Original title: The Butterfly Touch

Original author: Arthur Hayes, co-founder of BitMEX

Translation & compilation: BitpushNews

Editor's note: In Arthur Hayes' 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

The capital expenditure (CAPEX) supporting AI model training and inference is unprecedented in the history of human civilization. Many believe that 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 end up building more than necessary.

AI proponents cite nationalism as a reason for lavish spending, but patriotism should not carry a price tag... Both the US and China believe that AI and technological supremacy are crucial for the survival of their domains.

Tech leaders are also very willing to sell them horror stories about what would happen to their country if the other side achieves machine intelligence dominance first. Objectively speaking, both leaders have witnessed firsthand how the proliferation of AI and drones can bring victory, and they are deeply convinced of it. Therefore, they will ensure that the primary economic and military goal is to further build the most efficient machine intelligence within their borders.

In the United States, most of the AI CAPEX so far has come from the operating cash flows of the most profitable software companies. However, given the current and future scale of spending, additional financing through credit channels is necessary.

In China, banks are slowing down funding for real estate and shifting towards the tech industry. In addition to data center-related spending, 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 printing money and loans) creates a perfect environment for cryptocurrencies. Tomorrow's fiat units will be far more numerous than today's, 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."

Furthermore, there is the "Red Queen Effect": as competitors increase model efficiency, the AI CAPEX invested by a company quickly depreciates. This leads to a race to further increase spending to create better models to beat rivals, while simultaneously making the hundreds of billions (soon trillions) spent by opponents 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 and change people's perception of the necessity of spending trillions on AI.

Market Indigestion: A massive and financially reckless AI-related IPO or mega-merger occurs that the market cannot digest. This will sober 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 price increases 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 to benefit from surging stock prices. Politically, it is very easy to campaign on an anti-AI platform that focuses on human labor value and curbs inflation.

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

Every Nation for Itself

Trump bombed Iran, caring little about the war's impact on the global economy. Or maybe he cares, but the assumption that this year's "special military operation" would end swiftly has proven overly optimistic. The US possesses God-given cheap energy (fossil fuels) and fertile farmland. Things might become more expensive, but even if the Strait of Hormuz is partially closed, Americans won't starve – unless politicians decide to spend money on Fallujah rather than food stamps.

But people in Europe, Africa, and most of Asia are not so lucky. Unfortunately, the political elites in these countries mistakenly believe that US politicians will consider their own food and energy shortages when deciding whether to launch another war that threatens the flow of essential commodities. 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 globe – literally – is wired for American hegemony... Why is German defense insufficient for Russia? Because... America. Why do most Gulf states have almost no energy transport infrastructure bypassing the Strait of Hormuz? Because... America. Why is global manufacturing concentrated in China? Because... America."

Unable to access fertilizer or fuel, the investment decisions of these countries will undergo a drastic shift. When you cannot obtain food and energy due to a war you are not even involved in, holding US Treasuries or S&P 500 ETFs becomes meaningless. To compensate for these deficiencies, sovereign nations will, in the future, marginally liquidate dollar assets to invest in infrastructure, defense, and physical commodities.

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

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

The "Good" Australia: Borrows dollars 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 (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 dollar assets has been "best practice." But today, holding dollar assets no longer guarantees you a shipment 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 instead of "illusory dollar financial assets."

Higher + Longer

War is inflationary, and the US-Iran conflict is no exception. AI CAPEX and infrastructure construction 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 around $60,000 earlier this year. With trillions of yet-to-be-created US dollars and RMB backing it, a return to $126,000 seems almost certain. Many skeptics have refused 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 currency debasement. But it will demonstrate its extreme sensitivity to fiat liquidity expansion. I expect the rally to intensify, and when it breaks through $90,000, forcing many call option sellers to cover their positions, the upward trajectory will become explosive.

I don't know how high Bitcoin can go, but I will be dialing Maelstrom's portfolio risk up to the maximum unless a massive change occurs. By the November midterm elections, US political attitudes towards AI and inflation could turn very hostile, which might be a small bump in the upward journey.

But remember: high oil prices hurt Trump less than people think. MAGA is destined to lose in California (where energy policies result in the highest gasoline prices in the US), but $100 crude oil and infrastructure reconstruction in Venezuela and the Middle East will benefit the oil and gas industries 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 already 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 generate positive cash flow for the protocol. This will completely reverse the token's lackluster price performance and create a massive catch-up opportunity, propelling it quickly towards its all-time high from years ago.

This is 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 it up; let's get wild.

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