Arthur Hayes predicts a new narrative: Bitcoin will become the preferred currency for artificial intelligence

Author: Arthur Hayes

Compiled by: Bai Ze Research Institute

Translator's Note: Any views expressed below are solely those of the author and should not be construed as investment advice or recommendations for engaging in investment trading. Due to length constraints, some content from the original text has been omitted.

A few weeks ago, after visiting a truly outstanding coffee shop in Paris, my confidence in the future of humanity was restored. Driven by a strong passion for crafting specialty coffee, the baristas at this shop offer a coffee omakase experience (similar to a Japanese omakase where the chef decides the meal). Customers wishing to experience this must make a reservation. When the baristas translate their passion for the coffee craft into an incredible customer experience, this experience—at least for now—can only be delivered by humans.

Therefore, I hope that artificial intelligence (AI) will primarily be used to eliminate most of the tedious and laborious jobs currently performed by humans, allowing more people to continue pursuing their dreams. Ideally, this would lead to the next "Renaissance," as millions (even billions) of humans could suddenly do what they love and create happiness through art.

Before such a glorious future arrives, we must break through boundaries and find answers to the most critical questions of our time: Will AI surpass us weak humans and become our masters? Since the first computer emerged during World War II, scientists and philosophers have debated and pondered how machines will evolve and their impact on human life. Most of the best science fiction authors have contemplated the interactions between humans and AI; however, there is still no clear consensus on the most likely outcomes. But today, we are closer than ever to finding answers. Recent advances in computing power have brought us to a tipping point, where AI will spread like a virus, almost overnight changing the course of humanity. In just two months, ChatGPT reached 100 million monthly active users, becoming the fastest adopted technology in human history—imagine how much more change will occur as AI integrates into human daily life and continues to learn and improve.

I am neither a scientist nor a philosopher; I am a businessman. As a businessman, my primary goal is to make money—therefore, when I see this new economic field of AI significantly enhancing the financial returns of many public and private companies, I feel both eager to embrace it and wary of it. I want to embrace AI because I know that enhancing humanity's future will make AI extremely valuable; however, I also know that the first capital invested in novel, super-exciting new technologies often gets burned because it pays too high a price for growth.

Take Amazon as an example: from its peak in 1999 to its trough in 2001, the company's stock price fell by 93%, but then it rose 400-fold. Can you seize the opportunity in the dark? I don’t think I can. I would rather miss the first surge of bullish sentiment and then buy in at the bottom.

But I also know myself; just sitting on the "sidelines" watching others participate won't make me comfortable. I must join this "fashion" wave. Therefore, to profit from the upcoming AI boom, I must identify the intersection between the industry I know best (cryptocurrency) and the exciting new developments in the AI industry. This is the purpose of this article and the next two articles I will write, which together will form a triptych on the potential intersections between cryptocurrency and AI.

The themes of these three articles are as follows:

Bitcoin Will Become the Currency of AI (This Article)

DAOs and DEXs: How AI Will Change the Meaning of Profit-Driven Enterprises

The Shitcoins That Will Benefit Most from AI's Data Demands

Before we begin this article, let’s clarify some terminology.

When I use the term artificial intelligence or AI, I refer to anthropomorphized thinking machines. While some may argue that AI is not "alive" in the sense of humans and carbon-based life forms, we still have not figured out what "consciousness" is—so on what basis can we say that silicon-based machines cannot possess consciousness?

I will assume that these AIs will primarily focus on a) survival and b) achieving the goals set by their creators (i.e., humans or future AIs).

Bitcoin Will Become the Preferred Currency of AI

In this article, I will explain why Bitcoin, created by Satoshi Nakamoto, will become the preferred currency of AI.

First, I will discuss why AI needs to use blockchain-based digital payment systems. I do not believe that this fact alone is sufficient to make Bitcoin the presumed winner, as fiat currencies can also operate on public blockchains (like Tether). Central Bank Digital Currencies (CBDCs) also rely on permissioned blockchains. However, the point of this section is that traditional payment systems (i.e., TradFi) are unsustainable for AI-driven economies.

Second, I believe that the two most critical "foods" for any AI are data and computational power. Similar to humans, AI's "food" is merely a derivative of energy. I believe that AI needs to make payments in a currency that can maintain its purchasing power for energy over the long term.

Third, I believe that Bitcoin is the currency that most closely represents pure energy. In this section, I will compare the monetary properties of Bitcoin, gold, and fiat currencies in relation to AI.

