Arthur Hayes’ New Article: AI Bubble Nears Burst, Crypto Market Under Short-Term Pressure

Original author: Arthur Hayes

Original compilation: Luffy, Foresight News

Is it all just an illusion, or has investing in artificial intelligence really become as simple as subscribing to Citrini Research and blindly buying all the stocks it recommends?

Am I dreaming? Or has the price of oil truly lost its influence over the economy and politics? That would explain why Trump and the Islamic Revolutionary Guard Corps are trading barbs on social media while a multitude of ships remain stranded in the Strait of Hormuz.

The two-year US Treasury yield is 0.5 percentage points above the effective federal funds rate. The market is sending such a clear signal. Will the Federal Reserve really hold its ground and refuse to raise rates at its next meeting?

Will all the dividends created by artificial intelligence for the United States truly fall only into the hands of a small group of tech insiders?

This chaotic world in front of me forces a reality check, to confirm whether I am awake or deep in a dream. If the test proves it's all an illusion, I will adjust my portfolio immediately. This article is my inspection process. By the time these words are written and my thoughts are organized, my position layout will either undergo a major shift or remain status quo.

Let me state my core judgment first: The current market state feels more like a dream. Within the entire investment system, the price of oil and other hydrocarbon energy sources is a core variable with reverse transmission effects. The essence of human perception of the world is converting energy into biological intelligence; the logic of artificial intelligence is no different. This law will never be broken. The market might deviate from this common sense in the short term, but reality will eventually exact its revenge.

This article will start with oil prices and ultimately conclude with the US election. The current situation is highly likely to trigger a bubble burst in AI stocks, dragging the entire crypto market down with it. Once the dust settles, Bitcoin will have a chance to find its bottom and rally. I previously asserted Bitcoin would never touch the $60,000 mark again – clearly a misjudgment, which is par for the course in market predictions. I always adhere to one principle: Have strong opinions, but hold them loosely.

Let's dive into the analysis.

2. To Negotiate or Not: The Core Predicament

Politicians always act in their own self-interest. The reasons behind Trump's unprovoked military action against Iran are likely known only to him. Faced with the constant barrage of statements from him and his advisors, it's impossible for outsiders to discern the truth. Since we're here, dwelling on the cause is pointless. The real question is whether Trump and the Islamic Revolutionary Guard Corps will choose a ceasefire and how they will end the standoff.

This conflict is now entirely Trump's making. For him and the Republican Party, starting a war during an election year puts them in an awkward position.

In the US, the prices of necessities like gasoline and food often directly determine election outcomes. With the Strait of Hormuz passage blocked, energy and food inflation are steadily rising, all stemming from the Trump administration's military action against Iran, undertaken without public consent. Some might point fingers at Israel, but that argument doesn't hold water. Anyone familiar with US history understands that domestic forces won't take orders from external entities.

As long as the war doesn't directly impact their lives or cause casualties among friends and family, the American public isn't averse to foreign wars. Trump has repeatedly emphasized that this specific military operation resulted in only thirteen US soldier casualties. This is precisely why the US prefers using high-precision long-range weaponry, engaging in "video game warfare." Even if this Middle Eastern campaign lacks a clear winning strategy and goes against the expectations of some supporters, his base still chooses to stand with the Republican Party. This is evidenced by some Republican lawmakers who wavered in their stance, faced internal pressure from Trump, and subsequently lost their elections.

Trump's core vulnerability isn't his base voters refusing to turn out in November. It's that soaring prices could drive a significant number of swing voters towards the Democratic Party. The cost of living has become his biggest electoral challenge.

To win over swing voters, Trump needs to at least stabilize current oil prices. Now that the supply chain is gradually absorbing the pressures from rising energy and raw material costs, completely curbing inflation is unrealistic. All Trump can do now is manage market expectations for inflation, not change inflation itself.

Whether Trump is willing to reach a settlement with Iran depends entirely on oil prices. As oil prices rise, his rhetoric softens. But the moment the market anticipates negotiations, causing oil prices to fall, he changes his tune. After all, from a geopolitical standpoint, any agreement reached would likely be more disadvantageous than the one the Obama administration signed with Iran. For many voters, this would equate to "defeat," costing the Republicans at the polls.

Negotiations always require compromise from both sides. The Islamic Revolutionary Guard Corps has similar considerations. If oil prices are too high, their key economic partners will pressure Iran to make concessions to the US. However, once Iran signals a willingness to negotiate and oil prices fall, the pressure from these partners diminishes.

