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Arthur Hayes Bitcoin 2026 Keynote: 21 Weeks Later

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Arthur Hayes Bitcoin 2026 Keynote: 21 Weeks Later

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  1. Good fucking morning everybody. I hope everyone is kind of sober after weekend in Vegas. So I finished ski season bit of a lull before heading to the beach for another
  2. 3 months and I thought well I need to have a mental update on what I think on the markets and so I have just recently watched the 28 days later recent zombie movie and that kind of was the inspiration for the title and you'll
  3. see what I mean in a second and basically I have had a think for a few days on how I think money printing is going to evolve and take into account what's going on in AI what's it going on in Iran with the war and out crops is
  4. this presentation. Obviously I've turned a bit more bullish and I'll explain why over the next 15 minutes.
  5. So obviously we can't ignore that there is a war going on right now. So I have to make a few assumptions in this presentation before I get to my eventual thesis. Number one
  6. I hope that we're all not going to die in a nuclear holocaust. If we do it's not investable so it doesn't fucking matter anyways. So let's put that particular worry to the side and number two that the markets are going to look
  7. through this event as something short-termish whatever that means and it's time to think about money creation and money printing and what that means for Bitcoin.
  8. So every morning I get up and if I want to dissect what's actually happening at least for my portfolio in reference to the war I just pull up this chart on Bloomberg that I created and it's the 6-month futures contract on WTI oil
  9. minus the the front month and I'm really interested in the spread and the evolution. And so all I care about is are there enough commodities and oil flowing through the street irrespective of the propaganda that I read from
  10. Donald Trump or from the Iranian side on what's actually going on in the street I just look at the prices and as we see it's kind of improved meaning that front-end prices are tending towards the back end, which says that yeah, shit's
  11. fucked up, but it's not like super duper fucked up, so I can ignore it and continue on thinking about other things.
  12. So, whenever I get on stage, I'm always talking about money printing and the evolution of my thinking from the last essay that I published about a few four weeks ago is that on a medium-term basis
  13. that liquidity is going to turn positive.
  14. And so, if we think about the negative side of the things, there is the AI deflation and people have been talking about all of the knowledge workers who have or will lose their jobs because of very efficient and cheap models that can
  15. do knowledge work. Uh I wrote an essay a few weeks months ago about my expectation about what these losses could be. I'll put some charts up in a second, but that's on the negative side.
  16. I think that I could be sort of a multi-hundred-billion-dollar issue for the banking system.
  17. On the Fed side, uh I'll get into this in a bit. There's a lot of consternation in the markets about the Fed chairperson-to-be, uh Kevin Warsh, and whether or not he is a hawk or a dove.
  18. And I'm going to put his comments into perspective and basically say that they're neutral. They're neither good nor bad for liquidity and the market the people who are getting all freaked out about Warsh as a super hawkish um Fed
  19. chairperson are not reading into the tea leaves as they should be. And then finally, commercial bank lending.
  20. Why is it going to increase? Why the war economy in the United States and abroad is going to drive banks to issue more loans to people who are involved in the production of this all sorts of armaments and the things that go into
  21. making those weapons. And finally, the banking regulation changes that will allow banks to increase the leverage on their balance sheets.
  22. So, this is I know a chart that is I've been looking at since October of last year and it's and the magenta line is the Nasdaq.
  23. Um gold the uh Bitcoin price and white is the US tech SAS stock ETFs. Now, most people believe, at least institutional investors, that Bitcoin is high beta
  24. Nasdaq. And it has behaved that way pretty much over the past, you know, 4 or 5 years. But since October all-time high in Bitcoin, 126,000, to the present, it's down about 50% while the
  25. Nasdaq's been flat. So, broad-based big tech has held up okay, but if you take a look at the type of tech stocks that have gotten clobbered, it's all of the SAS companies. Companies who produce a product that now an AI can do for $10 a
  26. month that they were charging $10,000 a seat or some ridiculous amount of money.
  27. These stocks got hammered. I think that it pointed to a credit deflationary event that was not being recognized by central banks and they weren't printing enough money, and Bitcoin followed suit.