Finally, I will tie all the points together and discuss the implications of Bitcoin as the preferred currency for AI. What impact will this have on on-chain transaction volumes? Most importantly, if the narrative of "AI + Bitcoin" becomes mainstream, how high can Bitcoin's price rise during this bull market cycle, which will end in 2025/26?

Either Blockchain or Bankruptcy

To understand AI's payment needs, we first need to understand the types of financial interactions that AI must engage in to survive continuously.

Suppose there is an AI named PoetAI. PoetAI's goal is to create beautiful poetry based on human language prompts by absorbing all existing poetry. Each time you provide a prompt to PoetAI and receive a poem, you must pay.

PoetAI uses data from others to learn how to write. Therefore, PoetAI must incur costs for the privilege of using past poetry from humans (and possibly other AIs). When PoetAI is first born, it must pay upfront costs to acquire the entire dataset of poetry. Subsequently, whenever new poetry is written, PoetAI must also acquire that data. PoetAI must continually pay all these different data providers because, as the number of poems increases, it will constantly try to acquire and learn more poetry.

Finally, PoetAI must exist in electronic form, which means that using semiconductors ("chips") incurs costs for electricity and computational power. As long as PoetAI is "alive," it must continuously pay these costs.

So, what type of payment system does PoetAI need? It must use a system that is always available, digital, and fully automated. A system that is only available during human working hours will not work. Clearly, the banking system—which is only open Monday through Friday—is not suitable.

One might argue that a "digital version of a bank" like PayPal is appropriate. However, PayPal has a censorship mechanism. PayPal and similar companies often block payments from individuals they deem unworthy. PayPal does this because it must comply with banking regulations.

For an AI that fundamentally does not understand human laws, such platforms are highly risky and therefore will be unpopular. AI needs a digital payment system with clear and transparent rules that apply regardless of who is transacting or what fees are being paid. No single entity should have the power to arbitrarily change the rules of the game. (AI has not yet formed a large enough force to compel payment systems to submit to its will.) The system must be resistant to censorship from the outset. Therefore, the most suitable payment system can only be supported by public or private blockchains. The rules of the blockchain are written in clear and transparent code. This is why AI can be very well suited to adopt blockchain digital payment systems.

"Wait a minute," you might say. "Permissioned blockchains cannot resist censorship because those who own the 'permissioned blockchain' can change the rules at any time." This is correct, and it is also part of why I believe that censorship-resistant digital currencies like Bitcoin will become the preferred currency for AI.

By using a blockchain-based payment system, PoetAI (or any other AI) can also receive micropayments as needed. PoetAI can then continuously make payments to other participants in the digital economy through this always-online blockchain network.

AI Must "Eat"

AI requires two key resources to exist continuously: data and computational power.

Let’s return to PoetAI. To succeed, PoetAI must constantly learn from new poetry. The data for these poems must be hosted somewhere. What happens with hosting? It consumes electricity.

Next, PoetAI needs a super-powerful network of computers to understand all this data. These computers take the provided data, learn from it, and then provide answers based on human language prompts. Learning is ongoing because the more poems PoetAI writes, the better it becomes at creating poetry. But in any case, these actions require computers to consume electricity.

When we strip PoetAI's "food" down to its most basic components, they are essentially semiconductors and electricity. NVIDIA's stock price has recently skyrocketed like a rocket because the market recognizes that the GPU chips produced by NVIDIA are crucial for all AI. However, this article is not about chips, so let’s discuss the second "food"—electricity.

The profitability of AI depends on its ability to earn more revenue from its output than the costs required for its survival. From this perspective, AI is not much different from humans. As humans, we must create enough value for society so that we can also afford the necessary food/energy.

When electricity is cheap, AI will be "happy," just as humans are happy when they can afford food. Similarly, the currency accepted for its output must maintain its purchasing power in kilowatt-hours, just as the currency humans accept for their labor must be able to purchase a constant amount of calories.

Bitcoin as Energy Currency

In this section, I will discuss how gold, fiat currencies, and Bitcoin provide value to AI. Understanding the value of each currency, its origins, and how it is held and transferred allows us to grasp how its purchasing power may change over time. Scarcity, censorship resistance, and energy purchasing power are the three attributes for evaluating each currency.

Gold

The amount of gold on Earth is limited. To obtain gold, we mine gold ore from the ground and then extract it into the shiny gold bars we are all familiar with.

Gold mining has evolved over time. Initially, we mined using human labor. Later, we began using horses and oxen for certain mining activities. With technological advancements, we now need to mine gold deep underground using hydrocarbon-powered machines.