At current oil prices, neither side has a strong incentive to back down. While oil prices are significantly higher than before the conflict, they haven't reached a crisis-triggering level. Commodity markets are generally stable, there's no global famine, and most countries can source key industrial materials from alternative channels.

But this delicate balance is unsustainable. A significant reduction in core global energy supply without a corresponding price surge defies market logic. Once global spare production capacity is exhausted, spot prices will inevitably spike – a consensus among many commodity analysts. The crisis hasn't fully erupted yet only because global energy inventories were ample before the conflict.

If the US-Iran standoff extends to the end of the second quarter, we can expect a massive surge in spot prices for hydrocarbons and basic commodities in the third quarter.

To paraphrase Churchill: politicians will make the right decision only after exhausting all other options. Only when the situation spirals completely out of control will Trump and Iran truly sit down at the negotiating table. In my view, the disruption to shipping through the Strait of Hormuz will likely persist until early Q3.

Let's assume oil prices trend higher amidst volatility. How would rising oil prices interact with Trump's campaign rhetoric?

3. The November Election Showdown: Republicans vs. Democrats

According to Polymarket's odds, the Republican Party will only manage to hold a slim majority in the Senate, while losing significant ground in the House of Representatives.

Conventional wisdom suggests the Republicans will lose the House. I have a different view. Trump still has a chance to turn the tables. The breakthrough lies in shifting the narrative, specifically by introducing rhetoric around regulating and taxing the data center construction and the AI industry.

Here's the current seat distribution among the parties (218 votes are needed to pass a bill):

Based on current Polymarket odds, here's the projected party composition after the election:

The post-election outlook for the Republican Party in both chambers is not optimistic. However, the GOP can change the situation through redistricting. When the existing rules guarantee defeat, changing the rules becomes inevitable. Assuming Polymarket's predictions are correct, Republicans need to gain 19 seats. Redistricting can help reduce that number.

Here's the potential impact of redistricting:

Now, the Republicans only need to gain 11 more seats. Next, let's look at the competitive races. Based on current polls, within the margin of error, which districts might lean slightly Republican?

There are 35 seats where the outcome is highly uncertain. As mentioned earlier, high inflation and rising living costs are negative topics Trump can't easily overcome. Another major issue that can galvanize voters on both sides is the expansion of data centers and AI's impact on the job market.

Almost everyone, except the ultra-wealthy, worries that data center construction will drive up costs and that AI will eliminate jobs. Multiple regions have already imposed moratoriums on new data center projects. Calls for higher taxes on AI companies to subsidize ordinary citizens are growing louder. After all, the vast majority are not AI executives or highly paid employees.

For voters in competitive districts, these issues are highly influential. Trump could easily secure the remaining key seats by taking a stance on the AI industry. At this stage, he only needs to make statements; no concrete legislation is required. He just needs to promise ordinary people that if the GOP wins, they will crack down on the AI industry after the election.

As a seasoned politician, Trump is a master at making campaign promises he rarely fulfills. His handling of the Epstein files is a classic example: loudly pledging a full investigation during the campaign, then releasing only a small amount of documents after taking office. He can use the same playbook here: promise legislation to slow data center expansion, impose windfall profit taxes on AI companies, and use the revenue for a new round of stimulus checks. After the election, with the GOP firmly in power, he can quietly backtrack.

Some might find it strange for Trump to mimic left-wing Democratic tactics. But remember, he rolled out the largest universal relief program since the New Deal, without restricting how recipients spent the money on daily necessities. To maintain his political position, temporarily distancing himself from AI sector titans like Elon Musk and projecting an image of supporting ordinary people is not a difficult task for Trump.

If Trump does issue strong rhetoric against the AI industry, the market won't just see it as a campaign tactic. It will assume the US is serious about limiting capital expansion in AI and increasing industry taxes. Panic would spread instantly, and the AI stock bubble would burst.

We saw a glimpse of this sensitivity when Elon Musk and Trump publicly argued on social media, leading to Musk's relevant departments questioning Trump. Trump responded by threatening to cancel government contracts related to Musk's companies, causing Tesla's stock to drop 18% in a single day. Politics can nurture an industry, but it can also deliver a swift blow.

That argument was later revealed to be a publicity stunt; the two quickly reconciled, and Musk was even invited to attend Trump's recent summit with Chinese leaders in Beijing. Yet, the market believed it at the time, triggering a massive sell-off.

