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

Original Source: Bitcoin Magazine

Article 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 enacted on April 1 could unlock trillions of dollars in new credit. Additionally, Hayes proposed a year-end Bitcoin price target of $125,000 and explained his "wartime money printing" theory behind this target.

PANews has compiled the key points of this speech. The details are as follows.

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

Of course, we cannot ignore the ongoing war. Therefore, before diving into my core argument, I must establish a few assumptions. First, we won't die from nuclear destruction; if that happens, any investment becomes meaningless, so let's set that concern aside. Second, the market will treat this event as something "short-term," whatever that implies. It's time to think about money creation, money printing, and what this means for Bitcoin.

Every morning, I analyze the war's actual impact on 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 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 converging with the back-end, indicating the situation is bad but not catastrophic. So I can temporarily ignore it and focus on other things.

Every time I take the stage, I always talk about money printing. Since my last article about two weeks ago, my thinking has shifted. I believe that in the medium to long term, liquidity will turn positive. Therefore, if we consider the negative aspect, we find the deflation brought by AI. There's ongoing discussion that many knowledge workers will lose their jobs due to efficient and cheap models capable of 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 address that later. The market is very worried about Fed Chair nominee Kevin Warsh, with everyone speculating whether he is a hawk or a dove. I'll 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 haven't read the signals correctly. Finally, let's look at commercial bank loans. Why will commercial bank loans increase? Why will the war economy in the US and abroad prompt banks to issue more loans to those involved in producing various weapons and related components? Furthermore, changes in banking regulations will allow banks to increase leverage on their balance sheets.

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

Most people, at least institutional investors, now believe that Bitcoin's price has closely tracked the Nasdaq, and it has indeed performed this way over the past four to five years. However, since Bitcoin hit an all-time high of $126,000 last October, it has declined about 50%, while the Nasdaq has remained flat. Big tech stocks have done okay.

But if you look closely at the tech stocks that have been hit hard, almost all are SaaS companies producing products that AI can now handle for $10 a 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 situation before the war. My chart cuts off at February 28.

My other wish is to fire all my accountants and lawyers. I spend way 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. This essentially forms my view on AI becoming the new subprime crisis and what it could mean for the commercial banking system.

I believe this narrative caused Bitcoin to decline from last October until the end of February this year, 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, with insufficient defense spending needing more printed money to build more bombs, what changes next?

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

These rules will restrict how banks can hold assets on their balance sheets and the capital they must hold against them. But I don't think that will be the case. I believe the Fed will essentially transfer reserves, Treasuries, and repurchase agreements to the commercial banking system, facilitated by new bank regulatory rules. These regulations will limit how banks hold assets on their balance sheets and the capital they must hold. Finally, to understand Warsh's impact on the Fed, it's crucial to realize he faces a very important constraint: he must work closely with Treasury Secretary Scott Bessent to ensure that any of his actions on the Fed's balance sheet do not impair 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 complex for some. On the asset side, we have Treasuries, Mortgage-Backed Securities (MBS), and repurchase agreements. These are tools that help people finance Treasury purchases. On the liability side, we have bank reserves, the Treasury General Account, government checking accounts, and currency in circulation.

Essentially, from 2008 to today, the Fed increased its liabilities in the form of bank reserves and purchased assets from the banking system. These assets include Treasuries, MBS, and repos. When Warsh says the balance sheet is too large, he means the Fed holds too many bonds and wants to reduce it. So, he might sell bonds. But this would cause significant market disruption. Alternatively, I think the current implication is that he will conduct asset swaps with the US banking system. On a commercial bank's balance sheet, Fed reserves are also considered an asset. There are about $3 trillion in reserves sitting on the Fed's balance sheet. Their funding sources include loans, deposits, and shareholder equity. Therefore, for a given balance sheet size, a corresponding amount of equity is needed. 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 repos.

This is exactly what the deregulation of the US commercial banking system is driving. So, whenever you hear US government monetary officials talk about deregulation, they mean they 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 Treasuries and repos, with liabilities including deposits and shareholder equity. The key point is that the net impact on dollar liquidity is neutral. Nothing is being sold, nothing is being bought; it's just a swap transaction. It's purely a regulatory accommodation regarding who can hold what. But ultimately, Warsh can stand up and tell everyone he successfully shrunk the Fed's balance sheet. Yet, for us investors, what is the final outcome? Nothing.

Furthermore, Warsh will not clash with Bessent. Their old photo with Powell's face just needs Warsh's face pasted on it. At the end of the day, we have issued $38 trillion in debt, and the government needs funding. The Fed will fulfill its duty to ensure orderly markets so people can buy this debt.

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 the presidential term, to the current largest peacetime deficit in US history, the deficit for fiscal 2026 is slightly higher than fiscal 2025. The key takeaway is that the US Treasury will not cut spending. Trump hasn't talked about significant spending cuts. Last year's DOGE plan has been forgotten. It's all wartime spending now. His new defense budget is 50% higher than before, reaching $1.5 trillion. This doesn't sound like the Treasury or politicians are coming together to reduce spending so the Fed can shrink its balance sheet.

Therefore, all the talk about the Fed shrinking its balance sheet doesn't make sense because the politicians and their Treasury are continuously increasing the debt stock. Here's another chart. Who is buying this debt? Foreigners aren't buying as much anymore. I've excluded countries typically used for hedge fund basis trades. You can see the 25% share of debt held by foreigners remains roughly constant, 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 1 this year: the Enhanced Supplementary Leverage Ratio (ESLR). This new rule allows banks to hold fewer reserves and other asset types to support loans and other items on their balance sheets. This means large banks like JPMorgan Chase and Citigroup can issue more Treasury bonds and repos in the market and get rollovers from the Fed. For smaller banks, which are the lending engines of the US economy, they can increase construction and industrial loan issuance.

S&P Global estimates that this ESLR balance sheet reduction will generate $1.3 trillion in new loans. So, why would banks have loan demand? One criticism of this analysis from other macroeconomists is that they believe the banking system lacks demand, isn't creating enough loans, or demand is insufficient. But there is a fantastic source of demand: the US Department of Defense. They not only inject equity into certain deals but also provide guarantees for 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. So, when a hyperscaler cannot 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 support their debt. So, keep a close eye on construction and industrial loans; I think you can get weekly data from the Fed.

The advantage of bank loans is that their multiplier effect is higher than central bank loans. Experience 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 in November last year, roughly around the same time Bitcoin bottomed. I think we've experienced some shocks and volatility. 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, but the specific number isn't crucial. Thank you all.