Arthur Hayes: We are still in a bull market cycle, and the worst-case scenario for BTC may pull back to $70,000

Author: Arthur Hayes

Compiled and organized by: BitpushNews

(The views expressed in this article are solely those of the author and should not be taken as investment advice or interpreted as recommendations to engage in investment transactions.)

Keep --- It --- Simple --- Stupid = KISS

Many readers often forget the KISS principle when dealing with the tidal wave of policies from the Trump administration.

Trump's media strategy aims to make you wake up every day and say to your friends, partners, or inner monologue, "Oh my God, did you see what Trump/Musk/Little Kennedy did yesterday? I can't believe they did that." Whether you are elated or frustrated, this farce called "The Emperor's Days" is quite entertaining.

For investors, this continuous state of excitement is detrimental to accumulating Bitcoin (sats). You might buy today and quickly sell tomorrow after digesting the next headline. The market oscillates in this process, and your Bitcoin reserves quickly diminish.

Remember the KISS principle.

Who is Trump? Trump is a master of real estate performance. To succeed in real estate, you must master the art of borrowing large sums of money at the lowest possible interest rates. Then, to sell units or rent space, you must boast about how impressive the new buildings or development projects will be. I am not interested in Trump's ability to evoke sympathy in global society, but I am very interested in his ability to finance policy goals.

I am sure Trump wants to finance his "America First" policy through debt. If not, he would allow the market to naturally clear the embedded credit in the system, leading to an economic depression worse than that of the 1930s. Does Trump want to be known as Herbert Hoover of the 21st century or Franklin Delano Roosevelt (FDR)? American history disparages Hoover because historians believe he did not print money quickly enough, while it praises Roosevelt because his New Deal policies were financed by printing money. I believe Trump wants to be regarded as the greatest president in history, so he does not want to destroy the foundations of the empire through austerity.

To emphasize this point, remember what Andrew Mellon, Hoover's Secretary of the Treasury, said about how to deal with an over-leveraged American and global economy after the stock market crash:

"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. That will clear out the rot in the system. High living costs and extravagant lifestyles will decline. People will work harder and live more morally. Values will be adjusted, and the enterprising will pick up the scraps from the less capable."

Current U.S. Treasury Secretary Scott Bessent would not make such outrageous statements.

If my view is correct that Trump will finance "America First" through debt, what does this imply for my outlook on global risk asset markets, particularly cryptocurrencies?

To answer this question, I must form a view on how Trump might increase the quantity of money/credit (i.e., print money) and lower its price (i.e., interest rates). Therefore, I must have a perspective on how the relationship between the U.S. Treasury, led by Scott Bessent, and the Federal Reserve, led by Jerome Powell, will evolve.

KISS Principle

Who do Bessent and Powell serve? Is it the same person?

Bessent was appointed by Trump 2.0, and from his past and current interviews, he strongly aligns with the "Emperor's" worldview.

Powell was appointed by Trump 1.0, but he is a capricious traitor who has defected to the Obama and Clinton camps. Powell destroyed what little credibility he had left when he significantly cut interest rates by 0.5% in September 2024. At that time, U.S. economic growth was above trend levels, and inflationary pressures still existed, making rate cuts unnecessary. But the Obama-Clinton puppet Kamala Harris needed a boost, and Powell dutifully cut rates. The results did not work out as expected, but after Trump's victory, Powell announced he would complete his term and once again firmly resist inflation.

When you are burdened with massive debt, several things happen.

First, interest payments consume most of your free cash flow. Second, you cannot finance additional asset purchases because, given the high debt levels, no one will lend you money. Therefore, you must restructure your debt, which requires extending maturities and lowering coupon rates. This is a form of soft default because doing so mathematically reduces the present value of the debt burden. Once your effective debt burden is lowered, you can borrow again at affordable prices. Viewed from this perspective, both the Treasury and the Fed play roles in restoring the financial health of the U.S. However, since Bessent and Powell serve different masters, the success of this effort is hindered.

Debt Restructuring

Bessent has publicly stated that the current debt structure in the U.S. must change. He hopes to eventually extend the average maturity of the debt burden, a process known on Wall Street as "debt maturity extension." Various macroeconomic experts have suggested ways to achieve this; I have discussed such solutions in detail in The Genie. However, for investors, the most important thing is that the U.S. will soft-default on its debt burden by lowering its net present value.

Given the global distribution of U.S. debt holders, achieving this restructuring will take time. This is a geopolitical "Gordian knot." Therefore, in the short term, over the next three to six months, this is unrelated to us cryptocurrency inventors.

