Arthur Hayes: Is it not a dream to have BTC 250,000 and ETH 10,000 by the end of the year?

Author: Arthur Hayes, founder of BitMEX; Translation: Golden Finance xiaozou

The highest tribute to the universe by human beings is the joy of dancing. Most religions incorporate music and dance into worship ceremonies. The "house music religion" I believe in is not "swaying your body" in church on Sunday morning, but in Club Space at about the same time.

In college, I joined a ballroom dance club. Each ballroom dance has a strict paradigm (for example, in a standard rumba, you cannot move when you bend your knees). For beginners, the most difficult thing is to complete the basic dance steps to the beat, and most of the effort is spent on finding the beat.

My favorite Czech music is 4/4, while the waltz is 3/4. Once you have the beat, your ears need to catch the first beat of the main instrument and count the remaining instrumental parts. If all music was just the mechanical repetition of "dong, two, three, four" like a drumbeat, it would be monotonous. It is the layers of other instruments and sound effects that the composer and producer add that give the music depth and richness. But when dancing, these unimportant sounds are of no use to accurately hit the beat.

Like music, price charts are the embodiment of human emotional fluctuations, and our portfolios dance to them. Just like ballroom dancing, decisions to buy and sell various assets must be in tune with the beat of a specific market. If you step in the wrong rhythm, you will lose money. Like a dancer who takes the wrong step, losing money is always embarrassing. The question is: which instrument in the financial markets should we listen to if we want to maintain elegance and prosperity?

If there is one core concept that supports my investment philosophy, it is this: understanding the changes in the supply of fiat money is the most important variable in profitable trading. For cryptocurrencies, this is even more critical—at least for Bitcoin, a fixed-supply asset whose price rises at a pace that is directly dependent on the pace of fiat money supply expansion.Since early 2009, the flood of fiat money creation relative to Bitcoin’s tiny supply has made Bitcoin the best performing fiat-denominated asset in human history.

The cacophony of current financial and political events is like the secondary notes in a piece of music. The market continues to rise, but with serious negative catalysts that could cause discord. Should we sit tight in the face of tariffs and threats of war? Or are they just insignificant distractions? If the latter, can we hear the guiding bass drum—the sound of credit creation?

The impact of tariffs and war is significant, just as an important instrument out of tune can ruin the entire piece. But these two issues are interrelated and have no impact on Bitcoin’s slow rise. US President Donald Trump cannot impose substantial tariffs on China because China will cut off the supply of rare earths to the American Pax Americana and its vassal states. Without rare earths, the US cannot manufacture weapons to sell to Ukrainian President "Slav Butcher" Zelensky or Israeli Prime Minister "Bedouin Executioner" Netanyahu. The US and China are thus locked in a deadly tango, maintaining a delicate balance between the economic and geopolitical levels. This is why the current situation - although brutal and deadly for the people in the two wars - will not have a substantial impact on global financial markets for the time being.

Meanwhile, the credit drum keeps beating. The US needs industrial policy - in fact, a euphemism for state capitalism, that dirty word: fascism. The US must move from a semi-capitalist to a fascist economic system because the war materials produced by its industrial giants are far from meeting the current geopolitical needs. The Israeli-Iraqi war lasted only twelve days because Israel exhausted its stock of missiles provided by the United States and could no longer maintain an impeccable air defense system. Russian President Vladimir Putin shrugged off threats from the US to step up NATO aid because they can neither match Russia’s weapons production, nor keep up with the pace of production, nor have the cost advantage over Russia.

The US also needs a more fascist economic arrangement to boost employment and corporate profits. From a Keynesian perspective, war is good for the economy. Weak organic demand from the public is replaced by the government’s insatiable need to produce weapons. Most importantly, the banking system is willing to provide credit to companies because producing the goods the government needs guarantees profits. Wartime presidents are often extremely popular (at least initially) because everyone seems to be better off. A more comprehensive accounting of economic growth would make it clear that war is extremely destructive in terms of net benefits. But such ideas cannot win elections - every politician’s primary goal is to be re-elected (if not for himself, then for members of his own party). Trump is a wartime president, like most of his American predecessors, and that is why he has put the US economy on a wartime footing. The beat becomes clear at this point: we must track the channels through which credit is injected into the economy.

