Arthur Hayes' Latest Speech: From AI Deflation to Wartime Inflation, Bullish on Bitcoin at $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 that quietly took effect on April 1 could unleash trillions of dollars in new credit. Additionally, Hayes presented a year-end price target of $125,000 for Bitcoin and elaborated on his "wartime money printing" theory behind this target.

PANews has compiled the key points of this speech. Below are the details.

Over the past few days, I have deeply considered how money printing policies will evolve, while also factoring in the development of AI and the situation of the war with Iran, which led to the content of this speech. Clearly, my stance has shifted to a more bullish one, and I will explain why.

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

Every morning, I analyze how the war actually impacts my portfolio using a chart from 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 war between Trump or Iran. The only thing I care about is: Are enough goods and oil passing smoothly through the Strait? Looking at the chart, the situation has improved, meaning the front-end price is trending toward the back-end. This indicates that while things are bad, they are not at their worst. So, I can temporarily ignore it and move on to other matters.

Every time I take the stage, I always talk about money printing. Since my last article about two weeks ago, my thinking has evolved. I believe that in the medium to long term, liquidity will turn positive. Therefore, if we consider the negative aspects, we find the deflation brought by AI. There has been constant discussion that many knowledge workers will lose their jobs due to efficient and cheap models capable of completing knowledge-based 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, with everyone guessing whether he is a hawk or a dove. I will objectively analyze his statements. Essentially, his remarks are neutral—neither beneficial nor harmful to liquidity. Those market participants panicking over Warsh being 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 U.S. and overseas prompt banks to issue more loans to those involved in producing various weapons and related components? Additionally, changes in banking regulations 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 U.S. tech stock ETF.

Currently, most people, especially institutional investors, believe that Bitcoin's price has been correlated with the Nasdaq Index, and it has indeed performed that way over the past four or five years. However, since Bitcoin hit its all-time high of $126,000 last October, it has dropped about 50%, while the Nasdaq has remained flat. Large-cap tech stocks have performed reasonably well.

But if you look closely at the tech stocks that have been hit hard, they are almost all SaaS companies. These companies produce products that AI can now handle for $10 a month, whereas they previously charged $10,000 or other absurdly high prices. These stocks have taken a severe beating. I believe this foreshadows a credit crunch event, which central banks haven't recognized. They aren't printing enough money, and Bitcoin has been affected. This was the pre-war situation. My chart cuts off at February 28.

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 negative impact on those who lend money to high-income individuals. That's essentially my take on AI becoming the new subprime crisis and what it could mean for the commercial banking system.

I believe this narrative is what caused Bitcoin to decline from last October until the outbreak of the U.S.-Iran war at the end of February. But since the war began, Bitcoin's performance has outperformed other stocks, surpassing the Nasdaq and SaaS stocks. I think Bitcoin is now focused on wartime inflation. Now that the U.S. and many other countries have explicitly acknowledged being in a state of war, with insufficient defense spending requiring them to print more money to build more bombs, what changes are coming next?

So, setting AI aside for now, let's talk about the Federal Reserve. In January of this year, when Kevin Warsh was nominated as Fed Chair, the market panicked. He has been critical of the Fed's massive balance sheet since the 2008 financial crisis and has publicly advocated for shrinking the balance sheet and lowering 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. Therefore, I care more about his statements on the balance sheet than about where short-term interest rates will go. If the market believes that Warsh's arrival will reduce dollar liquidity, they will be bearish on Bitcoin and other risk assets. This is where the narrative of the "incoming super-hawkish Fed Chair" we've seen in the media recently comes from.

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

Here is a very simple balance sheet. No specific numbers, as I know this can be a bit complex for some. On the asset side, there are Treasuries, mortgage-backed securities (MBS), and repo agreements—tools used to help people finance Treasury purchases. On the liability side, there are bank reserves, the Treasury General Account, government checking accounts, and currency in circulation.

Basically, from 2008 until now, the Fed has increased its liabilities in the form of bank reserves and purchased assets from the banking system. These assets include Treasuries, MBS, and repo 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 severely shock the market. Alternatively, I think the current implication is that he will conduct asset swaps with the U.S. banking system. On commercial banks' balance sheets, Federal Reserve reserves are also considered an asset. There are about $3 trillion in these reserves, all sitting 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 Treasuries and repo agreements.

This is precisely what the deregulation of the U.S. commercial banking system is driving. So, whenever you hear U.S. 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 U.S. commercial banks to take the baton of money creation from the Fed. Their balance sheets will contain Treasuries and repo agreements, while liabilities will include deposits and shareholder equity. The key here is that the net impact on dollar liquidity is neutral. Nothing was sold, nothing was bought; it's just a swap transaction. In terms of who can hold what, it's purely a regulatory workaround. But in the end, Warsh can stand up and tell everyone he successfully shrank the Fed's balance sheet. However, for us investors, what do we care about the ultimate result? The ultimate result is nothing.

Furthermore, Warsh will not clash with Bessent. Remember that old photo with Powell's face? Just swap it with Warsh's. Ultimately, we have $38 trillion in debt, and the government needs funding. The Fed will do its duty to ensure an orderly market so that people can buy this debt.

Now let's look at spending. This is a chart for the current fiscal year, from October to the following September. You can see, from the COVID era through this presidency to the current largest peacetime deficit in U.S. history, the deficit for FY2026 is slightly higher than FY2025. The point of all this is that the U.S. Treasury is not reducing spending. Trump hasn't talked about drastic spending cuts. Last year's DOGE plan is already forgotten. Now it's all wartime spending. His new defense budget is 50% higher than before, reaching $1.5 trillion. This doesn't sound like the Treasury or politicians are cutting 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 Department are continuously increasing the debt load. Here's another chart. Who is buying this debt? Foreigners aren't buying as much anymore. I've excluded countries typically involved in hedge fund basis trades. You can see the 25% share of debt held by foreigners remains roughly flat, while total debt has risen sharply. This means a new, price-insensitive buyer is needed to absorb all this debt, and that buyer is the U.S. commercial banking system.

The banking system can increase its debt holdings thanks to a new regulation that just took effect on April 1st of 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 and Citibank can issue more Treasuries and repo bonds in the market and get rollovers from the Fed. For smaller banks, which are the lending engines of the U.S. economy, they can increase their 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 some other macroeconomic analysts is that they believe the banking system lacks demand, isn't creating enough loans, or that demand is insufficient. But there is a fantastic source of demand: the U.S. Department of Defense. They will not only inject equity into certain deals but also guarantee offtake production. Banks, seeing that companies have a guaranteed customer like the government (which can print money), will lend to them. They will also lend to resource extractors mining the critical resources needed to build bombs.

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

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

This liquidity chart bottomed out last November, around the same time Bitcoin bottomed. I think we've experienced some shocks and some volatility. Now is the 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 isn't crucial. Thank you, everyone.