Original title: Time Signature
Original author: Arthur Hayes, founder of BitMEX
Original translation: xiaozou, Golden Finance
The highest tribute of humanity to the universe is the joy that arises from dancing. Most religions integrate music and dance into their worship rituals. And the 'house music faith' that I believe in is not about 'shaking your body' in a church on Sunday morning, but rather in a club space around the same time.
In college, I joined a ballroom dance club. Each type of ballroom dance has strict paradigms (for example, in a standard rumba, one cannot move while bending the knee), and for beginners, the hardest part is to step through the basic dance steps in time to the music, of which a considerable effort goes into finding the beat.
My favorite dance rhythm is 4/4, while the waltz is in 3/4. Once you master the beat, your ears must catch the downbeat of the main instrument and count the remaining measures' instrument parts. If all music is mechanically repeated like 'one, two, three, four,' it will surely become monotonous. It is the layering of different instruments and sound effects by the composer and producer that gives depth and richness to the music. However, while dancing, these unimportant sounds do not help in accurately stepping to the beat.
Like music, price charts are manifestations of human emotional fluctuations, and our investment portfolio dances accordingly. Just like in ballroom dancing, decisions to buy or sell various assets must match the rhythm of a specific market. Once you step out of rhythm, you will incur losses. Just like a dancer stepping out of sync, losing money is always a messy affair. The question is: if we want to remain elegant and prosperous, which instrument in the financial market should we listen to?
If there is a core principle that supports my investment philosophy, it is this: understanding changes in the supply of fiat currency is the most crucial variable in profitable trading. This point is even more critical for cryptocurrencies—at least for Bitcoin as a fixed supply asset, its price increase rate directly depends on the pace of fiat supply expansion. Since early 2009, the flood of fiat currency creation relative to Bitcoin's minuscule supply has made Bitcoin the best-performing asset in human history in terms of fiat currency valuation.
The jarring noise woven from current financial and political events is akin to auxiliary sounds in music. Although the market continues to rise, it is accompanied by severe negative catalysts that may cause dissonance. In the face of tariffs and war threats, should we remain still? Or are these merely inconsequential distractions? If the latter, can we hear the bass drum that guides the direction—namely, credit creation?
The impact of tariffs and wars is quite significant, just like an important instrument being out of tune can ruin an entire piece of music. However, these two issues are interrelated and have no effect on Bitcoin's gradual rise. U.S. President Trump cannot impose substantial tariffs on China, as China will cut off the supply of rare earths to 'America's governance' and its vassal states. Without rare earths, the U.S. cannot manufacture weapons to sell to Ukrainian President 'Slavic butcher' Zelensky, nor can it supply Israeli Prime Minister 'Bedouin butcher' Netanyahu. The U.S. and China have thus engaged in a deadly tango, maintaining a delicate balance at both economic and geopolitical levels. This is why the current situation—despite being brutally deadly for the populace in both wars—will not temporarily have a substantial impact on the global financial markets.
Meanwhile, the drum of credit is always beating. America needs an industrial policy—essentially a euphemism for state capitalism, that dirty word: fascism. The U.S. must shift from semi-capitalism to a fascist economic system, as its industrial giants' self-produced war supplies are far from meeting current geopolitical needs. The Iraq War lasted only twelve days simply because Israel exhausted the missile stocks provided by the U.S., unable to maintain an impeccable air defense system. Russian President Putin scoffs at the threats from the U.S. and NATO to increase aid, as they cannot reach the Russian production levels nor keep up with the production pace, let alone match Russia's cost advantages.
The U.S. also needs a more fascist economic arrangement to boost employment and corporate profits. From a Keynesian perspective, war greatly benefits the economy. The public's weak organic demand is replaced by the government's endless demand for weapon production. Most importantly, the banking system is willing to provide credit to businesses because producing materials needed by the government ensures profits. Wartime presidents are often very popular (at least in the early stages) because everyone seems to be getting wealthier. If a more comprehensive way of accounting for economic growth were adopted, it would clearly show that war is extremely destructive in net benefits. But such ideas cannot win elections—every politician's primary goal is re-election (if not for themselves, then for their party members). Trump, like most of his presidential predecessors, is a wartime president, which is why he has shifted the U.S. economy into a wartime state. At this point, the rhythm becomes clear: we must track the channels through which credit is injected into the economy.
