Arthur Hayes: BTC may drop to $70,000 at worst, but the Bull Market cycle is still in place

Original Title: KISS of Death

Original author: Arthur Hayes

Original translation: Bitpush News

(The views expressed in this article are the author's personal views and should not be taken as a basis for investment decisions, nor should they be interpreted as advice or opinions on participating in investment transactions.)

Keep—It—Simple—Stupid = KISS

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

The goal of Trump's media strategy is to get you to wake up every day and say to your friends, partners, or inner monologues, "Oh my God, did you see what Trump/Musk/JFK Jr. did yesterday, I can't believe they did." Whether you're in a high mood or depressed, this farce called "The Emperor's Day" is quite entertaining.

For investors, this sustained state of excitement is not conducive to accumulating Bitcoin (sats). You may buy in today, only to sell out quickly after digesting the next headline tomorrow. The market keeps fluctuating during this process, and your Bitcoin reserves quickly shrink.

Please remember the KISS principle.

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

I am convinced that Trump wants to achieve his 'America First' policy through debt financing. If not, he will allow the market to naturally clear the embedded credit in the system, leading to a more severe economic depression than the 1930s. Is Trump aiming to be called the Herbert Hoover of the 21st century, or the Franklin Delano Roosevelt (FDR)? American history belittles Hoover because historians believe he did not print money fast enough, while praising Roosevelt because his New Deal policies were paid for by printing money. I believe Trump wants to be considered the greatest president in history, so he does not want to destroy the foundation of the empire through contraction policies.

To emphasize this point, remember what Andrew Mellon, the U.S. Secretary of the Treasury under Hoover, said about how to deal with the excessive leverage in the U.S. and global economy after the stock market crash:

Settle labor, settle stocks, settle farmers, settle real estate. This will eliminate corruption in the system. High living costs and extravagant lifestyles will decrease. People will work harder and live more morally. Values will be adjusted, and those with initiative will pick up the pieces from those with lesser abilities.

The current US Treasury Secretary, Scott Bessent, will not talk nonsense like that.

If I'm correct in my view that Trump will achieve "America First" through debt financing, how does this affect my view of the future of global risk asset markets, especially cryptocurrencies?

In order to answer this question, I have to form an opinion on the possible ways in which Trump might increase the amount of money/credit (i.e., print money) and lower its price (i.e., interest rates). Therefore, I must have an opinion on how the relationship between the US Treasury, led by Scott Basent, and the Federal Reserve, led by Jerome Powell, will evolve.

KISS principle

Who do Besant and Powell serve? Are they the same person?

Bessant was appointed by Trump 2.0, and judging by his past and present interviews, he strongly agrees with the worldview of this "emperor".

Powell was appointed by Trump 1.0, but he is a fickle traitor who defected to the Obama and Clinton camps. Powell destroyed his last bit of credibility when he cut rates by 0.5% in September 2024, when the US economy was growing above trend levels and there were still signs of inflation, making a rate cut unnecessary. But the puppet of Obama-Clinton Kamala Harris needed a boost, and Powell dutifully cut rates. The results did not have the desired effect, but after Trump's re-election, Powell announced he would complete his term and once again firmly combat inflation.

When you are burdened with a huge debt, several things will happen.

First, interest payments will consume most of your free cash flow. Second, you cannot finance additional assets because no one will lend you money given the high debt level. Therefore, you must restructure your debt, which requires extending the maturity dates and lowering the face interest rate. This is a form of soft default, as doing so mathematically reduces the present value of the debt burden. Once your effective debt burden is reduced, you can borrow again at an affordable price. From these perspectives, the Treasury and the Federal Reserve play a role in restoring the financial health of the United States. However, the success of this effort has been hindered due to Bernanke and Powell serving different masters.

Debt restructuring

Bessent publicly stated that the current debt structure in the United States must change. He hopes to ultimately extend the average maturity of the debt burden, known on Wall Street as "debt maturity extension." Various macroeconomic experts have proposed suggestions on how to achieve this goal; I have discussed such solutions in detail in The Genie. However, the most important thing for investors is that the United States will engage in a soft default on its debt burden by reducing the net present value.

Given the global distribution of U.S. debt holders, it will take time to achieve such a restructuring. This is a geopolitical "Gordian knot". So, in the short term, i.e., in the next three to six months, it's not about us cryptocurrency inventors.