That was just volatility from a personal conflict. If Trump, representing the Republican Party, explicitly states plans to impose heavy taxes on AI models and agent-related businesses, the impact would be far greater. When similar rhetoric emerged from South Korean political circles, the local benchmark index nearly hit the daily limit down the next day. The market only returned to an uptrend after the government issued an emergency denial.

The current market's optimistic outlook on the AI sector is built on the assumptions that industry revenues will continue to grow exponentially and that new technology and wealth concentration won't trigger public backlash. This belief is detached from reality; it's more like living in a dream. Trump's statements would become the reality check that pricks the bubble. Whether he actually takes action still hinges on oil prices.

The more the Iran situation pushes oil prices up and exacerbates inflation, the fewer options Trump will have for campaign messaging, eventually forcing him to target data centers and the AI industry.

The reason Trump desperately wants to avoid the Democrats controlling the House is clear. If the Democrats take the House, they can use their subpoena power to continuously call Trump, his family, and his inner circle to testify, pounding them with tough questions. If the Democrats retake the White House in 2028, a DOJ armed with extensive leads from these hearings could pursue a reckoning, investigating Trump's business entities.

Let's map out the entire logic chain: A prolonged US-Iran standoff forces oil prices higher; rising prices frustrate voters; Trump is left with regulating and taxing the AI industry to win back support.

From now until the November election, even a halving of AI-related stocks is a price Trump might accept if it means escaping endless Democratic investigations. After the election, he can easily reverse his anti-data center and AI rhetoric. The industry would recover, and the S&P 500 could potentially hit the 10,000 mark.

But for investors, market movements are interconnected. A crash in the AI sector would fundamentally alter expectations for its future returns. After experiencing the shock of regulation and heavy taxes, investors will no longer be able to blindly bet on this track.

4. California Dreaming: Where Does the Liquidity Flow?

Before analyzing the impact of the proposed listings of three giants – SpaceX, Anthropic, and OpenAI – on global financial markets, let me explain one thing: why Bitcoin hasn't experienced a simultaneous surge despite the easing of USD liquidity since the end of Q3 last year.

On November 30, 2022, ChatGPT was launched to the public, kicking off the AI super-bubble. Almost simultaneously, the scandal of FTX founder SBF misappropriating user funds was fully exposed. Bitcoin, after hitting a low of around $15,000 that year, rallied to $125,000 by October 2025, a cumulative increase of over six times. However, Nvidia's stock rose elevenfold during the same period, and numerous small and mid-cap tech stocks leveraging computing power to convert electricity into intelligence also skyrocketed. The returns of the AI sector have far outpaced the crypto market, and the gap has been widening since late 2024.

Even with Bitcoin (white) at all-time highs, Nvidia's (gold) returns were still superior

Bitcoin (white) has performed worse since its ATH, now down 50%. Nvidia (gold), the world's most valuable company, is still up 10% since late 2025

Based on my previous logic of analyzing the crypto market through fiat liquidity, Bitcoin should have seen larger gains in this environment. The reality is opposite. What's the problem?

Previously, I was accustomed to looking at the total amount of fiat currency issuance, overlooking the specific direction of capital flows. I originally believed that liquidity would eventually find its way into Bitcoin, pushing the price up. This time, my judgment was off.

My conclusion is: almost all of the new USD liquidity has been absorbed by the AI track. AI is a highly capital-intensive industry. Building the massive data centers needed to run AI consumes enormous amounts of energy. Hydrocarbons, nuclear power, and renewable energy are converted into electricity, which is then sent to data centers to power the specialized chips for model training and inference operations.

Starting in 2024, global capital expenditures for data centers began to surge, accelerating further in 2025, along with a massive increase in industry financing needs. Aggregating publicly available data, total debt financing across AI-related fields since November 2022 amounts to $1.5 trillion. Coincidentally, the increase in the US broad money supply M2 over the same period was also exactly $1.5 trillion. The answer is clear: all the newly created dollars flowed into the AI track, leaving no incremental liquidity for Bitcoin.

Bitcoin's strong rebound from the FTX bankruptcy lows in 2022 was possible because the massive debt-fueled expansion in AI primarily occurred after 2025. Of that $1.5 trillion in debt, $1.3 trillion was incurred from 2025 to the present. Coincidentally, Bitcoin's price peak occurred around October 2025, precisely when AI capital expenditures reached unprecedented levels.

This linkage is crucial. If the AI stock market crashes,