The Big Whale: The rate cut was initiated by the US Federal Reserve in September, but unlike equities, which rose sharply, cryptocurrencies did not follow suit as strongly. How do you explain this?
Arthur Hayes: The main reason for this is that expectations for an increase in the money supply have not really changed.
I'm one of those who believe that the quantity of money in circulation is more crucial than its price. Admittedly, when we talk about lowering interest rates, we focus on the cost of money - i.e. the price of borrowing or lending. However, the real determining factor is the quantity of money issued, in other words, the volume of credit dollars generated by banks, central banks and governments. So far, however, this quantity has not increased significantly.
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When do you think this will eventually happen?
We will have to watch if the Fed ends its quantitative tightening programme, restarts money printing via quantitative easing (QE), banks increase lending, or the US Treasury reduces its current account at the Fed. There are multiple ways to inject dollars into the financial system.
I am convinced that these events will occur, as the effects of interest rate cuts are likely to be less effective than expected. Furthermore, if Kamala Harris loses ground in the polls, the Democrats will probably be forced to do more to support the financial markets before the presidential election. This will inevitably lead to the issuance of new dollars by the Fed, the Treasury or the banking system.
In addition, China represents another potential hotbed of exploding fiat money liquidity. Since the Fed began cutting rates, the People's Bank of China has also cut several of its key rates.
Most recently, they announced a $142bn injection into state-owned banks. While this may not be enough to prevent a recession in China or contain the effects of their property bubble bursting, it is nevertheless a step in the right direction. China still has considerable scope to increase liquidity, especially as the dollar weakens. Ultimately, this could benefit the cryptocurrency market. However, it will be some time before we see the effects.
"Until November, the economic environment will be very favourable for cryptos" In terms of the timetable for the next few months, what can we expect?
We are now in a very favourable liquidity environment for the reasons I have just mentioned. I am very optimistic until the beginning of November, when the US elections take place, because I think there will be a great deal of uncertainty until the result is definitively known, which could take weeks or even months.
In my opinion, whoever wins, the other party will not accept it and there will be protests, legal action, demonstrations in the streets, etc. All the more so as the debt ceiling will have to be renegotiated at the beginning of January. From my point of view, these uncertainties will weigh down on the crypto markets.
Once everything has stabilised, it will be the start of a new bull market. No matter who wins, whether it's Kamala Harris or Donald Trump, they will print money to fund their respective agendas, whether it's tax cuts for Trump or social spending for Harris. Mechanically, there will be more money in circulation, and therefore more liquidity for the markets. This will lead to an increase in asset values, including crypto-currencies.
Some argue that we have not yet entered the true bull market (Bull Run). Why don't you share this view?
In fact. In my opinion, we have been in the middle of a Bull Run since March 2023, when the bitcoin price began a steady rise. This date also coincides with the regional bank crisis in the United States. I am convinced that this bull market will continue.
I recently published an essay entitled "Volatility Supercycle", in which I explain that each financial crisis requires an increasingly muscular response from the authorities to control volatility.
During the COVID-19 crisis, the US created 40% of all dollars ever issued between 2020 and 2022 to support the economy. And this is just the beginning. We are now witnessing a major reshaping of global economic power, with the rise of the BRICS, de-dollarisation and the emergence of a multipolar order.
To cope with this geopolitical and economic volatility, governments will have to print unprecedented amounts of money. That's why I'm convinced that the next cryptocurrency bull market is inevitable and, in the long term, I predict a $1 million bitcoin. Only the outbreak of new global conflicts could hinder this momentum.
"Larry Fink has achieved in six months what the Winklevoss brothers couldn't achieve in ten years" In fact, BlackRock and more widely many traditional financial institutions have been constantly praising the qualities of bitcoin in recent months. In your opinion, what explains this change in perception?
Honestly, I doubt that BlackRock's executives fully understand the implications. At a higher level, banks are looking for ways to circumvent the increasing limitations imposed by governments and create new sources of profit. The crypto sector allows them to do this, even if they are not necessarily "pro-crypto". Above all, they see a commercial opportunity.
As governments continue to run up debts and impose restrictions on banks, the latter will look to offer crypto services to escape certain forms of control.
I've always said, the big financial institutions don't hate cryptocurrencies as such, they hate the fact that outsiders like me or CZ (Changpeng Zhao, ex-CEO and co-founder of Binance) have been able to make huge profits from them. Now that Larry Fink and BlackRock are profiting, they love Bitcoin. Their Bitcoin ETF was their most successful launch, and they are the world's largest asset manager.
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Now they are all over the mainstream financial media extolling the virtues of Bitcoin, simply because they are making money from it. It just goes to show how profit-driven mainstream financial institutions are above all else.
It all depends on the price. The higher the price of Bitcoin, the more people want to buy it, it's as simple as that. The fundamentals of decentralisation and resistance to censorship are important, of course, but what really attracts traditional investors is the money to be made. When they see bitcoin reach $64,000 or the total capitalisation of crypto-currencies exceed $1.5 trillion, they get interested because they can make money from it. It's not about belief in the technology, it's about profits.
Did the rapid approval of Ethereum Spot ETFs surprise you?
Not really. Larry Fink got in six months what the Winklevoss brothers couldn't get in ten years. It all depends on who's asking. When Larry Fink asks for something, it happens immediately. When it's a "crypto bro", it's a different story.
As far as Ethereum is concerned, why has its price remained relatively low compared to Bitcoin recently?