New Loan

Powell and the Federal Reserve have extensive control over the quantity and price of credit. The law allows the Federal Reserve to print money to purchase debt securities, thereby increasing the quantity of currency/credit, i.e. printing money. The Federal Reserve also sets short-term interest rates. Given that the United States cannot default on nominal dollars, the Federal Reserve determines the risk-free rate of the dollar, i.e. the effective federal funds rate (EFFR).

The Fed has four main levers to manipulate short-term interest rates: the reverse repo program (RRP), the reserve balance interest rate (IORB), the federal funds rate floor, and the federal funds rate cap. Without delving into the intricacies of the currency market, we just need to understand that the Fed can unilaterally increase the volume of dollars and reduce their price.

If Bessant and Powell serve the same Leader, it will be very easy to analyze the future path of dollar liquidity and the reaction of China, Japan and the EU to US monetary policy. Given that they are clearly not serving the same people, I wonder how Trump can manipulate Powell to print money and lower interest rates while allowing Powell to stick to the Fed's mission to fight inflation.

Collapse the economy

The Federal Reserve - Law of Recession: If the U.S. economy falls into recession, or the Federal Reserve is concerned that the U.S. economy will fall into recession, it will cut interest rates and/or print money.

Let's use recent economic history to test this law (Thanks to Bianco Research for providing this excellent table).

!

This is a list of direct causes of the modern American economic recession after World War II. The definition of recession is when the quarter-on-quarter GDP growth is negative. I will focus on the 1980s to the present.

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

Fundamentally, "Pax Americana" and the global economy it rules are financed by debt. Large corporations fund future production expansions and current operations by issuing bonds. If cash flow growth slows significantly or declines completely, eventually, the repayment of the debt will be called into question. This is problematic because the company's liabilities are largely assets of the bank. Corporate debt assets held by banks support their customers' deposit liabilities. In short, if the debt cannot be repaid, the "value" of all existing fiat credit bank instruments is questioned.

In addition, in the United States, most households are leveraged. Their consumption patterns are marginally paid for with mortgages, car loans, and personal loans. If their ability to generate cash flow slows or declines, they will not be able to meet their debt obligations. Again, the banking system holds these liabilities and supports its deposit liabilities.

Crucially, the Fed cannot allow for a massive default or an increase in the probability of a default on corporate and/or household debt during a recession or before cash flow slows or contracts. This can lead to corporate and consumer debt defaults, leading to systemic financial distress. To protect the solvency of the debt-financed economy, the Fed actively or passively cuts interest rates and prints money whenever there is a recession or people's perception of recession risk increases.

KISS principle

Trump manipulated Powell to ease financial conditions by triggering a recession or convincing markets that a recession was imminent.

To avert a financial crisis, Powell will then take some or all of the following measures: cut interest rates, end quantitative tightening (QT), restart quantitative easing (QE) and/or suspend supplementary leverage for banks to buy US Treasuries (SLR)。

Here is a picture from DOGE: (

![])https://img.gateio.im/social/moments-67e5c0a68311c89614c190604ca085db###

( How did 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. In addition, there is a monetary multiplier effect on government spending. That's why the Washington, D.C. metro area is one of the richest in the United States, because there's a plethora of professional parasites sucking blood from the government. It is difficult to estimate the exact money multiplier directly, but conceptually, it is easy to understand that government spending has a follow-on effect.

According to the data of Perplexity:

● The median household income in Washington, D.C. is $122,246, which is much higher than the national median household income.

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

As a former president, Trump is well aware of the extent of fraud, malpractice and waste within the administration. The establishment of both parties does not want to curb this because everyone benefits from it. Given that the Trumpists are people outside the Democratic and Republican parties, they do not hesitate to expose the shortcomings in the government's spending program. The creation of an advisory committee led by Elon Musk and backed by Trump, called the Government Efficiency Unit )DOGE(, is the central impetus for rapid and deep cuts in government spending.

How does DOGE do this when many of the biggest spending items are non-discretionary spending? If the payment is fraudulent, the payment can be stopped. If computers can replace government employees who manage these projects, the cost of human resources will drop dramatically. The question then becomes, how much fraud and inefficiency really goes into government spending each year? If what DOGE and Trump say is true, then the amount will reach trillions of dollars per year.

