Original title: The Butterfly Touch

Original author: Arthur Hayes, co-founder of BitMEX

Original translation: BitpushNews

Editor's note: In Arthur Hayes's latest article "The Butterfly Touch," he predicts that USD and RMB liquidity will continue to rise, and Bitcoin and cryptocurrencies will benefit from this trend.

AI Optimism

Capital expenditure (CAPEX) supporting AI model training and inference is unprecedented in the history of human civilization. Many believe this investment in intelligence will create value for humanity unlike any previous technological development. I agree; however, as humans, we always tend to overdo things. 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 reason for lavish spending, but patriotism shouldn't come with a price tag... Both the US and China believe AI and technological supremacy are vital to their territories' survival.

Tech tycoons are also very willing to sell them horror stories: what would happen to their country if the other side gains machine intelligence supremacy first. Objectively speaking, both leaders have witnessed firsthand how the proliferation of AI and drones can bring victory, and they are convinced of this. Therefore, they will ensure that the primary economic and military objective 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 flows of the most profitable software companies. However, given the scale of current and future spending, increased financing through credit channels will be necessary.

In China, banks are slowing down financing for real estate and shifting towards the tech sector. Beyond data center-related expenditures, 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. 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 decreases, the complexity of tasks AI can perform increases, meaning computational power consumption grows exponentially; this is the essence of the "Jevons Paradox."

Additionally, there is the "Red Queen effect": as competitors improve model efficiency, a company's AI CAPEX rapidly depreciates. This leads to a race to further increase spending to create better models to beat competitors, while simultaneously rendering the hundreds of billions (soon trillions) spent by rivals 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 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 up the market from its frenzy, and people will begin to question whether machine intelligence is truly worth that much money.

Political Shift: The 2028 US Presidential Election. The rising prices of raw materials, labor, and especially electricity caused by massive AI buildout are unpopular in many regions. Furthermore, 90% of Americans do not hold significant stock portfolios and cannot benefit from soaring share prices. Politically, it is very easy to campaign on an anti-AI platform, emphasizing 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's bombing of Iran shows little regard for the impact of war on the global economy. Or perhaps he does care, but assumptions about a quick victory in this year's "special military operation" have proven overly optimistic. America 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 less fortunate. 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 shortages of food and energy. These countries, trusting the US, have 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 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, the investment decisions of these countries will undergo a dramatic shift. When you can't get food and energy due to a war you didn't start, holding US Treasuries or S&P 500 ETFs becomes meaningless. To compensate for these deficiencies, sovereign states will marginally liquidate USD assets in the future, instead investing in infrastructure, defense, and physical commodities.

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

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

"Good" Australia: Borrows USD from the Fed to buy jet fuel.

If the US market needs more momentum to offset sovereign selling, regulations can be relaxed to allow banks to hold more US Treasuries and stocks. The relaxation 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 has been "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 that will last for decades. This means monetary policymakers must maintain accommodative financial conditions to fill the void left by foreigners channeling savings into physical infrastructure rather than "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 both 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 at $60,000 earlier this year. Backed by trillions of USD and RMB yet to be created, a return to $126,000 seems inevitable. Many naysayers refuse to participate in this rally 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 reckless money printing. But it will demonstrate extreme sensitivity to fiat liquidity expansion. I expect the rally to intensify, with the upward trajectory becoming explosive when it breaks through $90,000, forcing many call option sellers to cover.

I don't know how high Bitcoin can go, but I will max out Maelstrom's portfolio risk unless a major change occurs. By the November midterm elections, US political attitudes towards AI and inflation could turn very hostile, potentially creating a bump in the ride up.

But remember: High oil prices don't hurt Trump as much as people think. MAGA is destined to lose California (where energy policies lead to the highest gas prices in the nation), but $100 crude oil and infrastructure reconstruction in Venezuela and the Middle East will benefit the oil and gas sectors in Trump-supporting states. As long as money can be stuffed 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 altcoins (Shitcoins). Besides our heavy positions in Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite is $NEAR. My next article will explain our thesis: why 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, rapidly pushing it back 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 mess it up. Let's go wild.

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