There's a lot of people trying to figure out what went wrong with Bitcoin. Are people just looking for excuses or is there really fire behind that smoke?
And it's not that everyone loses their job because of AI. It's we only need a small percentage of people to lose their job and cause a financial panic.
It's almost like this fiat-based, debt-based monetary system is incompatible with the growth of technology that we need.
You need to get to the bailout, but to get to the bailout, you need the crisis. Things need to go down in price pretty quickly. And that's what Bitcoin is telling us. They're not printing enough money. In the next 4 years, they expect agent-to-agent commerce to be up to $5 trillion.
People go on Polymarket to have an idea of what the politics are. Regardless of what your view is, you're getting lied to. So, how do I get truth out there? Well, where are people putting their money?
A lot of people are saying maybe the war is an excuse to print money. I don't know if governments need excuses to print money. So, what would you say is the tipping point then that things start to really go haywire?
All right, Arthur. So, man, I read a lot of your newsletters. I've been watching a bunch of your videos. I love your takes that you have. I want to talk a lot about the markets, but before we dip into that, I've heard some of your background. I think you started in like institutional finance. You were sort of like in the trenches there a little bit. Give us a little bit of the background that you have there just so that can sort of help us understand more about your views in the future.
Yeah. So, I got a traditional business school education, a business school as an undergrad in Philadelphia in the US and I also took a minor in Chinese. So I wanted always obviously to get out to Asia. I was fortunate enough to go on a study abroad program to Hong Kong back in 2006 and then got a job in the summer and then came back as a full-time person back in 2008. So my first day on the trading desk in Hong Kong was the Monday after Lehman filed for bankruptcy. And so you can imagine the type of trajectory your financial service career is on when the first day you join a bunch of people that you interned with and no longer have a job and the entire financial ecosystem is melting down before your eyes. So that was my first day, welcome to the fire as a trader.
Got prepared for crypto and then I did that for 5 years. I worked at Deutsche Bank and Citibank in Hong Kong doing ETF market making.
I thankfully lost my job in 2013 and then I read the Bitcoin white paper and kind of the rest is history in terms of my involvement in the space. I've been doing crypto-related things for almost 12 years now.
Yeah. So then that led you to Bitcoin and then that led you to founding or co-founding BitMEX.
Which so you sort of used sort of the derivatives trading background, Bitcoin trading to launch that platform.
Exactly. And we're most famous for the invention of the perpetual swap. It's probably our biggest achievement as a company. And obviously I'm sure all your users use these products today. So it's been a great ride and now I'm focused on trading my own money and investing in early stage crypto companies through my family office, Maelstrom.
Okay. Okay. So investing your own money and investing back into the space, into the crypto space in general.
Got it. So, understanding that, I'm curious. You know, there's a lot of people trying to figure out what went wrong with Bitcoin. It's down about 50% at the time of this recording. There's been a lot of people pointing fingers and smoking guns. One of the latest pieces that came out is some ETF funds maybe blowing up. I think people were pointing fingers over to some Hong Kong funds originally. Now they're thinking maybe there's some manipulation here in the United States, some of the funds here. What's your take on that? Are people just looking for excuses or is there really fire behind that smoke?
Yeah, I've been doing this for a long time as I mentioned and anytime a lot of traders lose money on what they believe is the surefire thing, meaning like oh I was told that Bitcoin is a safe haven, best performing asset in human history, again all those things are true if you bought it in like 2010 but just because you bought it like 6 months ago and you're whining that it's down 50% and it's a very volatile asset because you know the world changes, then you start blaming other people and you know every cycle lets a new boogeyman and so I guess this cycle it was the market makers.
It was these no-name, faceless market makers who always manipulate the price down. They never manipulate it up because you're usually long on leverage and you know they point out all these stories. Oh, this person was doing this trading strategy or that trading strategy. You know, maybe some trading firm got reprimanded for something. But like to be able to control a multi-trillion dollar market like Bitcoin with one shop and put the price anywhere you want I think is a bit ludicrous. And so yeah I don't think there's anything there. It's just traders whining that they didn't make money when they thought they should have and they're trying to find somebody other than themselves to blame for their losses.
Yeah. Explain to us the market making. So obviously as you said you had a background in that. A lot of people do think that the market makers, as you said, they only suppress the price down, not up. Explain to us what market making is and maybe how much influence they really have over the price of Bitcoin.