An example that could be very obvious is who the Social Security Administration )SSA( sends checks. If DOGE's claims are to be believed, the department is handing out nearly a trillion dollars to deceased people and people whose identities have not been properly verified. I don't know the veracity of this statement. But imagine you're an SSA benefits fraudster and know that Elon and the "big guys" are digging deep into the data and may uncover fraudulent payments you've received over the years and submit them to the Department of Justice. Do you continue your scam or run away? The point is, the mere discovery of threats can lead to a decrease in fraudulent activity. As the old Chinese saying goes, kill the chicken and set an example for the monkey. So while the establishment media is fooling Elon and DOGE, I believe there are hundreds of billions, if not a trillion.

Let's move on to the human resources side of the government spending equation. Trump and DOGE are laying off hundreds of thousands of government employees. It remains to be determined whether unions will have the strength to bring legal challenges to the mass removal of "useless" government workers. But the consequences are already being felt.

DeAntonio explained, "So far, the layoffs we have seen may just 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 recruitment 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 the Trump 2.0 presidency has only just begun a little over a month ago, the impact of DOGE is clear. Jobless claims in the Washington, D.C. area have surged. House prices plummeted. And consumer discretionary spending, arguably driven by massive fraud and fraud by the U.S. government, also disappointed financial analysts' forecasts. The market started talking about the word "recession".

Home prices in Washington, D.C., have fallen 11 percent since the start of the year, according to a new analysis from real estate trading platform Parcl Labs, which tracks the impact of the actions of )DOGE###, the government's efficiency unit, on the city's real estate market.

– Newsweek

Rothstein posted on Bluesky that the U.S. is almost certain to head for a severe economic contraction due to mass layoffs in government departments and the abrupt cancellation of federal contracts.

– The Economic Times

The word "recession" is an economic disgrace. Powell doesn't want to be the modern-day Hester Prinn (and be humiliated and condemned by the public), so he has to respond.

Powell pivoted again

How many times Powell has turned since 2018, he must have felt dizzy. The question for investors is whether Powell will preemptively save the financial system from collapse or will react only after a major financial institution has gone bankrupt. The path chosen by Powell is purely political. Therefore, I can't predict.

However, what I do know is that this year there is 2.08 trillion US dollars of US corporate debt and 10 trillion US dollars of US national debt that must be extended. If the US is on the edge of recession or in recession, the cash flow impact will make it almost impossible to extend these huge bonds at the current interest rate level. Therefore, in order to maintain the sanctity of the 'American peace' financial system, the Fed must and will take action.

For us crypto investors, the question is how quickly and at what scale will the U.S. release credit? Let's break down the four main steps the Fed will take to turn things around.

Rate cut

It is estimated that for every 0.25% decrease in the federal funds rate, it is equivalent to a $100 billion quantitative easing or printing of money. Assuming the Fed lowers the rate from 4.25% to 0%.

This is equivalent to $1.7 trillion in quantitative easing. Powell may not lower rates to 0%, but you can be sure Trump will allow Elon to continue cutting expenses until Powell lowers rates to the desired level. When the acceptable rate level is reached, Trump will control his "mad dog".

( Stop Quantitative Tightening )QT###

The recently released minutes of the Federal Reserve's January 2025 meeting detailed that certain committee members believe quantitative tightening must end sometime in 2025. Quantitative tightening is the process by which the Fed reduces the size of its balance sheet, thereby reducing the amount of dollar credit. The Fed is doing $60 billion a month in quantitative tightening. Assuming the Fed starts acting in April, this means that stopping quantitative tightening will inject $540 billion in liquidity in 2025 relative to previous expectations.

( Restart quantitative easing ) QE ( / Supplemental Leverage Ratio ) SLR ### Exemption

To absorb the supply of U.S. treasuries, the Fed can restart quantitative easing and provide banks with exempted leverage ratio supplements. Through quantitative easing, the Fed can print money and purchase treasuries to increase the quantity of credit. Exempting leverage ratio supplements allows U.S. commercial banks to use unlimited leverage to purchase treasuries, 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 providing exempted leverage ratio supplements 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 new issuance, that means an increase of $500 billion to $1 trillion per year in the money supply. The 50% participation rate is conservative because during COVID-19, the Fed bought 40% of the new issuance. Nevertheless, in 2025, large exporters (China) or oil producers (Saudi Arabia) have stopped or significantly slowed down their purchases of government bonds with dollar surpluses; As a result, the Fed and banks have more room for maneuver.