  28. And this is um pre-war, so I added this chart on February 28th.
  29. So, um and this is another wish of mine that I want to fire all of my human accountants and lawyers. I spend way too much money on this shit. I can't wait for Claude to take over. And that is going to have a very bad impact on anyone who has loans out to these folks
  30. who earn, you know, very very good salaries. And this is basically sort of my thought process on AI being the new subprime and what that could mean for the commercial banking system. And I think this meta this narrative drove
  31. Bitcoin lower from October till the US Iran war started in late February.
  32. But since the war has started, uh Bitcoin has outperformed. It's outperformed Nasdaq in magenta and outperformed uh the SAS stocks. And basically, I think that Bitcoin is now focusing on wartime inflation. What is
  33. going to change now that there is an explicit admission by the United States and a lot of other countries that they're on a wartime footing, their defense spending is inadequate, and they need to print more money to build more
  34. bombs.
  35. So, that is, you know, putting the AI to to the side, moving on to the Fed. And so, you know, when Kevin Warsh was nominated, I think it was in January of this year, everybody started freaking out because in his tenure from when he
  36. was a governor, I think during the financial crisis after wait until present, he's been very critical about the Fed's very large balance sheet. And he's gone on record saying that he believes the Fed balance sheet
  37. is too large, that he's going to find a way to to shrink it, and alongside that he'll be able to lower interest rates.
  38. Now, if you read read my essays, you know that I am a big proponent that the quantity of money is more important than its price. And so, I care more about what he says about the balance sheet than where the short-term interest rates
  39. go. And so, if the market believes that there's going to be less dollar liquidity floating around the system because of what Warsh will do at the Fed, then they'll be bearish on Bitcoin and other risk assets. This is what
  40. we've seen in sort of the media um talking about sort of this hawkish Fed that's going to come into place after May when Warsh takes over. Now, I don't believe that's the case. I believe that essentially the Fed will swap um reserve
  41. s and treasuries and repos and put them on the commercial banking system. And they'll do that with the help of new regulations in terms of how banks are allowed to hold assets on their balance sheet and how much capital they have to have against those.
  42. And finally, what I think is the most important to understand what Warsh will or won't do at the Fed is that he has a very material binding constraint. And that is he needs to work alongside Scott Bessent at the Treasury to make sure
  43. that whatever he does with the Fed's balance sheet does not impair the ability for Bessent to go out and sell billions of dollars of bonds.
  44. So, here is a very simple um balance sheet. There's no numbers cuz they know that's a little bit complicated for some people. So, on the asset side, treasuries, mortgage-backed securities, and repos.
  45. These are the things that help people finance the purchase of Treasuries.
  46. On the liability side, there's bank reserves, the Treasury General Account, the checking account of the government, and currency in circulation. And essentially, from 2018 into the present, the Fed boosted its liabilities in the
  47. terms of bank reserves and bought assets from the banking system. That's Treasuries, mortgage-backed securities, and repos. And when War says that the balance sheet is too large, he's saying that the Fed owns too many of these debt
  48. securities, and he wants to be able to reduce that balance sheet.
  49. So, again, he could sell bonds.
  50. Does it Does very disruptive to the market? Or, what I think it what it has been hinted at is that it'll do a swap with the US banking system. Now, the bank balance sheet, um commercial banking balance sheet, as again, has Fed
  51. reserves as an asset, something like three-ish trillion dollars um that they have on on balance with the Fed. They have loans uh on the funding side, deposits, and shareholders' equity. And so, for a certain size of balance sheet,
  52. you have to have a certain amount of equity against it, and that's sort of capital al- adequacy ratios. And so, what had needs to happen is that the Fed and the banks need to swap.
  53. The banks need to get rid of the reserves, have a lesser demand for reserves, and replace those reserves with Treasuries and repos.
  54. And this is what is being pushed with the deregulation of the US commercial banking system. So, whenever you think about or hear Basted and any other monetary officials in the United States government talk about deregulation, what
  55. they mean is we want to allow the banking system to absorb all of this debt that we're creating and take it off of the balance sheet of the Fed. And again, the end state is that the US commercial banks take over the money
  56. creation baton from the Fed, and you have Treasuries and repos on their balance sheet, and the liability side uh deposits and shareholders' equities.
