Bitcoin’s drop signals a looming AI turmoil, though massive Fed stimulus will ultimately push the cryptocurrency to unprecedented highs, argues Arthur Hayes.

The swift advance of artificial intelligence could displace a significant share of the workforce, sparking widespread credit stress and forcing policymakers into drastic action, according to Arthur Hayes.

The BitMEX co-founder contends that bitcoin’s roughly 52% decline from its October record high is a forward-looking signal of deeper financial trouble ahead. BTC has fallen from $126,000 to around $67,000, even as the Nasdaq has held relatively steady — a divergence Hayes interprets as crypto markets front-running a looming credit contraction.

In his recent essay, “This Is Fine,” Hayes describes bitcoin as the “global fiat liquidity fire alarm,” arguing that it is the most sensitive barometer of changes in credit supply. While equities appear complacent, he believes bitcoin’s sharp repricing reflects expectations of a large-scale debt unwind that has yet to be fully recognized in traditional markets.

Hayes models a scenario in which AI replaces 20% of the United States’ 72.1 million knowledge workers. Such displacement, he estimates, could result in approximately $557 billion in consumer loan and mortgage defaults — about half the magnitude of the 2008 financial crisis. Regional banks would be especially vulnerable, potentially triggering systemic stress.

In that event, Hayes expects the Federal Reserve to respond with extraordinary liquidity measures. Although deflationary shocks initially punish risk assets, he argues they ultimately benefit bitcoin once central banks intervene. Markets first price in the damage, he says, then rebound sharply as monetary authorities expand the money supply.

He also highlighted gold’s strength relative to bitcoin as a warning sign of rising risk aversion. A rally in gold alongside weakness in BTC, Hayes suggests, signals mounting fears of a deflationary credit event within the U.S.-led financial system.

Should the Fed deploy emergency support similar to its response during the March 2023 regional banking turmoil, Hayes believes bitcoin would stage a decisive recovery. Sustained liquidity injections, in his view, could propel the cryptocurrency to new all-time highs.

Still, he cautions that the path may involve further downside. Political delays or hesitation from policymakers could allow bitcoin to drop below $60,000 before intervention arrives. Until then, Hayes advises investors to stay liquid, avoid excessive leverage and wait for clear confirmation that monetary easing is underway before aggressively re-entering risk markets.