Market makers are trend followers and liquidity providers. And so, if you're a market maker, your job is to buy low and sell high and do it, you know, millions of times because you're putting in orders every second or obviously milliseconds, nanoseconds, that sort of thing. And so, their job isn't to go long or short Bitcoin. Yes, there might be a trader at the same firm who has a mandate to take directional risk, but the market maker, the person that's providing liquidity that would allow you to get in and out of position with low slippage, that person or firm is literally just trying to make the spread. And they're not trying to take a view on the price of Bitcoin or say, 'Okay, I'm just going to slam the price down and bring it back up.' It's just not, Bitcoin is way too liquid of a market to do that. Yes, and definitely there are some shenanigans on some shitcoins, but most of the shitcoins deserve to be zeros anyways. And so they're just being propped up with artificial liquidity because there's actually no real buyers. And I guess a lot of people experience that after the 1010 issues on Binance and a lot of other altcoin and shitcoin trading platforms. If you want to talk about Bitcoin, you know, the multi-trillion dollar market cap market, there is no one market maker that is taking a massive big enough directional position to influence the price, causing it to go down 50% in 6 months or whatever it has been from the highs in October till today.
Yeah. I mean, certainly there's funds that are piling on massive shorts and might try to potentially make it, maybe some news break and take advantage of some short-term prices, right? Certainly there's some of that. But to say that the market makers are literally responsible for the reason why Bitcoin has underperformed a lot of other assets. I think that's just nonsensical.
Yeah. So, I know you've talked a lot about global liquidity, which I definitely want to get into. And I think you've even called sort of Bitcoin sort of like the smoke alarm or the fire alarm in the global liquidity cycle. So, talking about maybe some of the real reasons why we've seen Bitcoin's draw down from 50%. Would you point more towards, since it's not the boogeyman of the market makers, it's more about the global liquidity that we see receding?
Yes. And I've written an essay about four weeks ago about my read on the reason why Bitcoin has underperformed sort of big tech, NASDAQ, and gold. And it's pointing to a liquidity destruction or credit event that's going to be sponsored by, in my opinion, the displacement of knowledge workers especially in western economies due to AI.
So you see a massive job displacement meaning people get displaced and then they have to find a new job but there's sort of like that in between spot and that creates a massive unemployment spike, tax receipts plunge and then the government has to come in with a massive stimulus.
I think it's more akin to yeah we have a small increase, maybe I don't know if small is the right number, but an increase say it's like 10 to 20% of people who lose their jobs because of AI automation and they have credit to service, mortgages, credit cards, auto loans, especially in the United States where it's a very flexible labor market and consumer spending is something like 70% of economic activity and most of it's leveraged. Then when you take the highest earning income group, knowledge workers, people who had university education who are doing some sort of knowledge work, computers, lawyers, accountants, what have you, and you're taking out the least productive members of that class, and you're saying, 'Well, there's nothing here for you right now. Maybe they will have been retrained. Call me in 3 to 5 years, but that credit card payment is due next month or in 10 days.' And where's the bank going to get those funds from to service that debt? That's that asset on their balance sheet. And I think that's the issue. And it's not that everyone loses their job because of AI. It's we only need a small percentage of people to lose their job for the leverage embedded in the system to take over and cause a financial panic. And that's the point that I'm trying to make.
Yeah. So I think some people are already kind of pointing to that some of these credit funds are already having some risk show up there. But I think some would say that maybe it's too early to blame that on AI. Maybe some of that is just like a delayed hangover from COVID and too much spending there. So some of the weakness that we're already seeing in some of these credit funds, these private credit funds, do you think that's attributed to AI or not yet?
Absolutely. I think it's people freaking out about software as a service. That's the main culprit here. And so these are, you know, people who make tax software, accounting software. If you have AI that does it better for like 10 bucks a month, now you can basically not need all these tools. And so these people have users and these users are no longer spending money on memberships or however you want to call it, annual recurring revenue and all of a sudden these companies that were the darlings of tech for the last 15 years are zeros. Now again not everyone is going to replace every single tool with AI. That's not the point. The point is you have leverage in your balance sheet and therefore people are like, well, how are you going to service this loan if you're down 30, 50% in terms of signups? Because there's a tool that does it better at like 1% the cost.
Yeah. I'd love to just pull on that just a little bit with you. I mean, as you're an entrepreneur and you're an investor, I wrote an article about a week ago and I was just saying that I think there's a difference from an entrepreneur to the analyst obviously, right? Entrepreneurs take risk. They see value where others don't. They see solutions to problems that nobody else sees. They create solutions for those problems. So like the goal of an entrepreneur is to go take territory, right? I want to go solve problems. I want to grow as fast I can. I want to go claim the mountain. And so the entrepreneur is different than the analyst. The analyst is the bean counter, right? It's the Keynesian economist who wants to put everybody into like a spreadsheet and doesn't take into consideration like human action if you will. And so I think from an entrepreneurial lens, I'm certainly an entrepreneur. I invest into businesses as well. Like I'm using AI to try to expand my business as fast as I can. Like, oh, I just freed up four hours from this person's time. Now he can do these other three projects that has been on my back order list that I haven't gotten to in a long time. And I think like a business, the goal of a business is to grow. I'm trying to grow my profits and grow my revenue every single year. So why would I as a business owner want to fire half my team when I could just increase my product line or my business by 50%. And it seems like the number one job that's at risk right now today is like AI software engineers, but yet it's like one of the most in demand jobs right now. So, I don't know. I'm curious as you're an entrepreneur and investor and you studied this. I'm just curious if you think there's maybe something in there.
