Original Title: The Butterfly Touch
Original Author: Arthur Hayes, Co-founder of BitMEX
Original Translation: BitpushNews

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 that is unlike any previous technological development. I agree; however, as humans, we always tend to go overboard. In this universe, the infinite and the perfect are unattainable. Therefore, as we anticipate a future driven by machine intelligence, we may end up overbuilding.

AI advocates cite nationalism as a reason for lavish spending, but patriotism should not be tagged with a price… Both the U.S. and China believe that AI and technological hegemony are crucial for the survival of their territories.

Tech moguls are also eager to sell them horror stories: What would happen if the other side gained hegemony in machine intelligence first? Objectively speaking, both leaders have witnessed how the proliferation of AI and drones has led to victories and are firmly convinced of this. Therefore, they will ensure that the primary economic and military goal is to build the most efficient machine intelligence domestically.

In the U.S., most of the AI CAPEX so far has come from the operating cash flow of the most profitable software companies. However, considering the current and future scale of spending, financing needs to be increased through credit channels.

In China, banks are slowing down funding for real estate and shifting to fund the tech industry. Besides spending related to data centers, both the U.S. and China are continuously investing to increase power supply.

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

The combination of political will (to win the AI race) and financial will (to fund construction through money printing and loans) creates a perfect environment for cryptocurrencies. The units of fiat currency tomorrow will far exceed those of today, and the rate of change is accelerating due to the surge in AI and electrification spending. As the cost of unit intelligence decreases, the complexity of tasks performed by AI increases, which means that 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, the AI CAPEX invested by a company rapidly depreciates. This leads to a race to further increase spending to create better models to outpace competitors, while also rendering the hundreds of billions (soon to reach trillions) invested by competitors obsolete. Therefore, unless hindered by exogenous market events, AI CAPEX spending will expand indefinitely.

When will this frenzy end?

I believe two events will occur almost simultaneously and change people's views on the necessity of spending trillions to build AI.

Market indigestion: A massive and financially irresponsible AI-related IPO or acquisition occurs, leading to market strain. This will awaken the market from its frenzy, causing people to question whether machine intelligence is really worth that much money.

Political shift: The 2028 U.S. election. The rise in prices of raw materials, labor, and especially electricity due to large-scale AI construction is unpopular in many areas. Additionally, 90% of Americans do not hold significant amounts of stock and cannot benefit from soaring stock prices. Politically, it is very easy to garner votes by opposing AI, focusing on the value of human labor, and curbing inflation.

But at this moment, the liquidity of the dollar and the yuan will continue to rise. Bitcoin and cryptocurrencies will benefit from this.

Every country, clearing the snow in front of their own door

Trump bombed Iran, not caring about the war's impact on the global economy. Or perhaps he does care, but the assumption that this year's "special military operation" would achieve a quick victory has proven overly optimistic. The U.S. has God-given cheap energy (fossil fuels) and fertile land. Things may become more expensive, but even if the Strait of Hormuz is partially closed, Americans will not starve—unless politicians decide to spend money on Fallujah instead of food stamps.

But the people in Europe, Africa, and most of Asia are not so fortunate. Unfortunately, the political elites in these countries mistakenly believe that American politicians will consider their plight of food and energy shortages when deciding whether to launch another war threatening the flow of basic commodities. These countries, trusting the U.S., have stored their surpluses in dollar-denominated financial assets instead of building pipelines, trade routes, or stockpiling essentials.

Marco Papic of BCA Research puts it best:

"The entire planet—literally—is connected for the sake of American hegemony… Why is Germany's defense insufficient against Russia? Because… America. Why do most Gulf countries have almost no energy transport infrastructure avoiding the Strait of Hormuz? Because… America. Why is global manufacturing concentrated in China? Because… America."

Due to the inability to obtain fertilizers or fuel, investment decisions in these countries will undergo a dramatic shift. When you cannot obtain food and energy because of a war you did not participate in, holding U.S. Treasury bonds or S&P 500 ETFs becomes meaningless. To compensate for these deficiencies, sovereign nations will marginally liquidate dollar assets in the future, turning to invest in infrastructure, defense, and physical goods.

This poses a problem for U.S. financial markets, as foreign holdings are substantial. If left unchecked, the slow liquidation of dollar assets will lead to market declines. U.S. Treasury Secretary Bessent and other policymakers understand this. They have two options: encourage the use of dollar swap lines or modify banking regulations.

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

"Good" Australia: Borrowing dollars from the Federal Reserve to buy jet fuel.

If the U.S. market needs more momentum to offset the sell-off by sovereign nations, regulations can be loosened to allow banks to hold more U.S. Treasuries and stocks. Easing capital requirements related to eSLR (supplementary leverage ratio) 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 fertilizers or oil. "Just-in-time" is dead, and "just-in-case" will endure. This is a structural trend that will last for decades. This means that monetary policymakers must maintain a loose financial environment to fill the gap left by foreigners investing their savings in physical infrastructure rather than "illusory dollar financial assets."

Higher + Longer

War is inflationary, and the U.S.-Iran conflict is no exception. AI CAPEX and infrastructure construction are excuses to increase lending. Politicians support money printing out of necessity, both real and perceived. This is why Bitcoin has outperformed other major risk assets like gold and tech stocks since February 28.

Bitcoin bottomed at $60,000 earlier this year, backed by trillions of dollars and yuan yet to be created, and returning to $126,000 is a foregone conclusion. Many bears refuse to participate in this round of the market because Bitcoin's performance over the past 24 months has lagged behind tech stocks and gold. They do not understand why Bitcoin remains an effective hedge against currency debasement. But it will show extreme sensitivity to the expansion of fiat liquidity. I expect the upward momentum to intensify, and when it breaks $90,000, many bullish options sellers will be forced to cover, making the upward trajectory explosive.

I do not know how high Bitcoin can go, but I will adjust the risk of the Maelstrom portfolio to the maximum unless a significant change occurs. By the time of the midterm elections in November, the U.S. political attitude towards AI and inflation may become very negative, which could be a small bump in the upward process.

But remember: High oil prices do not hurt Trump as much as people imagine. MAGA is destined to lose in California (where energy policies have led to the highest oil prices in the nation), but $100 oil and infrastructure rebuilding in Venezuela and the Middle East will benefit the oil and gas industry in the states where Trump supporters reside. As long as he can put money in the pockets of ordinary Americans, Trump still has time to win re-election. So, go for it, baby, let the S&P 500 soar to 10,000 points!

It's time to play with shitcoins. Besides our already heavily invested Hyperliquid ($HYPE) and Zcash ($ZEC), my next favorite is $NEAR. My next article will explain our argument: why the "privacy narrative" combined with "Near Intents" will create positive cash flow for the protocol. This will completely reverse the token's sluggish price performance and create a massive catch-up opportunity, propelling it rapidly towards its historical peak from years ago.

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