Gold is certainly a derivative of energy, but the source of that energy is not constant. It could be human or animal labor, or it could be machines burning diesel. But no single source of energy is directly related to the price of gold production.

Gold is a physical commodity. To use it as currency, you need to carry gold from point A to point B. However, in the digital world, we can create proof of ownership or derivatives representing gold stored in a vault. The problem with proof of ownership of gold is that you must trust the entity issuing the proof to actually have the gold they claim to be holding. Therefore, if gold is to achieve efficient digitization, it must rely on that entity. In this sense, digital gold does not resist censorship.

Fiat Currency

Fiat currency is born when a government issues a decree that turns previously worthless paper into money. The U.S. government issues dollars, which are just printed on paper; but by mandating that all legal transactions within the U.S. must be conducted in dollars, demand for the dollar is created. Moreover, since most new dollars are virtually created—i.e., recorded digitally in the credit and debit of commercial bank accounts—rather than printed, their creation itself requires almost no energy.

The value of the dollar or any fiat currency entirely depends on the credibility of the government issuing the currency. The issue of credibility is that an increase in per capita energy expenditure does not necessarily mean that the government will be more credible. A government can spend vast amounts of energy or possess significant natural wealth, but if it is extremely corrupt, no one will believe it can maintain the value of its fiat currency relative to energy over time. When it comes to currency valuation, politics is more important than the material wealth of the government.

This means that it cannot be assumed that fiat currency has any energy value over time, nor can we objectively predict which form of politics will last the longest. Large-scale human civilization has only existed for a few thousand years. Compared to the length of time the universe has existed, this span is barely a speck of dust. During this time, we have tried various forms of political organization—but none have proven to be absolutely correct.

Fiat currency can be held physically or digitally. Currently, the world is in a transitional phase where we have both paper currency and digital fiat currency. I believe that paper currency will be phased out by most countries within the next decade. All fiat currencies will become digital and will be transferred instantly on some payment network—either operated independently by the state, such as CBDCs, or on public blockchains (like ERC-20 USDT). Therefore, digital fiat currencies also lack censorship resistance, as governments control their issuance, usage, and can change the rules at any time.

Bitcoin

Bitcoin is created by solving complex problems with computers. Miners purchase ASIC chips and use electricity to create Bitcoin. It’s that simple. There is no other way to create Bitcoin besides consuming electricity.

The Bitcoin network has determined that the total supply of Bitcoin will always be 21 million. Therefore, Bitcoin is a limited digital commodity. Bitcoin is a purely digital product with no mass. Whether I have 1 satoshi (1 satoshi = 0.00000001 Bitcoin) or 21 million Bitcoins, they weigh the same: nothing.

All participants in Bitcoin must agree on the network rules; otherwise, transactions will not be processed. The network rules are public and transparent to everyone. The rules can change, but changes require the agreement of a vast majority of miners when validating blocks. The "economic game theory" that underpins Bitcoin helps ensure that users of the network do not act against their own interests. For example, network participants would not vote to increase the total supply of Bitcoin, as this would undermine one of the key factors maintaining its value (i.e., limited supply). Bitcoin is censorship-resistant because the only way to change the rules is to submit a public proposal to the entire network and have it decided by a majority. There is no single entity that can arbitrarily change the network rules.

Now, let’s summarize these three forms of currency and their attributes.

Scarcity:

Gold—limited supply on Earth, but the quantity beyond Earth is unknown. When we start mining asteroids, the supply of recoverable gold will surge. What will happen to gold's "value" in the near future?

Fiat currency—unlimited supply. Governments can create any amount of currency at almost no cost.

Bitcoin—supply is forever limited.

Censorship Resistance:

Gold—physical commodity. The only way to use digital gold is to trust the proof of gold issued by a centralized entity. Therefore, its digital form is not censorship-resistant.

Fiat currency—can be physical or digital. While it can be in digital form, it lacks censorship resistance due to government oversight.

Bitcoin—purely digital and censorship-resistant.

Energy Purchasing Power:

Gold—can be created through various forms of energy. Therefore, no single source of energy can define the value of gold.

Fiat currency—consumes almost no energy, and its value is more based on government political activities. Thus, its value cannot be precisely defined at any time in the present or future.

Bitcoin—can only be created through computers that consume electricity. Over time, the cost of electricity determines the value of Bitcoin.

How Will AI Choose?

Let’s look at some questions that AI will ask itself before choosing a payment network and currency.

Can this currency resist censorship?

As I mentioned above, I believe AI needs a currency that can operate on a censorship-resistant blockchain. Only Bitcoin possesses this quality.

Bitcoin wins.