Firstly, because Ethereum's value is not yet as well understood as Bitcoin's. That's the first factor I see. Secondly, it is crucial to understand the origin of flows into ETFs, particularly Bitcoin.
The largest funds must declare their largest positions. At the top of the list are players such as Millennium, Citadel and Point72. These are all hedge funds. They do not adhere to the Bitcoin philosophy. In fact, they don't adhere to any philosophy at all. Their only motivation is profit.
What do these hedge funds do? They practice what is known as "basis trading". In practical terms, they quickly bought the Bitcoin ETF as soon as it was listed, while simultaneously selling equivalent futures contracts on the CME (Chicago Mercantile Exchange) market. This risk-adjusted strategy is proving highly lucrative.
As for Ethereum, whose ETF was launched this summer, the return on the basis trade was negligible. If we exclude the income from staking, this transaction loses its interest. What's more, liquidity for Ethereum futures on the CME is limited.
However, the situation could change in the coming months, not least because of the rate cuts that have affected Ethereum. After the Merge , the idea was developed that Ethereum was akin to a kind of "Internet Bond" thanks to the staking yield. But when US bonds offer yields above 5%, compared with 3% to 4% for Ethereum staking, many investors opt for bonds, perceived as less risky.
The Fed recently cut rates by 50 basis points, and this trend is likely to continue. If bond yields fall below Ethereum staking yields, interest in the cryptocurrency will rise again. So, as rates fall and the prospect of higher Ethereum staking yields emerges, Ethereum will regain its attractiveness to investors looking for fixed income in a low rate environment.
"This spring, rates will be below 2%" So in your view, is it realistic to expect rates below 2% fairly soon?
I think that as early as this spring, we will be below 2%, mainly because of the period of uncertainty linked to the US election but also the negotiations around the debt ceiling.
As a result, the Fed will be forced to act. By cutting key rates, it will be able to put an end to quantitative tightening, all to keep the financial markets afloat. Especially if Kamala Harris becomes chairwoman, since the agencies are backing the Democrats. So it will make sense that once in power, she will ease financial conditions even further to ensure that her power is firmly established within the federal government.
Which candidates would be most likely to develop a policy in favour of the development of the sector, particularly with the emergence of regulation specific to cryptocurrencies?
Kamala Harris and Donald Trump have both held presidential or vice-presidential posts for four years. I will therefore focus on their concrete actions, or those of their party, rather than their statements.
Donald Trump was in office from 2016 to 2020. During that time, no significant changes were made to the regulation of cryptocurrencies. So I don't see why that would change dramatically if he were to return to office. As for Kamala Harris, her track record in this area doesn't require in-depth analysis.
Also, I doubt that US regulation is really crucial for the sector. The US represents only 4% of the world's population. The rest of the world, 96%, can decide its own regulatory approach. So why is everyone focusing on the US? Of course, if you are a company operating in the United States, this is of direct concern to you. But let's not forget that crypto is a global phenomenon. Bitcoin has grown from zero to nearly $1.5 trillion in value without regulatory clarity or government support. Why would the industry suddenly need it now?
In reality, those calling for regulation are mainly entrepreneurs who have raised money from venture capitalists. They need institutional adoption to develop their business, nothing more, nothing less.
So the sector doesn't need any particular regulation to develop?
Frankly, I don't think so. The United States can do what it likes. They can be pro-crypto, they can be anti-crypto, it doesn't matter. What is the thing that has made Bitcoin the most successful asset in human history? Money printing. It has nothing to do with regulations. So if people are looking for a bullish catalyst, it's the fact that Kamala Harris and Donald Trump are both running on a platform of increased government spending. It's just that they're going to allocate them differently to their supporters.
Yet, regulations are starting to emerge all over the world. Isn't this necessary for the sector to move into another dimension and for crypto to be massively adopted?
I have worked in two investment banks and have been studying financial history for many years. Banks don't care about laws. They can break the laws as many times as they like because the people who run the banks never go to prison. Especially since if there was really strong demand from customers who really wanted to invest in crypto, the banks would already be offering this service, which in my opinion is not the case.
The real usefulness of bitcoin is not yet firmly established in people's minds. The majority of these banks' customers are still too conditioned to think as the system worked from the 1970s to 2008. They have not yet adjusted their frame of reference to the new inflationary, globally competitive situation, and how crypto fits into that, and how holding government bonds is a recipe for losing all your capital.
Do you think Bitcoin and Ethereum could compete one day?
Thinking that a change in regulation would lead to a massive influx of money from traditional finance is, in my opinion, a mistake at the moment.
For Bitcoin, no. It is, in my opinion, the best form of crypto currency. Its decentralised, censorship-resistant network is the largest. Despite some obvious flaws, it far outperforms any alternative.
As for Ethereum, it dominates the "decentralised world computer" race. Its ecosystem is the cradle of innovation, often copied by its competitors. The most recognised protocols, such as Uniswap or EigenLayer , have emerged from it.
Certainly, Solana is in the news a lot at the moment. It has been a great success, with an excellent user interface and a committed community, particularly around memecoins. But what does Solana actually represent? Its market value is only a quarter of that of ETH. It will be extremely difficult for Solana to surpass ETH, especially as Ethereum continues to evolve. While nothing is impossible, if I had to bet, I would always bet on Ethereum.
What will be the narratives of this next Bull Run?
As the Fed cuts rates, investors will turn to investments offering attractive returns in the crypto ecosystem. Ethereum staking, particularly via platforms such as EtherFi , will provide these returns in a non-custodial manner. In addition, the possibility of generating crypto market base returns with Ethena could also attract growing interest.
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