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Arthur Hayes's Latest Long Read: The AI Bubble is the Greatest Opportunity

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The bull market is here, and I'm buying with my eyes closed. Seize the opportunity while the herd is still asleep, while the AI bubble has not yet burst.

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," it is predicted that USD and RMB liquidity will continue to rise, benefiting Bitcoin and cryptocurrencies.

AI Optimism

Capital expenditure (CAPEX) to support AI model training and inference is unprecedented in human history. Many believe that this investment in intelligence will create value for humanity unlike all previous technological builds. I concur; however, as humans, we always overdo it. In this universe, absolute infinity and perfection are unattainable. Therefore, in envisioning a future driven by machine intelligence, we may overconstruct.

AI proponents cite nationalism as a reason for lavish spending, but patriotism should not come with a price tag... Both the U.S. and China view AI and technological supremacy as crucial to the survival of their territories.

Tech titans are also very eager to sell horror stories: what will happen if the other gains AI supremacy first. Objectively, both leaders have seen firsthand how the proliferation of AI and drones leads to victory and they believe in this. Therefore, they will ensure that the primary objective, economically and militarily, is to further build the most efficient machine intelligence domestically.

In the U.S., most AI CAPEX to date has come from the operating cash flows of the most profitable software companies. However, given the scale of current and future expenditures, additional financing will be needed through credit channels.

In China, banks are slowing down funding for real estate and instead turning to fund the tech sector. Besides expenditures related to data centers, both the U.S. and China continue to invest in increasing power supply.

That is to say, central banks are creating more fiat currency, easing financial conditions.

The combination of political will (winning the AI race) and financial will (funding construction through money printing and loans) has created the perfect environment for cryptocurrency. The fiat unit of tomorrow will be far greater than today, and with the surge in AI and electrification expenditure, the rate of change is accelerating. As the cost of intelligent units decreases and the complexity of AI-executed tasks increases, this means that computing power consumption is experiencing exponential growth; this is the essence of the "Jevons Paradox."

There is also the "Red Queen Effect": as competitors improve the efficiency of their models, the AI CAPEX of a company quickly depreciates. This leads to further increased expenditure to create better models to beat competitors in the race, while also rendering the billions (soon to be trillions) of dollars invested by competitors obsolete. Therefore, unless hindered by exogenous market events, AI CAPEX expenditure will expand infinitely.

When Will This Frenzy End?

I believe there are two events that will happen almost simultaneously and change people's perceptions of the necessity of spending trillions on building AI.

Market Indigestion: A massively scaled and financially irresponsible AI-related IPO or mega-merger that the market cannot bear. This will sober the market from its frenzy, prompting people to question if machine intelligence is truly worth so much money.

Political Shift: The 2028 U.S. Presidential Election. The surge in AI construction leading to a rise in raw materials, labor, especially electricity prices, is not welcomed in many regions. Moreover, 90% of Americans do not hold significant stock, unable to benefit from soaring stock prices. Politically, it is very easy to gain votes by campaigning against AI, focusing on human labor value, and curbing inflation.

But at this moment, the liquidity of the U.S. dollar and the Chinese yuan will continue to rise. Bitcoin and cryptocurrency will benefit from this.

Every Country Should Mind Its Own Business

Trump bombs Iran, showing no concern for the impact of war on the global economy. Or he may care, but the assumption that this year's "special military operation" could quickly triumph has proven overly optimistic. The U.S. has divinely bestowed cheap energy (fossil fuels) and fertile farmland. Prices may rise, but even if the Strait of Hormuz is partially closed, Americans won't starve — unless politicians decide to spend money on Falujah rather than food stamps.

However, people in most of Europe, Africa, and Asia are not so fortunate. Unfortunately, the political elites of these countries mistakenly believe that U.S. politicians, when deciding whether to launch another war that threatens the flow of essential goods, will take into account their shortage of food and energy. These countries, trusting the U.S., store their surpluses in dollar-denominated financial assets instead of building pipelines, trade routes, or stockpiling necessities.