New Loans

Powell and the Fed have broad control over the quantity of credit and its price. The law allows the Fed to print money to purchase debt securities, thereby increasing the quantity of money/credit, i.e., printing money. The Fed also sets short-term interest rates. Given that the U.S. cannot default nominally in dollars, the Fed determines the risk-free rate of the dollar, which is the effective federal funds rate (EFFR).

The Fed has four main levers to manipulate short-term interest rates: reverse repurchase agreements (RRP), interest on reserve balances (IORB), the lower bound of the federal funds rate, and the upper bound of the federal funds rate. Without delving into the complex details of the money market, we just need to understand that the Fed can unilaterally increase the quantity of dollars and lower their price.

If Bessent and Powell serve the same Leader, it would be very easy to analyze the future path of dollar liquidity and how China, Japan, and the EU would respond to U.S. monetary policy. Given that they are clearly not serving the same person, I wonder how Trump can manipulate Powell to print money and lower interest rates while allowing Powell to maintain the Fed's anti-inflation mandate.

Crashing the Economy

The Fed-Recession Law: If the U.S. economy falls into recession, or if the Fed fears that the U.S. economy will fall into recession, it will cut interest rates and/or print money.

Let’s test this law with recent economic history (thanks to Bianco Research for this excellent table).

This is a list of direct causes of modern American economic recessions since World War II. A recession is defined as negative quarter-over-quarter GDP growth. I will focus on the period from the 1980s to the present.

This is a chart of the lower bound of the federal funds rate. Each red arrow represents the beginning of a loosening cycle that coincided with a recession. As you can see, it is very clear that the Fed will at least cut rates during a recession.

Fundamentally, "Pax Americana" and its ruling global economy are financed by debt. Large corporations fund expansions for future production and current operations by issuing bonds. If cash flow growth slows significantly or declines completely, the repayment of the debt will ultimately be called into question. This is problematic because corporate liabilities are largely bank assets. The corporate debt assets held by banks support their customers' deposit liabilities. In short, if the debt cannot be repaid, it will call into question the "value" of all existing legal tender bank notes.

Moreover, in the U.S., most households are leveraged. Their consumption patterns are marginally financed by mortgages, auto loans, and personal loans. If their cash flow generation capacity slows or declines, they will be unable to meet their debt obligations. Similarly, the banking system holds these debts and supports their deposit liabilities.

Crucially, the Fed cannot allow large-scale defaults or an increase in the probability of corporate and/or household debt defaults to occur during an economic recession or before cash flow generation slows or contracts. This would lead to corporate and consumer debt defaults, resulting in systemic financial distress. To protect the solvency of the debt-financed economic system, the Fed will proactively or reactively cut rates and print money whenever a recession occurs or when perceptions of recession risk intensify.

KISS Principle

Trump manipulates Powell to loosen financial conditions by triggering a recession or making the market believe a recession is imminent.

To avoid a financial crisis, Powell will subsequently take some or all of the following actions: cut interest rates, end quantitative tightening (QT), restart quantitative easing (QE), and/or suspend the supplementary leverage ratio (SLR) for banks purchasing U.S. Treasury bonds.

Here’s a picture from DOGE:

How does Trump unilaterally trigger a recession?

The marginal driver of U.S. economic growth has always been the government itself. Whether the spending is fraudulent or necessary, government spending creates economic activity. Additionally, government spending has a monetary multiplier effect. This is why the Washington D.C. metropolitan area is one of the wealthiest regions in the U.S., as there are many professional parasites sucking blood from the government. It is difficult to directly estimate the exact monetary multiplier, but conceptually, it is easy to understand that government spending has follow-on effects.

According to data from Perplexity:

● The median household income in Washington D.C. is $122,246, far above the national median household income.

● This places Washington D.C. in the 96th percentile of U.S. cities by household income.

As a former president, Trump is well aware of the extent of fraud, waste, and abuse within the government. The establishment on both sides of the aisle does not want to curb this because everyone benefits from it. Given that Trumpists are outside the Democratic and Republican parties, they are unreserved in exposing the flaws in government spending programs. Establishing a consulting committee led by Elon Musk, backed by Trump, called the "Department of Government Efficiency (DOGE)," is a core driver for rapidly cutting government spending.

How does DOGE achieve this when many of the largest spending items are non-discretionary? Payments can be stopped if they are fraudulent. If computers can replace the government employees managing these programs, human resource costs will plummet. The question becomes, how much fraud and inefficiency is there in government spending each year? If what DOGE and Trump say is true, the annual amount could reach trillions of dollars.

