Bitcoin's Asymmetric Upside: How an AI Bust Could Trigger Market Conditions That Buoy Bitcoin

Arthur Hayes, co-founder of BitMEX, has written an essay titled 'Safety First' in which he reframes the AI safety debate as a credit story with implications for Bitcoin. According to Hayes, recent warnings from US AI labs that AI should be slowed may signal slack demand at current prices and not death.

Hayes argues that no one buys AI because they are not willing to pay for it at US prices, which are much higher than those of Chinese rivals. This has led to a situation where data centers, chips from Nvidia and Broadcom, and cloud capacity from Microsoft and Google may all see softened demand.

The $1 trillion debt behind AI infrastructure is also a major concern, with Hayes modeling the three dominant AI labs as financially unviable on a full-cost basis. Their forecast compute requirements generate funding requirements that outweigh investment-grade debt and lower-rated debt.

Hayes suggests that the policy response will be key in determining the impact of an AI bust on crypto markets. He proposes two possible paths for government: either taking on excess capacity to help with national security, or backing up insurers who could be caught with de-rated AI debt on their books.

Both options require money creation on the Fed balance sheet or taxpayer backing of reinsurance vehicles. Hayes notes that Bitcoin's price is sensitive to liquidity, and that effects on its price are quite sensitive to liquidity, along with Ethereum, Solana, USDT and USDC stablecoins, and DeFi protocols like Aave tracking real rates, and inflows to Bitcoin ETFs managed by BlackRock and Fidelity.