Arthur Hayes believes that the Fed may need to inject liquidity into the economy if the artificial intelligence investment bubble bursts, which would benefit Bitcoin.
In a Sept. 22 essay titled “Safety First,” the BitMEX co-founder said the crypto asset’s future relies on debt financing for the burgeoning sector of artificial intelligence infrastructure.
Hayes questions whether demand for high-end AI services will grow quickly enough to justify heavy investments in data centers, semiconductors and computing power. He interprets new calls from top AI developers to throttle frontier-model development as a sign of demand destruction. However, these calls are made due to cybersecurity and safety concerns.
Also, credit represents a primary source of financing for AI infrastructure, and corporate bonds and private financing tied to AI infrastructure expose it to future cash flow risk. Apollo estimates that around $5 trillion could be spent on AI infrastructure by 2030.
If the demand for A.I. slows, owners of data centers and companies that lend to them could lose money through the private credit and insurance markets. The federal government could step in to support demand for infrastructure or backstop insurers that are exposed to asset price declines.
Neither intervention has been announced by U.S. authorities; these are merely hypothetical outcomes of a decision to intervene.
For Bitcoin, what would be most important about this kind of intervention is what comes next: government borrowing, banking-system support or monetary easing that adds to dollar liquidity. That is why Hayes has stressed this liquidity cycle as critical to shaping his views about the direction of crypto markets.
However, the current monetary policy indicates no plans for easing in the immediate future. On September 16, the Federal Reserve raised interest rates. It decided to increase its federal funds target range by 25 basis points to 3.75%-4.00%, due to high inflation.
Overall, evidence for an immediate AI investment crash is sparse. Major tech companies continue to make large-scale computing investments, and large debt markets provide an important source of funding.
Apollo has described issuance for artificial intelligence as an important part of the credit markets, as well as the large investment and financial risks associated with projected revenues.
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Thus Hayes’s Bitcoin thesis depends on a number of things that have not yet happened: a deterioration in the economics of AI, stress in the credit markets, and a response to liquidity from the US government. He is not arguing that an AI downturn also implies a Bitcoin rally.
Rather, he sees government and monetary reaction to a credit shock as the channel through which liquidity support could ultimately be provided to the cryptocurrency.