I have explained in the article (Black or White) (see the previous article 'If Trump's 'America First' plan succeeds, BTC will reach $1 million') how the government's profit guarantees for 'key' industries lead to bank credit expansion. I call this policy 'poor man's quantitative easing' as it can create a fountain of credit. I had predicted that this would become the means by which Trump's team stimulates the economy, and the MP Materials deal is the first large-scale real-world example. The first part of this article will analyze how this deal expands the supply of dollar credit—this template will be used by the Trump administration to produce the key materials needed for 21st-century warfare: semiconductors, rare earths, industrial metals, etc.
War also requires the government to continuously incur massive debt. Even if capital gains tax increases due to the appreciation of the wealthy's assets alongside credit expansion, the fiscal deficit will continue to rise. Who will buy this debt? Stablecoin issuers.
As the total market cap of cryptocurrencies rises, part of it will be stored in the form of stablecoins. Most of these managed stablecoin assets are invested in U.S. Treasury bonds. Therefore, if the Trump administration can create a favorable regulatory environment for traditional financial (TradFi) participants to invest in crypto, the total market cap of cryptocurrencies will skyrocket. Subsequently, the managed stablecoin assets will automatically increase, creating more purchasing power for U.S. Treasury bonds. Treasury Secretary Bessent will continue to issue Treasury bonds far exceeding the scale of Treasury bills and bonds, specifically for stablecoin issuers to subscribe.
Let's jump into the credit waltz, and I will guide the readers to perfectly interpret this financial dance.
1. Poor man's quantitative easing
Central bank money printing cannot create a robust wartime economy. The financial industry has replaced rocket engineering. To correct the failures of wartime production, the banking system is encouraged to provide credit to key industries recognized by the government (rather than corporate hitmen).
American private enterprises are guided by profit maximization. Since the 1970s, it has been more profitable to engage in 'knowledge' work domestically while outsourcing production overseas. China was eager to upgrade its manufacturing technology by becoming the global low-cost (which has evolved into high-quality over time) factory. However, the threat to the elite rule of 'America's governance' is not the $1 Nike shoes, but rather the empire's inability to produce war supplies when its hegemony faces severe challenges. This is the root of the uproar over rare earth issues.
Rare earths are not rare, but their large-scale processing faces enormous environmental externalities and capital expenditure requirements. More than thirty years ago, China decided to dominate rare earth production, and today's China benefits from this foresight. To reverse the situation, Trump is borrowing from the Chinese economic system to ensure the U.S. increases rare earth output to continue the empire's warlike nature.
According to Reuters, the following are the key points regarding the deal with U.S. rare earth producer MP Materials:
● The U.S. Department of Defense will become the largest shareholder of MP Materials.
● This deal will increase U.S. rare earth output 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% due to this deal announcement.
Everything seems beautiful, but where does the construction funding come from?
MP Materials stated that JPMorgan and Goldman Sachs will provide $1 billion in loans to build a facility with ten times the capacity.
Why are banks suddenly willing to lend to the real economy? Because the U.S. government guarantees that this 'vanity project' will allow borrowers to make a profit without loss. The following T-shaped table will analyze how this deal promotes economic growth through the creation of credit out of thin air.
MP Materials (MP) needs to build rare earth processing facilities and obtain a $1,000 loan from JPMorgan (JPM). This lending activity creates $1,000 of new fiat currency and is deposited into JPMorgan's account.
Subsequently, MP began constructing rare earth processing facilities. This requires hiring working-class individuals (Plebes). In this simplified model, we assume all costs are labor expenses. MP must pay workers' wages, causing a debit of $1,000 from its account, while the working-class individuals see a credit of $1,000 in their JPMorgan accounts.
The U.S. Department of Defense (DoD) needs to pay for these rare earths. The funding is provided by the Treasury, which must issue bonds to finance the Department of Defense. JPMorgan converts MP company's loan assets into reserves held by the Federal Reserve through the discount window. These reserves are used to purchase bonds, leading to a credit to the Treasury General Account (TGA). The Department of Defense then procures rare earths, and this payment becomes MP's revenue, which ultimately returns as a deposit to JPMorgan.