One potentially very obvious example is the Social Security Administration (SSA) sending checks to whom. If we believe DOGE's claims, the agency is issuing nearly a trillion dollars to deceased individuals and those whose identities have not been properly verified. I do not know the truth of this claim. But imagine you are an SSA welfare fraudster and know that Elon and the "big guy" are delving into the data, potentially discovering fraudulent payments you have received for years and submitting them to the Justice Department. Would you continue your scheme or flee? The key is that the mere threat of discovery could reduce fraud activity. As the old Chinese saying goes, "Kill the chicken to scare the monkey." Therefore, while the establishment media may be fooling around with Elon and DOGE, I believe there are hundreds of billions, if not a trillion dollars, at stake.

Next, let’s talk about the human resources aspect of the government spending equation. Trump and DOGE are laying off hundreds of thousands of government employees. Whether the unions have enough power to legally challenge the mass purge of "useless" government workers remains to be seen. But the consequences are already evident.

DeAntonio explains: "The layoffs we have seen so far may only be the tip of the iceberg. The scale and timing of future layoffs will determine whether the labor market can remain stable. We currently expect that due to ongoing hiring freezes, delayed resignations, and layoffs initiated by DOGE, the number of federal government employees will decrease by about 400,000 by 2025."

-- Fox Business

Even though Trump's 2.0 presidency has just begun a little over a month ago, the impact of DOGE is evident. The number of unemployment claims in the Washington D.C. area has surged. Housing prices have plummeted. And consumer discretionary spending, arguably driven by massive fraud and abuse within the U.S. government, has disappointed financial analysts' forecasts. The market is starting to talk about the word "recession."

A new analysis from real estate trading platform Parcl Labs shows that housing prices in Washington D.C. have dropped 11% since the beginning of this year, tracking the impact of the Department of Government Efficiency (DOGE) on the city's real estate market.

-- Newsweek

Rothstein posted on Bluesky that due to massive layoffs in government departments and sudden cancellations of federal contracts, the U.S. is almost certain to head toward severe economic contraction.

-- The Economic Times

The word "recession" is an economic disgrace. Powell does not want to be the modern Hester Prynne (and face public humiliation and condemnation), so he must respond.

Powell Turns Again

How many times has Powell turned since 2018? He must be feeling dizzy. The question for investors is whether Powell will act preemptively to save the financial system from collapse or react after a major financial institution goes bankrupt. The path Powell chooses is purely political. Therefore, I cannot predict.

But what I do know is that there is $2.08 trillion in U.S. corporate debt and $10 trillion in U.S. Treasury debt that must be rolled over this year. If the U.S. is on the brink of recession or in recession, the cash flow shock will make rolling over these massive bonds at current interest rate levels nearly impossible. Therefore, to maintain the sanctity of the "American Peace" financial system, the Fed must and will take action.

For us cryptocurrency investors, the question is how quickly and to what extent will the U.S. release credit? Let’s break down the four main measures the Fed will take to turn the tide.

Interest Rate Cuts

It is estimated that for every 0.25% cut in the federal funds rate, it equates to $100 billion in quantitative easing or printing money. Assuming the Fed cuts rates from 4.25% to 0%.

This amounts to $1.7 trillion in quantitative easing. Powell may not cut rates to 0%, but you can be sure Trump will allow Elon to continue cutting spending until Powell brings rates down to an acceptable level. When an acceptable interest rate level is reached, Trump will have his "mad dog" under control.

Stopping Quantitative Tightening (QT)

The recently released minutes from the Fed's January 2025 meeting detail that some committee members believe quantitative tightening must end at some point in 2025. Quantitative tightening is the process by which the Fed reduces the size of its balance sheet, thereby reducing the quantity of dollar credit. The Fed is currently conducting $60 billion in quantitative tightening each month. Assuming the Fed takes action in April, stopping quantitative tightening will inject $540 billion in liquidity compared to previous expectations.

Restarting Quantitative Easing (QE) / Supplementary Leverage Ratio (SLR) Exemptions

To absorb the supply of U.S. Treasury bonds, the Fed can restart quantitative easing and grant banks supplementary leverage ratio exemptions. Through quantitative easing, the Fed can print money and purchase Treasury bonds, thereby increasing the quantity of credit. Supplementary leverage ratio exemptions allow U.S. commercial banks to use unlimited leverage to purchase Treasury bonds, thereby increasing the quantity of credit. The key is that both the Fed and the commercial banking system are allowed to create money out of thin air. Restarting quantitative easing and granting supplementary leverage ratio exemptions are decisions that only the Fed can make.

