is no exception. AI CAPEX and infrastructure buildout are excuses to increase lending. Politicians support money printing out of real or 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 USD and RMB, making a return to $126,000 a near certainty. Many doubters refuse to participate in this rally because Bitcoin underperformed tech stocks and gold over the past 24 months. They don't understand why Bitcoin remains effective as a hedge against fiat 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 drastic changes. By the November midterm elections, US political sentiment towards AI and inflation could turn very hostile, which might be a small bump in the uptrend.

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

Time to play with altcoins (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 create positive cash flow for the protocol. This will completely reverse the token's sluggish price performance and create a massive catch-up opportunity, rapidly shooting it towards its all-time high from years ago.

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

Original Link