Arthur Hayes: Middle East Conflict Could Trigger Cryptocurrency Market "Avalanche," Bitcoin Emerges as a Hedge Against Inflation

BitMEX founder Arthur Hayes recently went skiing in New Zealand and attended an avalanche science course. He likened the "persistent weak layer" in the snowpack to the current tensions between Israel and Iran, suggesting that this geopolitical risk could trigger a global "avalanche" at any time, affecting energy prices and supply chain stability.

With China initiating monetary easing, the crypto market presents high risks and returns. In the event of an escalation in the Middle East conflict, it could have a devastating impact on Bitcoin and meme coins. Hayes also expressed concerns that his investments in meme coins would become worthless like dog poop after being impacted. Nevertheless, Hayes remains confident in the long-term resilience of Bitcoin and has proposed investment strategies to address geopolitical risks.

Tensions in the Middle East lead to a drop in Bitcoin along with the US stock market

Geopolitical Pressure and Bitcoin's Anti-Inflation Properties

Hayes first pointed out that the post-World War II geopolitical situation in the Middle East forms the basis of the current global order, with uncertainties such as wars often linked to Israel. He mentioned that wars typically lead to inflation, and as the U.S. continues to borrow to buy weapons for Israel, the supply of the US dollar may increase, thereby increasing the value of assets like Bitcoin, known for being "anti-inflationary."

He stated that since its inception, Bitcoin has shown remarkable performance amid the growth of the Federal Reserve's balance sheet. The current Middle East situation may further drive up energy prices, strengthening Bitcoin's position as a "digital store of value."

Analysis of China and Russia's Role in the Middle East Situation

Hayes suggested that the current conflict between Israel and Iran is seen as a proxy war between the U.S./Europe and China/Russia and is unlikely to escalate beyond the region. China and Russia may be potential allies of Iran but are limited to material support and are not expected to engage directly in the conflict. China may view this as an opportunity to expand its "Belt and Road" initiative if Iran's regime restructures post-conflict, supporting China's further economic expansion using Iran's resources.

Middle East Conflict's Limited Impact on Bitcoin Mining

Hayes analyzed the impact of the Middle East conflict on the market, presenting two scenarios: a small-scale conflict with limited impact and a full-scale escalation potentially causing a market crash. Iran currently accounts for about 7% of global Bitcoin mining power, and even if mining facilities are damaged, the long-term impact on Bitcoin's price is relatively small.

He explained that as energy costs rise, all miners face the same pressure to stabilize mining profits. Additionally, the Bitcoin network is designed to self-adjust; mining difficulty adjusts with changes in computing power, ensuring mining profitability despite energy price fluctuations. With rising energy prices, the value of Bitcoin as a "digital reserve asset" may also rise, similar to gold's inflation-resistant performance during the oil crisis, enhancing its scarcity and value preservation potential.

Historical Evidence of Gold and Bitcoin's Anti-Inflation Properties

Hayes cited historical events to demonstrate the anti-inflation properties of gold and Bitcoin. In 1973, Arab countries imposed an oil embargo on the U.S. due to its support for Israel in the Yom Kippur War, leading to a surge in oil prices. The 1979 Iranian Revolution overthrew the Western-backed Saudi Arabian regime, withdrawing Iran's oil supply from the international market, tightening global oil supply.

The chart below shows the oil and gold prices from 1973 to 1979, with oil spot prices in white and gold prices against the USD, indexed at 100 as the base. Over time, oil prices rose by 412%, with gold prices showing a similar increase of 380%.

The chart below displays gold prices represented in gold's purchasing power and the S&P 500 index in red, relative to oil price changes, indexed at 100 as the base. Gold's purchasing power for oil decreased by only 7%, while stocks' purchasing power for oil decreased by 80%, indicating that as oil prices soared, the relative purchasing power of the S&P 500 significantly weakened, performing far less stable than gold.

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U.S. Continues to Aid Israel, Borrowing to Raise Funds Increases Inflation

Hayes also noted that regardless of the controversy surrounding Israel's military actions in the Middle East, the U.S. has consistently expressed support. This support mainly manifests in military aid, as Israel cannot afford the substantial military costs, prompting the U.S. government to borrow to provide the necessary weapons.

He further stated that since October 7, 2023, Israel has received approximately $17.9 billion in military aid. This reliance on borrowing makes the U.S. face greater financial pressure, requiring more funding sources. Due to lower domestic savings rates, the Federal Reserve often needs to absorb these debts and expand its balance sheet to support the government's debt issuances.

He mentioned that this operation is similar to the actions during the 2008 financial crisis and COVID-19 period when the FED extensively printed money to buy government bonds, diluting the value of the U.S. dollar and increasing inflation risks.

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Bitcoin Surpasses FED's Balance Sheet Expansion by a Large Margin

Hayes suggested that if the Middle East situation intensifies, leading to rising energy prices and more money printing by the Federal Reserve, Bitcoin and other cryptocurrencies may become safe-haven assets, driving a new upward trend. The chart below compares Bitcoin's price to the FED's balance sheet, indexed at 100 as the base point. Since its inception, Bitcoin has accumulated a growth of 25,000%, far exceeding the growth of the FED's balance sheet.

It demonstrates that Bitcoin possesses strong anti-inflation capabilities in times of increased monetary supply, considered a high-quality inflation-resistant asset.

Arthur Hayes Urges Caution in Trading

Hayes mentioned that despite a bullish long-term trend for Bitcoin, price volatility should not be ignored. The conflict between Israel and Iran made him realize that holding a large amount of meme coins in the short term could bring greater risks, prompting him to reduce his holdings to mitigate potential losses.

At the same time, Hayes advised that in the current inflationary environment and geopolitical turmoil, assets should be allocated in assets that hedge against fiat devaluation, such as Bitcoin or other value-preserving assets. In the face of uncertainty, trading based on personal views of wars should be avoided, focusing on protecting the purchasing power of one's capital to prepare for possible future economic impacts.