If the federal deficit remains in the range of $1 trillion to $2 trillion per year, and the Fed or banks absorb half of the newly issued amount, this means the money supply will increase by $500 billion to $1 trillion annually. A 50% participation rate is conservative, as during COVID-19, the Fed purchased 40% of the newly issued amount. Nevertheless, by 2025, major exporting countries (China) or oil-producing countries (Saudi Arabia) may have stopped or significantly slowed their purchases of Treasury bonds with dollar surpluses; thus, the Fed and banks have more room to maneuver.

Let’s do some calculations:

Interest Rate Cuts: $1.7 trillion + Stopping Quantitative Tightening: $0.54 trillion + Restarting Quantitative Easing/Supplementary Leverage Ratio Exemptions: $500 billion to $1 trillion = Total = $2.74 trillion to $3.24 trillion

COVID-19 vs. DOGE Printing Money

In the U.S. alone, the Fed and Treasury created approximately $4 trillion in credit between 2020 and 2022 in response to the COVID-19 pandemic.

The scale of DOGE-inspired money printing could reach 70% to 80% of the COVID-19 levels.

Since $4 trillion was printed in the U.S., Bitcoin rose about 24 times from its low in 2020 to its high in 2021. Given that Bitcoin's market cap is now much larger than it was then, let’s be conservative and call the increase from the U.S. printing $3.24 trillion a 10-fold rise. For those asking how Bitcoin could reach $1 million during Trump's presidency, this is the answer.

Several Key Assumptions

Even though the current market is a mess, I have painted a very bright future for Bitcoin. Let’s look at my assumptions so that readers can judge for themselves whether these assumptions are reasonable.

• Trump will finance "America First" through debt.

• Trump is using DOGE as a means to clear political opponents addicted to fraudulent income sources, cut government spending, and increase the likelihood of a recession triggered by a slowdown in U.S. government spending.

• The Fed will implement a series of policies before or after a recession to increase the quantity of money and lower the price of money.

Based on your worldview, it is up to you to decide whether this is reasonable.

U.S. Strategic Reserves

Waking up on Monday morning, I saw that Trump’s market had launched. On Truth Social, Trump reiterated that the U.S. would establish a strategic reserve filled with Bitcoin and a bunch of junk coins. The market surged significantly due to the "news." This is nothing new, but the market viewed Trump’s reaffirmation of his cryptocurrency policy intentions as an excuse for a violent dead cat bounce.

For this reserve to have a positive impact on prices, the U.S. government needs to have the ability to actually purchase these cryptocurrencies. There are no secret piles of dollars waiting to be deployed. Trump needs the help of Republican lawmakers to raise the debt ceiling and/or revalue gold to match current market prices. These are the only two ways to fund the cryptocurrency strategic reserve. I am not saying Trump will not keep his promise, but the timeframe for when purchases might begin could be longer than leveraged traders can hold out before being liquidated. Therefore, take profits on the way up.

Trading Strategy

Bitcoin and the broader cryptocurrency market are the only truly global free markets that exist today. The price of Bitcoin tells the world in real-time how the global society views the current state of fiat currency liquidity. Bitcoin reached a high of $110,000 just before Trump’s coronation in mid-January and hit a local low of $78,000, a drop of about 30%. Bitcoin is screaming that a liquidity crisis is imminent, even as U.S. stock indices remain close to historical highs. I believe in Bitcoin's signals, so a severe correction in the U.S. stock market driven by recession fears is imminent.

If Bitcoin leads the market down, it will do so on the way up as well. Given that minor financial turbulence quickly escalates into full-blown panic due to the massive leverage embedded in the system, if my overall prediction is correct, we won’t have to wait long for the Fed to take action. Bitcoin will hit a bottom first and then rebound first. As for those rotten traditional financial systems led by U.S. stocks, they will lag behind in starting to rise but will have to go through a round of declines first.

I firmly believe we are still in a bull market cycle, so the worst-case bottom will be the previous cycle's historical high of $70,000. I am not sure we will drop that low. A positive signal for dollar liquidity is that the U.S. Treasury general account is declining, which serves to inject liquidity.

Based on my confidence in Trump as a type of financier and his ultimate goals, when Bitcoin trades in the $80,000 to $90,000 range, Maelstrom increases its risk exposure. If the current situation is merely a "dead cat bounce" (a brief rebound followed by further declines), I expect Bitcoin may again test the low around $80,000.

If the S&P 500 or Nasdaq 100 index drops 20% to 30% from historical highs, coupled with a major financial institution on the brink of collapse, we could see a comprehensive linkage of global markets. This means all risk assets will be hit simultaneously, and Bitcoin may again drop below $80,000, even testing $70,000. Whatever happens, we will cautiously build positions gradually during the downturn, without using leverage, in anticipation of a global (especially U.S.-led) fiat financial market re-expanding after the eventual collapse, pushing Bitcoin to $1 million or even higher!