In my article "Black or White" (see Jinse Finance's previous article "If Trump's "America First" plan succeeds, BTC will reach $1 million" ) I explained how the government's profit guarantee for "key" industries leads to bank credit expansion. I call this policy "poor man's version of quantitative easing", which can create a fountain of credit. I predicted that this would become a means for the Trump team to stimulate the economy, and the MP Materials transaction is the first large-scale real-life example. The first part of this article will analyze how this transaction expands the supply of US dollar credit - this template will be used by the Trump administration to produce key materials needed for 21st century wars: semiconductors, rare earths, industrial metals, etc.

War also requires the government to continue to borrow heavily. Even if capital gains taxes increase as the assets of the rich appreciate with credit expansion, the fiscal deficit will continue to rise. Who will buy this debt? Stablecoin issuers.

As the total market value of cryptocurrencies rises, part of it will be stored in stablecoins. Most of these custodial stablecoin assets are invested in U.S. Treasuries. Therefore, if the Trump administration can create a favorable regulatory environment for traditional finance (TradFi) to participate in crypto investments, the total market value of cryptocurrencies will surge. Then the custodial stablecoin assets will automatically increase, creating more purchasing power for U.S. Treasuries. Treasury Secretary Bessant will continue to issue Treasury bonds far exceeding the size of Treasury notes and bonds, exclusively for subscription by stablecoin issuers.

Let's dance the credit waltz, and I will guide readers to perform this financial dance perfectly.

1. Quantitative Easing for the Poor

Central bank money printing cannot create a strong wartime economy. The financial industry replaced rocket engineering. To correct wartime production failures, the banking system was encouraged to provide credit to key industries (not corporate snipers) identified by the government.

American private enterprises are based on profit maximization. From the 1970s to the present, it has been more profitable to do "knowledge" work at home while outsourcing production overseas. China was happy to upgrade its manufacturing technology by becoming a low-cost (and over time high-quality) factory for the world. But it is not the $1 Nike shoes that threaten the elite rule of the "American World" but the empire's inability to produce war materials when its hegemony is seriously challenged. This is the root cause of the clamor over the rare earth issue.

Rare earths are not rare, but their large-scale processing faces huge environmental externalities and capital expenditure requirements. China decided to dominate rare earth production more than 30 years ago, and today China benefits from this foresight. To reverse the situation, Trump is borrowing from the Chinese economic system to ensure that the United States increases rare earth production to continue the bellicosity of the empire.

According to Reuters, the following are the key points of the deal for US rare earth producer MP Materials:

● The US Department of Defense will become the largest shareholder of MP Materials

● The deal will increase US rare earth production and weaken China's dominance

● The Department of Defense will also set a floor price for key rare earths

● The floor price will be twice the current market price in China

● MP Materials' stock price soared nearly 50% on the news of the deal

All this seems beautiful, but where does the construction money come from?

MP Materials said that JPMorgan Chase and Goldman Sachs will provide a $1 billion loan to build a facility with 10 times the production capacity.

Why are banks suddenly willing to lend to the real economy? Because the U.S. government guarantees this "face project" can ensure that the borrower can make a profit. The T-chart below will explain how this transaction promotes economic growth by creating credit out of thin air.

MP Materials (MP) needs to build a rare earth processing facility and obtains a $1,000 loan from JPMorgan Chase (JPM). This loan creates $1,000 in new fiat currency and deposits it into a JPMorgan Chase account.

MP then begins to build a rare earth processing facility. To do this, civilian workers (Plebes) need to be hired. In this simplified model, all costs are assumed to be labor costs. MP must pay the workers, resulting in a $1,000 debit to its account and a $1,000 credit to the civilian worker’s account at JPMorgan.

The Department of Defense (DoD) needs to pay for the rare earths. The funds are provided by the Treasury, which must issue bonds to finance the DoD. JPMorgan converts MP’s corporate loan assets into reserves held by the Federal Reserve through the discount window. These reserves are used to purchase bonds, resulting in a credit to the Treasury General Account (TGA). The DoD then purchases the rare earths, which becomes revenue for MP and ultimately returns to JPMorgan as a deposit.

The final fiat balance (EB) is $1,000 higher than the initial JPMorgan loan amount. This expansion is due to the money multiplier effect.