BCA Research's Marco Papic put it best:

"The entire planet—quite literally—runs through the United States. Why does Germany's defense fall short against Russia? … The United States. Why do most Gulf countries have almost no energy transport infrastructure that bypasses the Strait of Hormuz? … The United States. Why is global manufacturing concentrated in China? … The United States."

Due to the inability to access fertilizers or fuels, investment decisions in these countries will undergo a major shift. When you can't get food and energy due to a war you didn't participate in, holding U.S. Treasuries or S&P 500 ETFs becomes meaningless. To offset these shortcomings, sovereign nations will increasingly liquidate dollar assets and instead invest in infrastructure, defense, and physical commodities.

This poses a problem for the U.S. financial markets because of the large proportion held by foreign countries. If left unchecked, the slow liquidation of dollar assets will lead to a market downturn. U.S. Treasury Secretary Bessent and other policymakers are aware of this. They have two response options: encourage the use of dollar swap lines or modify bank regulatory requirements.

"Bad" Australia: Selling U.S. bonds to buy aviation jet fuel.

"Good" Australia: Borrowing dollars from the Fed to buy aviation jet fuel.

If the U.S. market needs more impetus to offset sovereign nation sell-offs, regulations can be relaxed to allow banks to hold more U.S. bonds and stocks. The relaxation of supplementary leverage ratio (eSLR) related capital requirements is a step in this direction.

Since the establishment of the Petrodollar system in the 1970s, storing surplus savings in dollar assets has been the "best practice." But today, holding dollar assets no longer ensures you get a shipment of fertilizers or oil. "Just-in-time" logistics is dead, and "just-in-case" remains. This is a structural trend that will last for decades. This means that monetary policymakers must maintain an accommodative financial environment to fill the void left by foreigners channeling savings into physical infrastructure rather than "illusory dollar financial assets."

Higher and Longer

War is inflationary, and the U.S.-Iran conflict is no exception. AI CAPEX and infrastructure development provide excuses for increased lending. Politicians, out of necessity from reality and perception, support money printing. This is why Bitcoin has outperformed gold and major risk assets like U.S. tech stocks post-February 28.

Bitcoin hit a bottom earlier this year at $60,000, backed by trillions of yet-to-be-created USD and RMB, returning to $126,000 is a sure thing. Many bears have refused to participate in this round of the market, as Bitcoin's performance in the past 24 months has been overshadowed by tech stocks and gold. They fail to understand why Bitcoin remains effective as a hedge against fiat currency debasement. However, it will demonstrate extreme sensitivity to fiat liquidity expansion. I expect the uptrend to intensify, and when it breaks $90,000, with many call option sellers forced to liquidate, the upward trajectory will become explosive.

I don't know how high Bitcoin can rise, but I will max out Maelstrom's portfolio risk unless something drastic happens. By the time of the mid-term elections in November, U.S. politics' stance on AI and inflation may turn very hostile, which could be a minor bump in the rally.

But remember: High oil prices do not hurt Trump as much as people think. MAGA is sure to lose in California (where energy policies have led to the highest gas prices in the U.S.), but $100 oil and infrastructure reconstruction in Venezuela and the Middle East will benefit the oil and gas industry in states where Trump's supporters are based. As long as money is put in the pockets of ordinary Americans, Trump still has a chance to win re-election. So, let it rip, baby, the S&P 500 is heading towards 10,000!

It's time to play with shitcoins. In addition to our heavy holdings in Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite breed is $NEAR. My next article will explain our thesis: why the "privacy narrative" combined with "Near Intents" will create a positive cash flow for the protocol. This will completely reverse the token's lackluster price performance and create a huge pump opportunity, propelling it rapidly towards its historical all-time high from years ago.

It's a bull market now; close your eyes and hit the buy button. There will be a time to sell, but it's definitely not now. Don't mess it up; let's go crazy together.