Let's do the math:

Rate cuts: $1.7 trillion + stop QF: $0.54 trillion + QE restarted/supplementary leverage waiver: $500 billion to $1 trillion = total = $2.74 trillion to $3.24 trillion

COVID vs. DOGE Money Printing

Only in the United States, the Federal Reserve and the Treasury created about $40 trillion in credit from 2020 to 2022 to address the Covid-19 pandemic.

The scale of banknote printing inspired by DOGE may reach 70% to 80% of the level of the COVID-19 pandemic.

With the United States printing only $4 trillion, Bitcoin has risen approximately 24 times from its low point in 2020 to its high point in 2021. Considering that the market value of Bitcoin is now much larger than it was then, let's be conservative and call the increase of $3.24 trillion printed by the United States alone 10 times. For those wondering how Bitcoin could reach $1 million during President Trump's term, this is the answer.

A few key assumptions

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

Trump will achieve 'America First' through debt financing.

Trump is using DOGE as a means to purge political opponents who indulge in fraudulent revenue streams, cut government spending, and increase the likelihood of a recession triggered by a slowdown in U.S. government spending.

The Fed will adopt a series of policies before or after a recession, increasing the quantity of money and lowering the price of money.

According to your worldview, it's up to you to decide whether this is reasonable.

U.S. Strategic Reserves

When I woke up on Monday morning, I saw the Trump market kick in. On Truth Social, Trump reiterated that the United States will build a strategic reserve filled with bitcoin and a bunch of junk coins. The market rose sharply on the "news". There's nothing new about this, but the market sees Trump's reaffirmation of his crypto policy intentions as an excuse for a violent dead cat rally.

If this reserve is to have a positive impact on the price, the U.S. government needs to be able to actually buy these cryptocurrencies. There are no secret dollars piling up, waiting to be deployed. Trump needs the help of Republican lawmakers to raise the debt ceiling and/or revaluate gold to match current market prices. This is the only way to fund a cryptocurrency strategic reserve. I'm not saying Trump won't keep his word, but the time frame on which the purchase could start could be longer than a leveraged trader would be able to hold on to before a liquidation. Therefore, reduce your position on high prices.

Trading Strategies

Bitcoin and the broader cryptocurrency market are the only truly global free markets that exist. The price of Bitcoin tells the world in real time how the global community perceives the current liquidity situation of fiat currencies. Bitcoin reached a high of $110,000 in mid-January on the eve of Trump's coronation and hit a local low of $78,000, down about 30%. Bitcoin is screaming and a liquidity crisis is looming, even as U.S. stock market indices remain near all-time highs. I believe in Bitcoin's signals, and as a result, a serious pullback in the US stock market, driven by recession fears, is coming.

If Bitcoin leads the market on the downside, it will do the same on the upside. Given the rapid spread of minor financial turbulence into widespread panic due to the massive embedded leverage in the system, if my overall prediction is correct, we won't have to wait too long for the Fed to take action. Bitcoin will fall first and then rebound first. As for the rotten traditional financial system, led by the US stock market, they will lag behind and only start to rise after a round of sharp decline.

I strongly believe that we are still in a bull cycle, so the worst-case bottom would be the all-time high of $70,000 in the previous cycle. I'm not sure we're going to fall that low. A positive signal for dollar liquidity is that the general account of the US Treasury is declining, which acts as an injection of liquidity.

Based on my confidence in Trump as a financier type and his ultimate goal, Maelstrom increased his exposure when Bitcoin was trading in the $80,000 to $90,000 range. If it's just a "dead cat rally" (a short rally that continues to fall after a brief rally), I expect Bitcoin to probably test the lows of around $80,000 again.

If the S&P 500 or Nasdaq 100 index falls 20% to 30% from its historical high, plus the imminent collapse of a major financial institution, we may see a global market-wide linkage. This means all risk assets will suffer simultaneously, and Bitcoin may once again drop below $80,000, or even test $70,000. Whatever happens, we will cautiously gradually build positions during the decline, without using leverage, in anticipation of a global (especially U.S.-dominated) fiat financial market re-inflating after the final collapse, pushing Bitcoin to $1 million or even higher!

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