The ultimate fiat balance (EB) is $1,000 higher than the initial amount of JPMorgan's loan. This expansion stems from the money multiplier effect.
Government procurement guarantees are achieved in this manner, utilizing commercial bank credit to construct new facilities and create jobs. Although not mentioned in this case, JPMorgan will now issue loans to working-class individuals (Plebes) with stable jobs for the purchase of assets and goods (real estate, cars, iPhones, etc.). This again creates new credit, ultimately flowing into other American businesses and returning as deposits to the banking system. It is evident that the money multiplier must be >1, and this wartime production will stimulate economic activity, being counted as 'economic growth.'
The supply of money, economic activity, and government debt are all inflating simultaneously. Everyone is happy—common people get jobs, financiers/businesspeople enjoy government-guaranteed profits. If such economic policies can create welfare out of thin air for everyone, why have they not become universal policies in countries around the world? Because they will trigger inflation.
The human resources and raw material supply required for producing goods are limited. The government creates money out of thin air through the banking system, which crowds out financing channels and even production capacity for other goods, ultimately leading to shortages of raw materials and labor. However, the supply of fiat currency is never exhausted, and the inevitable result is wage and commodity inflation, causing individuals and entities that are not directly linked to the government or banking system to eventually fall into trouble. If in doubt, one might want to review the daily historical materials from the two world wars.
The MP Materials deal is the first typical case of 'poor man's quantitative easing' policy. The brilliance of this policy lies in the fact that it does not require congressional approval—under Trump and his successor in 2028, the Department of Defense can directly issue guaranteed procurement orders in regular operations. Profit-driven banks will follow suit, fulfilling their 'patriotic duty' by funding enterprises that rely on government finances. In fact, politicians from all parties will rush to argue why businesses in their districts should receive Department of Defense orders.
Since this credit creation model can avoid political resistance, how should we protect our portfolios from the impending erosion of inflation?
2. The crypto bubble
Politicians are well aware: stimulating credit growth to drive 'key' industries will inevitably lead to inflation. The real challenge lies in guiding the excess credit to inflate an asset bubble that will not undermine social stability. If wheat prices were to skyrocket like Bitcoin did over the past 15 years, most governments would have been overthrown by revolutionary citizens long ago. Therefore, the government encourages the public—these groups whose purchasing power continues to diminish—to participate in the credit game by investing in government-backed anti-inflation assets.
Let's look at a non-crypto example in the real world: since the late 1980s, China's banking system has created the largest scale of credit in the shortest time in human history, primarily directed to state-owned enterprises. They successfully created low-cost and high-quality factories globally, with one-third of industrial goods produced in China today. If you still think Chinese manufacturing is inferior, you might want to test drive BYD and compare it to Tesla.
Since 1996, China's M2 money supply has surged by 5000%. Civilians attempting to escape credit inflation face extremely low bank deposit rates, thus flocking into the real estate market—which aligns with the government's urbanization strategy. As of 2020, the continuously rising housing prices have effectively suppressed the public's desire to hoard physical goods. Measured by the income-to-housing price ratio, the housing prices in China's first-tier cities (Beijing, Shanghai, Shenzhen, Guangzhou) rank among the highest globally.
Land prices have increased 80 times over the past 19 years, with a compound annual growth rate of 26%.
This housing price inflation has not undermined social stability, as ordinary middle-class comrades can purchase at least one apartment through loans. Therefore, everyone is involved. An extremely important second-order effect is that local governments mainly fund social services by selling land to developers, who then construct apartments to sell to the public. As housing prices rise, land prices and land sales grow in sync with tax revenue.
We may conclude that the Trump administration's excessive credit growth must create bubbles that allow ordinary people to profit while providing funds to the government. The bubble that the Trump administration is about to create will center around cryptocurrencies. Before delving into how the crypto bubble achieves the Trump administration's various policy goals, let me first explain why Bitcoin and cryptocurrencies will surge rapidly as the U.S. moves toward a fascist economy.
I created a custom indicator on the Bloomie platform called <.BANKUS Index > (in white). This index combines the reserves held by the Federal Reserve Bank with the total deposits and liabilities of the banking system, serving as an alternative indicator for loan growth. Bitcoin is marked in gold, and both benchmark lines are set at 100 basis points as of January 2020. When the scale of credit doubles, Bitcoin's gains reach 15 times—its fiat price has a highly leveraged relationship with credit growth. At this point, no retail or institutional investor can deny: if you believe that more fiat currency will be issued in the future, Bitcoin is the best investment target.