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Well, I think let's take it look at it this way. Maybe as an entrepreneur, you're using a lot of services firms. You need to do a lot of back office work, accounting, bill management, legal services, right? And if you as a customer can say, 'Okay, I know I need to have a certified CPA, whatever, a senior person sign off on these accounts, but guess what? I can do everything up until this person signs this with a cloud bot or some instance of an LLM that's been trained on this type of work. I can do it perfectly.' So no longer am I spending hundreds of thousands of dollars on junior level accountants basically doing ledger entries. Now I'm just going to the senior person saying, 'Hey, here are these books. It's already done exactly how you want them done. Check it and sign off.' And so all of a sudden, I'm no longer spending all this money on all this friction that's embedded in the economy. Yeah, sure. Of course, entrepreneurs are going to hire, grow, give more work to people because of AI, maybe be able to do more with their business, but there's all these friction services that we use as business people that we no longer need if we have an AI who's very capable.
And so I think that's the issue. And it's not that, you know, again, 100% of people are not going to lose their job because of AI. We're talking about people who manipulate structured symbols. There's a legal system. It's just precedent and laws that's easily digestible by an LLM or accounting. There are rules. These are what you have to do. Give me the data. I'll hook into your data systems and I'll compile your reports in real time faster than you going to some big four accountant and spinning your wheels for months on end. Spending hundreds of thousands, millions of dollars on accounting. That's what's at risk right now.
Yeah. Yeah. No, I see it. And to the point that you're making, it doesn't have to be a big chunk. It just has to be a little bit to really start to move things sideways. And I'm an edge case, I suppose. I just think about my own company. I have a couple companies, but the one that I mainly run about 24 employees. I have like a bookkeeper, controller, but I've been needing to bring a CFO in, but I've been delaying. And I've built up these AI agents that are like intelligent experts in all these different areas of my business. And I built up a CFO agent. And so I take the reports and I feed it into the CFO, and then I give it back to her. But I found myself to be this middleman where it's like now I'm just shuffling reports back and forth between my controller, my bookkeeper, and my CFO. I'm like, screw this. I'm just going to hire a CFO. That's not my best use of time. But maybe what she's doing could be automated, right? So then there's a blip there, right? So okay, I'll get the CFO, but then maybe I'll get rid of her. And so to the point that I think you're making, which is warranted, there is a disruption coming. People are going to lose their jobs. So what would you say is the tipping point then that things start to really go haywire?
When people start recognizing that these people getting fired from companies like Block and Amazon have debt that they need to service whether that's a house, credit card, loan, whatever. And so there's going to be an aha moment and the market's like oh whether it's delinquencies rise, some very overleveraged lender goes, it's always the worst players, you go bankrupt or something happens and then people look at oh what was a theme that made them go bankrupt and extrapolate that higher up into the competency stack in terms of the companies that are affected and then oh no all the credit that's on the bank's balance sheets that's related to this income bracket is all of a sudden questionable. Do I really want to be exposed to a bank that has a lot of consumer loans or a lot of auto loans or this type of mortgage? That was what subprime was all about. It was again not everybody lost money on their house or was delinquent. It was we're talking like 10%, 10-15% and that was enough to literally cause a global financial crisis. So again, it's not about a massive number of people. It's we only need, it's just the start of this trend and it's really going to impact the banking system.
So what do you think the domino effect of that? Obviously 2008 we saw the domino effect. It brought down basically the whole banking system. Back then it was so much money I couldn't believe it was like 700 billion for the TARP package. It's like no, you can't spend that much. Now it's like a drop in the bucket. But you know in 2023 we saw three banks go down and they had a bailout package in six days right. So from Bear Stearns collapsing it was like almost a year before the bailout package right?
And then in 2023 three banks went down we had six days. So I'm curious what you think sort of that domino effect is. Do the banks pull a 2023 step and put the bonds on their own books, paper over that or kind of how you think that cascades through the system.
