Arthur Hayes on Fed Rate Cuts: The Market May Face Unexpected Shocks

Original Title: Arthur Hayes: 'If They Go 50, That Will Be a Nuclear Catastrophe for Financial Markets'

Author: CoinDesk Staff

Translation: Mars Finance, Eason
In an interview with CoinDesk's Markets Daily, Arthur Hayes, co-founder of BitMEX and Chief Information Officer of Maelstrom, discussed the impact of the Federal Reserve's interest rate cuts, his views on this year's cryptocurrency market trends, and why he is investing in Bitcoin ordinals and inscriptions.

Arthur Hayes, co-founder of BitMEX and Chief Information Officer of Maelstrom, spoke with Markets Daily host Jennifer Sanasie and CoinDesk's Executive Editor of Technology and Protocols Brad Keoun, sharing his thoughts on whether a 25 or 50 basis point cut by the Federal Reserve would lead to financial turmoil or a short-term rebound. He also explored the potential impacts of government spending, inflation, and major economies' reliance on the fiat currency system, as well as the dynamics of Bitcoin relative to traditional markets. The following transcript has been lightly edited for clarity.

Today, the Federal Reserve will hold a meeting. What do you think we will see? How will this affect the markets?

Arthur Hayes:

So, the question is whether they will raise rates by 25 basis points or 50 basis points. I don't think they should raise rates. I believe the U.S. economy is quite strong. If you look at the GDP data from the past eight or nine quarters, it has been consistently growing. The U.S. government continues to inject massive amounts of money to keep the economy growing at a very fast pace. Clearly, this helps Kamala Harris and her campaign partner's chances for re-election or election, and I think that is the goal of the current Democratic administration.

Therefore, when government spending is massive, and the Federal Reserve cuts rates, inflation will be above their target—I think this is a mistake. If they decide to continue cutting rates, inflation will accelerate in the fourth quarter. I believe that if the market starts to shake, the Federal Reserve's response will be to simply double down on rate cuts, making the problem worse.

So, if they cut rates by 25% or 50%, the market's reaction will be the opposite of what they think. I believe everyone thinks the market will go up. The more they cut rates, the more the stock market, bonds, cryptocurrencies, and other markets will rise. I actually hold the opposite view; you know, the more they cut rates, the less the market will like it. Maybe this will happen a day or two after the cuts, but they won't learn their lesson. They will just continue to cut rates. So, we will enter a very rapid rate-cutting cycle, and that is my view.

Sanasie:

Let's dig a little deeper. Suppose they cut rates. How do you think the market will react? More specifically, how do you think the cryptocurrency market will react?

Hayes:

So, I believe, and I have extensively argued this, that the most important macroeconomic variable is the USD/JPY exchange rate. Therefore, if the dollar weakens significantly because the Bank of Japan lowers rates to zero or negative, while the Federal Reserve and all other major central banks have been raising rates since March 2022, the spread will widen significantly. The USD/JPY peaked around 162. Then something happened. The Federal Reserve hinted at starting to cut rates this summer. The Bank of Japan indicated it would start raising rates and raised by 15 basis points on July 31. We saw a 10% drop in global markets in the following week. If the Federal Reserve raises rates by 25 or 50 basis points, then the dollar's exchange rate will decline. In subsequent meetings, the USD/JPY exchange rate will continue to narrow. The USD/JPY will continue to strengthen, the yen will strengthen, the actual nominal value will decline, and people will continue to deleverage, leading to a drop in the stock market. I believe the cryptocurrency market is yet to be determined.

Keoun:

So what are your thoughts on Bitcoin? Will decoupling happen immediately or at some other time?

Hayes:

I don't think that will happen immediately. I believe that if we experience a massive sell-off, people will sell what they can sell, not what they want to sell. Bitcoin is a highly liquid asset. People have a lot of illiquid assets on their books, especially if you are an investment manager. So if you have some Bitcoin, you will sell it. If the basis drops further from its current level, that is the difference between Bitcoin and futures contracts. You will see large hedge funds like Millennium and those doing basis trading, which started with the ETF rollout earlier this year. They will close their positions and sell Bitcoin spot into a very illiquid market. So I think Bitcoin will drop along with other markets. But soon, when we see the early signs of financial collapse, Bitcoin will say, "Well, I believe the market will respond positively to more money printing." [Treasury Secretary] Janet Yellen and [Federal Reserve Chair] Jay Powell cannot afford a financial collapse in the weeks leading up to the election, especially if they want Harris to beat Donald Trump.

Keoun:

I don't want to exaggerate, but Bitcoin is currently priced at around $60,000. You know, if we get a 50 basis point cut, where will Bitcoin go? If we get a 25 basis point cut, where will Bitcoin go? Do you have specific predictions?