Will the currency maintain its value relative to AI's "food" over time?

AI's "food" is electricity. AI must ensure that it can always afford to "eat." Bitcoin will win because Bitcoin is essentially a derivative of electricity costs.

Bitcoin wins.

Is the currency scarce?

On Earth, the supply of gold is limited, but beyond Earth, the supply is essentially unlimited. Fiat currency is not scarce because governments can create more fiat currency at zero cost. Bitcoin's supply is limited by cryptography.

Bitcoin wins.

Does this currency have a provable longevity?

AI's potential lifespan is much longer than that of human civilization. Theoretically, if AI can survive in a vacuum, it could exist for trillions of years until the universe is destroyed. Current human civilization can only survive on Earth, with no signs that we have the capability to avoid various extinction events (whether from asteroid impacts or massive volcanic eruptions).

AI should not trust any institution that requires human operation because 1) humans are prone to error, and 2) probability-based AI will outlast human civilization. In the future, the mining of gold and Bitcoin can be done by AI-driven robots, but fiat currency needs to be managed by a government made up of humans. AI is unlikely to allow itself to rely on anything operated by humans, so only gold and Bitcoin are suitable.

In summary, Bitcoin is the preferred currency for any AI. It is purely digital, censorship-resistant, provably scarce, and its intrinsic value entirely depends on electricity costs. Today, nothing can challenge Bitcoin in these aspects.

Bitcoin Price = to the Moon?

I have a feeling that most of you are wondering if I will attempt to estimate the impact of AI adopting Bitcoin on its price. Well, let me take a guess. Before I do, please understand that analysis does not represent absolute correctness but rather sows the seeds for potential narratives (AI + Bitcoin) that may emerge in the future. If enough people believe in a bright future where AI dominates the global economy and uses Bitcoin as currency, then before this possibility occurs, the market will pay a certain price for growth, and Bitcoin's value may rise to ridiculous levels.

My mental model is as follows:

• As I have written all year, a crazy printing spree will occur in the near future as part of an attempt to eliminate a massive amount of non-productive sovereign debt through inflation.

• This newly created capital will seek to invest in things that are expected to rejuvenate the global economy. In this decade, I believe this will be everything related to AI and robotics. While many other "boring" industries will face funding shortages, AI and robotics companies will face more funding than they currently need for their development.

• If Bitcoin begins to be adopted by AI, we may see two different "frenzies" combine into a "super frenzy": the frenzy to escape inflation within the fiat financial system and the frenzy to escape inflation itself. The overlap of these two frenzies could drive investors to pay a steep price for growth, leading to the value of the Bitcoin network rising to ridiculous levels.

I created a predictive model using three levels (low, medium, and frenzy) to understand the potential range of outcomes.

This model depends on two key variables:

AI Economic Scale

What proportion of global GDP will the AI economy account for in the future decade of 2025/26? The global GDP in 2022 was $100 trillion (IMF), and I will estimate the proportions as follows:

Low = 5%

Medium = 10%

Frenzy = 50%

Bitcoin Market Cap / Daily Transaction Value Multiple

The value of the Bitcoin network is a prediction of the future transaction volume that will occur. To understand the possibilities, I looked at the multiples since 2015. I calculated the daily value of BTC transferred on the Bitcoin network, excluding "change" returned to the sender. Then, I calculated the median for each year to obtain a figure not affected by daily highs or lows. Finally, I divided the Bitcoin market cap on that day by the median to derive the forward multiple (i.e., predicted performance).

Here are the relevant statistics from 2015 to the present.

I expect my low, medium, and frenzy to be as follows:

Low = 8x

Medium = 23x

Frenzy = 172x

I assume that Bitcoin transactions will match the GDP share of AI. Intuitively, this makes sense because GDP is merely a measure of economic activity—therefore, there must be at least a certain amount of payments between economic participants.

*BTC Price Estimate = (([AI Economic Scale %] * [2022 GDP / 365] * [Bitcoin Market Cap to Daily Transaction Value Multiple] * [100% Payment Velocity Percentage]) / [BTC Total Supply]) + BTC USD Spot Price*

The results are as follows, showing the potential Bitcoin price and its nominal price level increase percentage:

Remember, if the market believes that my assumptions could hold true in the future, then the market will pay too high a price for the growth of the Bitcoin network. When market prices adjust from "will never happen" to "maybe could happen," the most money is made.

While I do not know, nor can I know, the future of AI + human civilization, I intend to hop on the hype train of the "AI + Bitcoin" narrative and profit from it. Because while AI may be my assistant, I will not be at the forefront of the AI field.