  57. Now, the point of all this is that the net effect to dollar liquidity is neutral. There's nothing being sold, there's nothing being bought. It's just a swap. It's purely regulatory fiction in terms of who is allowed to hold what.
  58. But, at the end of the day, Warsh can get up and tell people that he has engineered a smaller Fed balance sheet.
  59. But, in reality for us as investors, all we care about is what is the net effect? The net effect is nothing.
  60. And furthermore, Warsh is not going to get into a fight with Bessen. Uh they had this photo with um Jerome Powell's face.
  61. Uh before we just replaced it with Warsh. At the end of the day, when you've issued $38 trillion of debt and you need to fund the government, the Federal Reserve will do what it's asked to do, which is make sure that the market is orderly so that
  62. people can buy this debt.
  63. And looking at spending. So, this is a chart of the fiscal year. It's October to September. And as we can see, deficits from the COVID period to the president to the present, largest peacetime deficits in the United States
  64. history. And fiscal year 2026 slightly tracking um as it was larger deficit than 2025. Now, the point of all this is that the US Treasury is not going to spend less money. Donald Trump
  65. is not talking about how he's going to reduce spending in a dramatic fashion.
  66. That debt ceiling happened last year.
  67. It's all forgotten about. It's all about wartime spending. His new defense budget is something like 50% over the previous one and one and a half trillion dollars.
  68. That does not sound like a treasury or politicians were coming together to reduce spending so that the Fed can reduce its balance sheet. So, all this talk about the Fed shrinking its balance sheet makes no sense because the
  69. politicians and the treasury that funds them is continually increasing the amount of debt that's out there.
  70. Here's another graphic. Who is buying the debt? The foreigners are not buying as much debt as they used to. Uh I excluded um countries that are usually used for hedge fund balances for the
  71. basis trade. And what you can see here is that 25% holders uh a holder ownership of foreigners has started to flatline while the amount of debt has gone up a lot.
  72. Which basically means there needs to be a new price insensitive buyer for all that debt, and that is the US commercial banking system.
  73. Now, the banking system can increase the amount of debt because of new regulations that just went live on April 1st of this year, called the enhanced supplemental leverage ratio. And basically allows banks to hold less
  74. reserves and other types of assets against the loans and other things it has on its balance sheet. And this means that large banks like JP Morgan and City Bank can onboard more treasury and repos in the market and take that rollover
  75. from the Fed. And for smaller banks, the engine of lending within the United States economy, they can increase the amount of construction and industrial loans that are out there. And S&P Global estimates that this ESR um balance sheet
  76. reduction will generate $1.3 trillion of new loans.
  77. Now, why will banks have demand for loans? One of the criticisms about this analysis from some of my other macro friends is that they claim the banking system is not demand and not creating enough loans or there's not enough
  78. demand. Well, we have a great source of demand that is the US Department of War.
  79. They not only will put in equity into certain deals, they'll guarantee off-take production, and banks, seeing that companies have a guaranteed customer that is a government that can print money, they will lend to them.
  80. They'll also lend to the resource miners who are mining the critical resources that go into making bombs. And finally, all of the AI capex is now a national security concern. And so, when a hyperscaler runs up against the ability
  81. not to finance their debt out of free cash flow, and they go to the market, they will find willing large banks with a massive balance sheet to support that debt.
  82. So, monitor construction industrial loans. You can get it at I think on a weekly basis from the Fed. This is just a chart from Bloomberg.
  83. The credit must flow.
  84. The great thing about bank lending is it has a higher multiplier than central bank lending at about three empirically we've we've seen empirically. So, that's about $4 trillion that's created, which means that it's
  85. larger than the amount of credit that could be destroyed by AI taking people's jobs, which is why I've turned more bullish on Bitcoin.
  86. And I've got a few seconds left. Again, my liquidity chart has bottomed back in November of last year around the same time that Bitcoin did. I think we've had a bit of a chop. We've had a bit of a war. Now it's time to break out and
  87. that's why I believe Bitcoin is going higher. I think my end of year price target is like $125,000. Whatever it is, it doesn't matter. I'm wrong anyways, but thank you very much everyone.