This is how government procurement guarantees use commercial bank credit to build new facilities and create jobs. Although not mentioned in this example, JPMorgan Chase now makes loans to civilian workers (Plebes) with stable jobs to purchase assets and goods (houses, cars, iPhones, etc.). This in turn creates new credit, which eventually flows to other US businesses and back into the banking system as deposits. As the money multiplier must be > 1, this wartime production will stimulate economic activity and be counted as "economic growth".

The money supply, economic activity, and government debt will expand simultaneously. Everyone is happy - civilians get jobs, and financiers/industrialists enjoy government-guaranteed profits. If this type of economic policy can create benefits for everyone out of thin air, why hasn't it become a universal policy in countries around the world? Because it will cause inflation.

The supply of human resources and raw materials required to produce goods is limited. The government's creation of money out of thin air through the commercial banking system will squeeze out the financing channels and even production capacity of other goods, ultimately leading to shortages of raw materials and labor. But with an inexhaustible supply of fiat money, wage and commodity inflation is inevitable, and those individuals and entities not directly tied to the government or banking system will eventually get into trouble. If in doubt, look to the daily history of the two world wars.

The MP Materials deal is the first classic example of a “poor man’s version of quantitative easing” policy. The best part is that it doesn’t require congressional approval—under Trump and his successor in 2028, the Department of Defense can simply issue guaranteed purchase orders in the course of its regular business. Profit-seeking banks will follow suit, fulfilling their “patriotic duty” by supporting companies that are dependent on the government’s finances. In fact, members of both parties will be scrambling to argue why companies in their districts deserve orders from the Department of Defense.

Since this model of credit creation can circumvent political resistance, how can we protect our portfolios from the inflation that comes with it?

Second, the Crypto Bubble

Politicians know that boosting “critical” industries by stimulating credit growth will inevitably lead to inflation. The real challenge is to direct excess credit to inflate an asset bubble that will not destabilize society.If wheat prices had soared as Bitcoin has over the past 15 years, most governments would have been overthrown by popular revolutions. So governments encourage citizens—whose real purchasing power continues to shrink—to play the credit game by investing in inflation-resistant assets backed by the state.

Let’s look at a real-world, non-crypto example: Since the late 1980s, China’s banking system has created the largest amount of credit in the shortest time in the history of human civilization, and has mainly channeled it to state-owned enterprises. They have successfully built the world’s low-cost, high-quality factories, and now one-third of the world’s industrial products are produced in China. If you still think Chinese manufacturing is of poor quality, why not test drive a BYD and compare it to a Tesla.

Since 1996, China's money supply, M2, has soared 5,000%. Civilians trying to escape credit inflation face extremely low bank deposit rates, so they flock to the real estate market - this is exactly what the government's urbanization strategy encourages. As of 2020, rising housing prices have effectively curbed people's desire to hoard physical goods. Measured by the income-to-house price ratio, housing prices in China's first-tier cities (Beijing, Shanghai, Shenzhen, and Guangzhou) are already among the highest in the world.

In 19 years, land prices have risen 80 times, with an annual compound growth rate of 26%.

This house price inflation did not destabilize society, because ordinary middle-class comrades were able to buy at least one apartment with loans. Therefore, everyone participated. An extremely important second-order effect is that local governments mainly finance social services by selling land to developers, who build apartments and sell them to ordinary people. As house prices rise, land prices and land sales grow in tandem with tax revenue.

We can perhaps conclude that the Trump administration's excessive credit growth must have created a bubble, both to make money for ordinary people and to provide funding for the government. The bubble that the Trump administration will create will be centered on cryptocurrency. Before I dive into how the crypto bubble achieves the various policy goals of the Trump administration, let me first explain why Bitcoin and cryptocurrencies will rise rapidly as the United States moves towards a fascist economy.

I created a custom indicator (in white) on the Bloomie platform called <.BANKUS Index >. The index combines bank reserves held by the Federal Reserve Bank of the United States with the sum of other deposits and liabilities of the banking system, and can be used as a proxy for loan growth. Bitcoin is marked in gold, and both baselines are 100 basis points in January 2020. As credit doubled, Bitcoin rose 15 times - its fiat currency price is highly leveraged to credit growth. At this point, no retail or institutional investor can deny that if you believe that more fiat currency will be issued in the future, Bitcoin is the best investment target.

