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 human history. Many believe this investment in intelligence will create value for humanity unlike any previous technological build-out. I agree; however, as humans, we always tend to overdo things. In this universe, positive infinity and perfection are unattainable. Therefore, in anticipating a machine intelligence-driven future, we are likely to overbuild.
AI advocates invoke nationalism as a reason for lavish spending, but patriotism shouldn't come with a price tag... Both the US and China believe that AI and technological supremacy are crucial to their territorial survival.
Tech moguls are also more than happy to sell them horror stories: what will happen to this country if the other side gains a first-mover advantage in machine intelligence supremacy. Objectively, both leaders have witnessed first-hand how the proliferation of AI and drones leads to victory and are true believers. Therefore, they will ensure the primary economic and military goal is to build the most efficient machine intelligence further within their borders.
In the US, most AI CAPEX to date has come from the operating cash flows of the most profitable software companies. But given the scale of current and future spending, additional financing through credit channels is still needed.
In China, banks are slowing funding for real estate and shifting to fund the tech sector. Beyond data-center-related spending, both the US and China are also continuously investing in increasing power supply.
That is, central banks are all creating more fiat currency, easing financial conditions.
The combination of political will (to win the AI race) and financial will (funding the build-out by printing money and lending) creates a perfect environment for cryptocurrency.There will be far more fiat currency units tomorrow than today, and the rate of change is accelerating due to surging AI and electrification spending. As the unit cost of intelligence declines and the complexity of tasks AI performs increases, it means computational power consumption grows exponentially; this is the essence of the "Jevons Paradox."
There is also the "Red Queen Effect": as competitors improve model efficiency, a company's invested AI CAPEX quickly becomes obsolete. This leads to a race to increase spending further to create better models to beat the opponent, while also rendering the opponent's hundreds of billions (soon trillions) of dollars outdated. Therefore, unless hindered by exogenous market events, AI CAPEX spending will expand infinitely.
When Will the Party End?
I believe two events will occur almost simultaneously and change the perception of the necessity of spending trillions on building AI.
Market Indigestion:The occurrence of a massive, financially irresponsible AI-related IPO or massive merger that the market cannot stomach. This will sober the market from its mania phase, leading people to question whether machine intelligence is truly worth that much money.
Political Wind Shift:The 2028 US presidential election. The rise in raw material, labor, and especially electricity prices due to massive AI build-out is unpopular in many regions. Moreover, 90% of Americans do not hold significant amounts of stocks and thus cannot benefit from soaring stock prices. Politically, it's very easy to campaign by being anti-AI, focusing on the value of human labor, and curbing inflation.
But at this moment, USD and CNY liquidity will continue to rise. Bitcoin and cryptocurrency will benefit.
Every Nation for Itself
Trump bombs Iran, completely unconcerned about the war's impact on the global economy. Or perhaps he is, but the assumption that this year's "special military operation" would be a quick victory has proven overly optimistic. The US has God-given cheap energy (fossil fuels) and fertile farmland. Things might get more expensive, but even with a partial closure of the Strait of Hormuz, Americans won't starve—unless politicians decide to spend money on Fallujah instead of food stamps.
But the people of Europe, Africa, and much of Asia are less fortunate. Unfortunately, the political elites of these countries mistakenly believe that US politicians will consider their plight of lacking food and energy when deciding whether to start another war that threatens the flow of basic commodities. Trusting the US, these countries have stored their surpluses in USD-denominated financial assets instead of building pipelines, trade routes, or stockpiling essentials.
Marco Papic of BCA Research put it best:
"The entire globe—literally—is connected for US hegemony... Why is Germany's defense insufficient against Russia? Because... the US. Why do most Gulf states have almost no energy transport infrastructure avoiding the Strait of Hormuz? Because... the US. Why is global manufacturing concentrated in China? Because... the US."
Unable to obtain fertilizer or fuel, the investment decisions of these countries will undergo a dramatic shift. It makes no sense to hold US Treasuries or S&P 500 ETFs when you can't get food and energy due to a war you didn't participate in. To compensate for these deficits, sovereign nations will increasingly liquidate USD assets on the margin in the future, investing instead in infrastructure, defense, and physical commodities.
This is a problem for US financial markets because foreign holdings are substantial.If left unchecked, the slow liquidation of USD assets will cause markets to fall. US Treasury Secretary Bessent and other policymakers understand this. They have two countermeasures: encourage the use of USD swap lines or amend bank regulations.
"Bad" Australia:Sell US Treasuries to buy jet fuel.
"Good" Australia: Borrow USD from the Federal Reserve to buy jet fuel.
If US markets need more momentum to offset sovereign selling, regulations can be loosened to allow banks to hold more US Treasuries and stocks. Relaxing eSLR (enhanced 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 USD assets has been "best practice." But today, holding USD assets no longer guarantees you a ship of fertilizer or oil. "Just-in-time" is dead, "Just-in-case" lives. This is a structural trend that will last for decades. This means monetary policymakers must keep financial conditions accommodative to fill the void left by foreigners putting savings into physical infrastructure rather than "ethereal USD financial assets."
Higher + Longer
War is inflationary, and the US-Iran conflict is no exception. AI CAPEX and infrastructure building are excuses to increase lending. Politicians support money printing out of real and perceived necessity. This is why Bitcoin has outperformed other major risk assets like gold and US tech stocks since February 28th.
With trillions of USD and CNY yet to be created backing it, Bitcoin, which bottomed at $60,000 earlier this year, returning to $126,000 is a foregone conclusion. Many naysayers 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 money printing. But it will demonstrate extreme sensitivity to fiat liquidity expansion. I expect the rally to intensify, and when it breaks through $90,000 and many call option sellers are forced to cover, the upward trajectory will become explosive.
I don't know how high Bitcoin can go, but I will adjust Maelstrom's portfolio risk to maximum unless something drastic changes. By the November midterm elections, the US political stance towards AI and inflation could become quite negative, which might be a small speed bump on the ascent.
But remember: High oil prices don't hurt Trump as much as people think. MAGA is destined to lose in California (where energy policy results in the highest gas prices in the US), but $100 crude and infrastructure rebuilding in Venezuela and the Middle East will benefit the oil & gas industries in states where Trump supporters live. As long as money can be stuffed into the pockets of ordinary Americans, Trump still has time to win re-election. So, blast off baby, S&P 500 to 10,000!
It's time to play with Altcoins (Shitcoins). Besides Hyperliquid ($HYPE) and Zcash ($ZEC) which we are already heavily invested in, my next favorite is $NEAR. My next article will explain our thesis: 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 quickly towards its all-time high from years ago.
It's a bull market; close your eyes, press the buy button. There will be a time to sell, but it is not now. Don't screw it up, let's go crazy together.