Trump and Bessent 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 holding rate of cryptocurrencies among traditionally non-stock holding groups (young people, low-income earners, and non-white individuals) has surpassed that of the wealthy white baby boomer generation. Therefore, the prosperity of cryptocurrencies will win broader and more diverse support for the ruling party's economic agenda. More critically, according to the latest executive order, to encourage various types of savings to be invested in the crypto space, 401k pension plans are now explicitly allowed to invest in crypto assets—these plans manage approximately $8.7 trillion in assets. It's about to take off!
The ultimate trump card is the proposal for a capital gains tax exemption on cryptocurrencies put forward by 'Emperor Trump'. Trump is promoting: war-driven crazy credit expansion + regulatory green light for pension funds to enter the market + total tax exemption policy. It is simply a celebration for all!
Everything seems perfect, but there is a fatal problem: the government must issue more debt to fulfill procurement guarantees to private enterprises from the Department of Defense and other departments. Who will take over this debt? Cryptocurrencies will once again emerge as winners.
Once capital enters the crypto capital market, it typically does not leave. If investors want to wait and see, they can hold USDT and other dollar stablecoins. USDT, in order to earn custodial fund income, will inevitably invest in the safest traditional financial income-generating tools: short-term Treasury bonds. These bonds have a maturity of less than a year, with near-zero interest rate risk and liquidity comparable to cash. The U.S. government can print unlimited money for free, making default nominally impossible. Current short-term Treasury yields range between 4.25% and 4.50%. Therefore, the higher the total market cap of crypto, the more funds stablecoin issuers absorb—ultimately, most of these custodial funds will flow into the short-term Treasury bond market.
On average, for every $1 increase in the total market cap of crypto, $0.09 flows into stablecoins. Suppose Trump successfully drives the total market cap of crypto to reach $100 trillion by the time he leaves office in 2028—equivalent to a 25-fold increase from current levels. If you think this is impossible, it only shows that your understanding of the crypto market is still too shallow. At that time, the influx of global funds will prompt stablecoin issuers to generate about $9 trillion in short-term Treasury purchasing power.
From a historical perspective, the Federal Reserve and the Treasury also massively increased the issuance of short-term Treasury bonds rather than long-term bonds to finance the U.S. participation in World War II.
Now Trump and Bessent have completed a perfect loop:
1. Created an American-style fascist economic system to produce wartime materials needed for indiscriminate bombing;
2. The inflationary impulse of financial assets caused by credit growth points directly to cryptocurrencies, and the price of cryptocurrencies has soared, resulting in huge profits for many people, who feel they are wealthier. They will vote for the Republican Party in 2026 and 2028... unless they have a teenage daughter at home... However, the lower class has always voted with their wallets.
3. The booming development of the cryptocurrency market has brought massive inflows of funds to stablecoins pegged to the dollar. These issuing institutions invest their managed dollar stablecoins in newly issued Treasury bonds to cover the continuously expanding federal deficit.
4. The drumbeat is deafening, and credit limits keep rising. Why aren't you all-in on cryptocurrencies? Don't be scared off by tariffs, wars, or various social issues.
3. Trading strategies
It's simple: Maelstrom is already fully invested. Because we are degens, the altcoin market offers an excellent opportunity beyond Bitcoin (the crypto reserve asset).
The upcoming Ethereum bull market will completely tear apart the market. Since Solana rose from $7 to $280 from the ashes of FTX, Ethereum has become the most despised large-cap cryptocurrency. But now it's different—Western institutional investors led by Tom Lee have fallen in love with Ethereum. Regardless, buy first and talk later. Or you can choose not to buy and then sulk in the corner of a nightclub, drinking bland beer, watching a group of people you think are less intelligent than you throw money on sparkling water at the table next door. This is not financial advice, so you decide for yourself. Maelstrom's strategy is: All in on Ethereum, All in on DeFi, All in on ERC-20 altcoin-driven degen ecosystem.
My year-end target price:
Bitcoin: $250,000
Ethereum: $10,000
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