Hayes:

I think if rates drop to 25, no, not much will change. I think everyone expects rates to drop to 25. I believe if rates drop to 50, that will be a nuclear catastrophe for financial markets. A day or two after the rate cut, you will see the stock market rise significantly because everyone thinks the more rates drop, the better. But in reality, I think this indicates a deeper level of corruption in the global financial system. And this will lead to a significant drop in prices afterward.

Sanasie:

Samson Mow recently predicted on Markets Daily that Bitcoin's price will reach $1 million by 2025. The video sparked strong reactions and high engagement from CoinDesk's audience. What do you think of this prediction? Will Bitcoin reach $1 million next year?

Hayes:

Of course, but I don't think it will. I still have a million-dollar price target. I am more optimistic for 2026 or 2027. Next year, regardless of who wins the U.S. election, our fiscal spending will increase significantly. If the dollar drops significantly, then China also has room to implement stimulus measures and stabilize the yuan. Then, other major central banks will follow the Federal Reserve's lead. They look at the Federal Reserve; they are easing policy, so we can ease policy too. We can do a lot of things like the Federal Reserve, and our exchange rates won't be destroyed. So I think once a new president is elected, regardless of who it is, this will happen because both Harris and Trump are committed to spending a lot of money. Trump is committed to tax cuts, and Harris is committed to welfare payments.

Keoun:

Arthur, I recently listened to your podcast where you mentioned that you believe this cycle is the sovereign debt default cycle. I'm curious, when you talk about cycles, what cycle are we currently in? How long is this cycle?

Hayes:

I really don't know how long this cycle will last. It depends on the situation, but I believe this: If you consider the global reserve currency, the dollar, and all the spending required to maintain the integrity of the system amidst all the wars, we are on the edge of a cliff, and you can choose any way to go. You can take massive austerity measures, massive deleveraging, or possibly even a revolution, or the authorities can placate voters by fixing government bond prices and printing as much money as possible to maintain stability, whether in the U.S., EU, China, or Japan. Every major economic bloc or country operates a similar financial system based on fiat decentralization, whether they are democratic, authoritarian, communist, capitalist, or anything else. These are all smokescreens. Ultimately, everyone is printing money. Everyone has a fiat decentralized banking system. Everyone needs inflation. Everyone needs to take wealth away from their savers. This way, the government can afford its spending plans, whether to fund wars, implement a Green New Deal, or provide welfare to the poor who are losing out in economic transitions, AI, and all that. There are many reasons why the government needs to spend money instead of tightening belts and restoring people's confidence in our existing fiat currencies.

Keoun:

The question is, can they continue to maintain this state?

Hayes:

Of course, Bitcoin can reach $1 million, or even $10 million. Bitcoin's market cap is $1.7 trillion. It is a magical internet currency created out of thin air since 2009. Bitcoin is the antidote to all of this. Yes, they have printed a lot of money globally, and the U.S. has done the worst in this regard. And Bitcoin is the response to that. We have this cryptocurrency ecosystem that thrives on all this printed money. We have various types of assets that have been created and have value because we have such a chaotic financial system. So, I say they are getting away with it. Bitcoin is a smoke detector. It tells us that something is wrong here.

Sanasie:

When you observe the cryptocurrency market and the commentary surrounding it, I know you have created a lot of your own content and participated in many things like this podcast, what do you think people don't talk about enough?

Hayes:

Patience. I think everyone is thinking that Bitcoin must go to $1 million today or next year because I used a lot of leverage, or my entire net worth is in this particular cryptocurrency. They hear these things about an impending collapse, all the debt. They are asking, why hasn't it happened yet? Why not now? I see all these things. I believe what you are saying. It's terrible. Politics has messed up. Finance has messed up. Why hasn't Bitcoin reacted? Or why hasn't the cryptocurrency I own reacted? I think it's just patience, right? Over the past decade, we have created a brand new financial ecosystem. Millions of people around the world have wallets with Bitcoin, Ethereum, Solana, etc. So far, this has been a very successful financial experiment, but it won't suddenly appreciate to ridiculous levels just because you have a lot of leverage or bought a lot of funds yesterday. So, I think people need to understand patience, because if you believe in math and the law of compound interest, then patience is inevitable. The system must print money, must devalue currency to survive; every other major civilization has done the same. Ultimately, inflation will come down on people's heads, and some kind of revolution will happen. So history is 100 to 100. Just wait and see.

Keoun:

Arthur, I want to talk about a specific market factor that has emerged this year, namely all these ETFs. In fact, you traded ETFs at Citigroup before. So I would love to hear your thoughts. I just listened to another podcast where you discussed the role and dynamics of market makers, but I'm curious, overall, what do you think about ETFs now becoming a major factor in this market?