So again, I don't know what the trigger will be. I think it's going to be in sort of these smaller banks that will have more exposure to these types of loans and who don't have the government guarantee. But to your point, there is no appetite for any whiff of deflation or a credit event. And so if we even start to see a few banks wobble, you are going to see an immediate response from the Fed and the US Treasury and other regulators around the world to sort of ring fence this problem because they don't want to suffer anything like 2008 again. Which is why this can happen a lot faster than people think because the response is almost immediate, right?
Yeah. A few days and then oh here is a blanket sort of bailout for the banking system and that's going to happen.
Except in this case this is a structural problem where you have on one hand every single major government saying AI, AI, AI, we have to win the war against AI, we have to upgrade the capability of AI and the first casualty are your workers who have the highest propensity to spend and this is government policy that's supporting the build up of all those capex to make these LLMs faster and cheaper and all these things. And again, and you could go back to 2008 as well. It was government policy to get as many people in homes as possible and loosen the underwriting standards and force banks to get into this business. It's government policy for us to underwrite AI at the national level regardless of where you live and therefore the consequences are going to be massive. And again, it's a government pushing this as well. It's not just entrepreneurs who say we have to do AI. It's almost like this fiat-based, debt-based monetary system is incompatible with the growth of technology that we need.
It's almost like that. But you're damned if you do, damned if you don't where it's like, well, if you don't take on the AI and push to dominate AI, then you're going to fall behind and you're doomed that way. But if you do push it and it wipes out all your workers, you're doomed that way as well. So, it's sort of like there's a no-win scenario there.
I've seen a lot of talk about, I mean I think Sam Altman said that they have way more advanced models they could produce but they don't even have the energy for it. We have a massive commodity crisis, energy crisis. They can't build the data centers fast enough. Of course we'll jump over to what's going on in the Middle East but data centers are at risk over there. It seems like already currently our ability to create energy in data centers is slowing down the rate of AI growth. Could that be enough of a brake to slow roll this a little bit so it's not as catastrophic as maybe we think it would be?
But again, we'll see what sort of, especially we're talking obviously in the United States and China, there's plenty of energy because of decisions that the government has made over there in terms of how they're going to electrify their economy. But if you're talking about the United States and I guess parts of Western Europe, yes, they have this issue of like there's a lot of demand to build data centers. There's not enough energy supply. I think we're going to see more instances where you have these hyperscalers are going to go straight to the source and start buying power plants, buying utilities, buying stranded energy resources and basically putting up a data center off the grid. That's already starting. It's only going to intensify now that data centers in the Middle East are getting droned and you really don't have any security over there. So yes, it'll slow, it'll halve the rate at which that grows, but the cure for high prices is high prices in the commodity space. And so they're going to find these resources and provision them to building out of AI. So, I'm not, yeah, it could slow down. But again, the price differential between a properly trained agent to do accounting and a junior level, mid-level CPA, it's still like 99.99% cheaper to use AI if you can get it to do the things you want it to do.
You're talking about a per month cost. So yes, the cost could go up and you could see people spending massive amounts of money on inference on these AI models, but you have to pair that against, well, what would I spend for a team of humans to do the same work? And I think it still comes out to be much cheaper in certain very specific use cases to use these AI models.
Yeah. So in that situation, I mean, that's bad for any number of reasons. Situations can be good and bad at the same time. It almost seems like from an investing standpoint and from like a global liquidity standpoint, the bad news is good news. Meaning people are going to lose their jobs, credit funds are going to blow up, but the Fed's going to pump in a bunch of liquidity.
But it's path dependent, meaning that sure you need to get to the bailout, but to get to the bailout, you need the crisis. And so things need to go down in price pretty quickly. And that's what Bitcoin is telling us. There's not enough money being created. The authorities still believe that AI is this productivity tool and will help them escape the debt that they have to pay back because productivity is going to elevate so fast per worker but they don't believe that there's going to be mass layoffs or enough to cause an issue in the banking system and so there's the economy there and that's what Bitcoin is telling us they're not printing enough money to counter what is going to happen in the near future until they get to that religion, oh no I need to print money, then Bitcoin is going to be at these levels or maybe even a bit lower. We'll see.
Yeah. Now, as somebody who's been in Bitcoin for a long time, since almost the beginning here, you've been through multiple of these like four-year cycles, as we call them, and there's so much talk about the four-year cycle being dead. And we're past that. When we cut the new supply in half, it doesn't really have enough effect on the supply demand equilibrium to really shift it. But here we are exactly 18 months after the halving and we got our peak in October, not November this year. And the price is down about 50%. The thing is that like each one of these cycles has their own reasoning and so like in this case I'm guessing are you saying it's not really about the four-year cycle it just so happens to coincide with the global liquidity cycle and that's what liquidity is telling us.
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