Trump and Bessant have also been conquered by the "orange pill (i.e. Bitcoin)". From their perspective, the most significant advantage of Bitcoin and cryptocurrencies is that the cryptocurrency holding rate of groups that traditionally do not own stocks (young people, low-income people and non-white people) has exceeded that of wealthy white baby boomers. Therefore, the prosperity of cryptocurrencies will win support from a wider and more diverse group of people for the ruling party's economic platform. More importantly, according to the latest executive order, in order to encourage all kinds of savings to invest in the crypto field, 401k pension plans are now explicitly allowed to invest in crypto assets - such plans manage about $8.7 trillion in assets. It's about to take off on the spot!

The ultimate killer move is the cryptocurrency capital gains tax exemption proposal proposed by "Trump the Great". Trump is pushing: crazy credit expansion driven by war + regulatory green light for pension funds to enter the market + full tax exemption policy. It's a celebration for all!

All this seems perfect, but there is a fatal problem: the government must issue more debt to honor the procurement guarantees of the Department of Defense and other departments to private enterprises. Who will take over these debts? Cryptocurrency will be the winner again.

Once capital enters the crypto capital market, it usually does not withdraw. If investors want to wait and see for the time being, they can hold USD stablecoins such as USDT. In order to earn the income of the custodial funds, USDT must invest in the safest traditional financial interest-bearing tool: short-term Treasury bonds. This type of Treasury bond has a term of less than one year, the interest rate risk is almost zero, and the liquidity is comparable to cash. The US government can print money for free and unlimited, and nominally there is no possibility of default. The current short-term Treasury bond yield is between 4.25% and 4.50%. Therefore, the higher the total market value of cryptocurrencies, the more funds stablecoin issuers absorb - and eventually most of these custodial funds will flow into the short-term Treasury market.

On average, for every $1 increase in the total market value of the crypto market, $0.09 flows into stablecoins. Assuming that Trump successfully pushes the total market value of cryptocurrencies to $100 trillion by the time he leaves office in 2028 - a 25-fold increase from the current level, if you think this is impossible, it only shows that you have a shallow understanding of the crypto market. By then, global capital inflows will enable stablecoin issuers to generate about $9 trillion in short-term Treasury purchasing power.

From a historical perspective, the Federal Reserve and the Treasury Department also significantly increased the issuance of short-term Treasury bonds rather than long-term bonds in order to finance the United States' participation in World War II.

Now Trump and Bessant have completed a perfect closed loop:

1. They have created an American-style fascist economic system to produce wartime supplies needed for indiscriminate bombing;

2. The financial asset inflation impulse caused by credit growth directly points to cryptocurrencies, and the prices of cryptocurrencies have soared. A large number of people have also gained huge profits and feel richer. They will vote Republican in 2026 and 2028... unless there is an adolescent daughter at home... but the lower classes have always voted with their wallets

3. The booming cryptocurrency market has brought huge inflows to stablecoins pegged to the US dollar. These issuers invest their custody of US dollar stablecoins in newly issued Treasury bonds to cover the widening federal deficit.

4. The drums are shaking and credit lines are rising. Why don't you invest all in cryptocurrencies? Don't be scared by tariffs, wars or various social issues.

3. Trading strategy

It's simple: Maelstrom is fully invested. Because we are degens, the altcoin market provides an excellent opportunity to surpass Bitcoin (crypto reserve asset).

The upcoming Ethereum bull run will completely tear the market apart. Ever since Solana rose from the ashes of FTX from $7 to $280, Ethereum has been the most hated large-cap cryptocurrency. But now it’s different - Western institutional investors, led by Tom Lee, are now in love with Ethereum. No matter what, buy it first. Or you can not buy it, and then hide in the corner of the nightclub like a sour complainer, drinking a bland beer, watching a group of people you think are less intelligent than you, splashing money on sparkling water at the next table. This is not financial advice, so make your own decision. Maelstrom’s strategy is: All in Ethereum, All in DeFi, All in ERC-20 altcoin driven degen ecosystem.

My year-end target price:

Bitcoin: $250,000

Ethereum: $10,000