Hayes:

So I think, ultimately, ETFs are for those who want exposure to Bitcoin's price performance. They don't want to own Bitcoin. They don't want to be their own financial institution. They want to outsource this work to Larry Fink, BlackRock, and all the other major institutions, and that's fine. Bitcoin can do anything you want it to do. What does that mean? You are a passive investor, and you are not actually using the protocol. So if we push this to the extreme, if every Bitcoin is owned by BlackRock or a similar institution, then the network would go to zero because no one is actually using it. So Bitcoin is valuable because we use it. It is not like gold. I can store gold in a vault to return it, and it is still gold, so it retains the chemical properties of gold. If I don't do anything with Bitcoin, then miners won't get paid, and the network will collapse. This is a fundamental and very subtle difference between Bitcoin and gold, and I think this is not an issue now. It may be an issue in the future. But ultimately, if you are wondering why, why did BlackRock get their ETF approval in six months while the Winklevoss twins couldn't get one in ten years? Right? They live in New York. They are both billionaires, very wealthy. Why didn't they get one, and BlackRock did in six months? Well, ultimately, you want the same financial institutions to control wealth, and that wealth can ultimately be seized by the government in one fell swoop. BlackRock is just another branch of the U.S. government, just like any other large Chinese asset management company in the Chinese government branch.

Sanasie:

If people don't use Bitcoin, its value will drop to zero. Bitcoin cannot function according to everyone's expectations in this industry. Tell me about what will happen in the future. If this really happens and people stop using Bitcoin, what will the problem be?

Hayes:

Miner revenues seem to be declining. How can they afford capital expenditures? Difficulty adjustments, and so on. I mean, if we have no use cases for Bitcoin, I think that is a very long-tail situation. Obviously, this is why I like Ordinals and Bitcoin 2D layer files and such. For example, let's pay miners, let's do something with this, create some usability for people, so that… people will use it, people will spend money, and we will solve this problem and eliminate it as a future issue.

Keoun:

This year you have done some very interesting things at Maelstrom, which is your family office and investment fund, right? You launched the Ordinal's Inscription series, Airheads, which, by the way, is very interesting.

Hayes:

Thank you. I think I am a flexible currency enthusiast, a passionate sh*tcoin enthusiast. But if I consider my classification of cryptocurrencies, Bitcoin is money. No other cryptocurrency is money. This is the hardest money we have created in human history. Bitcoin cares about the security of the network. Bitcoin cares about an immutable blockchain. Ethereum is not money, no matter what people say. In 2016, when the community allowed a hard fork to repay the people affected by the DAO hack, they decided not to be money anymore. Ethereum wants to be the best decentralized computer ever. So far, it has done that. I categorize Solana in this camp. Obviously, I am now a loyal fan of Aptos. They are also trying to enter this space. Then you have many other applications. They want to do something on these networks, and I am very interested in decentralized finance because I believe that people in other parts of the world should be able to easily access financial products through the internet and a few clicks, but for most people outside the U.S. and Western Europe, that is not the case. Their financial systems are quite chaotic. That is why DeFi makes sense for these people. So I love all of this. It's all an experiment. You know, some things have been around for 10 years, Bitcoin has been around for 15 years, while others are less than a year old. But we are trying to create a whole new system that allows anyone with an internet connection to choose how to save, how to invest, and how to express their culture through the internet.

Keoun:

As for your NFT collection, like why you chose to join Bitcoin now, what are the Ordinal inscriptions? What was the idea at the time? Or what are your goals for the project?

Hayes:

So we are investors in Oil Wallet, and…

Keoun:

Yes, by the way, I met one of their people at the Bitcoin Parthenon event in Nashville. We chatted for a bit. But anyway, go on.

Hayes:

Yes. We are investors in this wallet, and how do we create some buzz for Ordinals? Well, let's do an Ordinals drop. Now I don't want to do another, you know, PFP 10,000 AI-generated collection. We have done that many times. So what can we do that is unique to Ordinals, and you can't do on any other protocol? So this is about doing recursive inscriptions. We want to show artists and creatives what we have done here. I actually don't care what happens to the price of these things. I just want to see people inspired to do other things, showcasing the capabilities of Oil Wallet. This is what you can do with it and demonstrate the capabilities of ordinals. What kind of creative thinking can create something completely unique that can only exist on further ordinals.

Keoun:

Okay, got it. Yes, that is really interesting.

Hayes:

That is the real goal. Of course, I hope these fools will become very, very valuable in the future, but the real goal is to inspire others to use ordinals and inscriptions to create other types of derivative works.