Original Translation: Wu Says Blockchain
On November 1, Arthur Hayes, co-founder of BitMEX and Chief Investment Officer of Maelstrom, discussed the potential impact of the 2024 U.S. presidential election on the crypto market on the Unchained podcast.
He emphasized that Bitcoin's liquidity is a safer choice amid market volatility and shared his views on Bitcoin, Ethereum, Solana, decentralized finance (DeFi), and memecoins, suggesting that speculative assets may benefit from capital inflows after the election.
Finally, Arthur Hayes pointed out that major economies (the U.S., EU, Japan, and China) have historically expanded the money supply in response to financial challenges, leaning towards investments in assets like Bitcoin and gold. He advocated for a long-term holding strategy in light of these global trends.
Market Expectations Related to the Election? Whoever Wins Will Support Cryptocurrency
Laura: Hello everyone, welcome to Unchained, I’m your host Laura Shin. Welcome, Arthur.
Arthur: Thank you for having me.
Laura: Before we start the show, I want to emphasize that what we discuss here does not constitute investment advice, so please do your own research. The reason I invited Arthur today is that you might be interested in his trading views during the election, as he is familiar with both cryptocurrency and macroeconomics. Arthur, as we record this, there is one week left until the election. What are your thoughts on how the election will affect the market?
Arthur: I believe that whether Trump or Harris wins, in the medium term, more money will be printed, so cryptocurrency should perform well. In the short term, the market clearly favors Trump, as what he says and how he plans to print and distribute money is very similar to the policies advocated by U.S. politicians since the Reagan era: tax cuts, reducing regulation on businesses, and keeping spending unchanged or even increasing it. This means the wealthy will enjoy tax breaks, the stock market will soar, and ordinary people will have access to healthcare. The U.S. can continue its military buildup abroad because the defense budget will not be reduced. That’s Trump’s stance, and the market welcomes it. As for Harris, her views are similar but expressed in a more complex way, which might be somewhat difficult to understand. But ultimately, her message aligns with Trump’s, just aimed at a different audience.
However, the market is more favorable and understanding of what Trump says. I think the real risk is that regardless of who wins, if the other side questions the fairness of the election, believes there are irregularities, and does not accept their candidate's loss, then we could see street protests and legal challenges, leading to greater uncertainty about the election results. I think that is the real risk the market faces.
Currently, it is generally believed that Trump is the frontrunner by a narrow margin. But I think the outcome of this election is still difficult to predict. The market also seems to think Trump will win. So I believe the current sentiment in the market is like this. I haven’t increased much risk; I already hold a fair amount of cryptocurrency and some energy stocks, and I’m satisfied with my positions. Considering that we may not be able to confirm who the next U.S. president is in the coming weeks, and we might not even know before the inauguration on January 20, is it wise to increase more risk now?
Delayed Election May Cause Market Turmoil and Favor Trump
Laura: Very interesting. So I want to ask, if the election results do not come out immediately and may take one to two weeks to determine, perhaps due to mail-in voting, counting, or even some recounts, if this situation is not the chaos you described but merely a prolonged uncertainty that could last a week, two weeks, or even a month, what do you think the impact would be?
Arthur: I think the market has already priced in the possibility of Trump winning. The current market sentiment seems to expect Trump to win, with the Republicans controlling both the House and the Senate, and then he will distribute funds to the wealthy. Therefore, the market has not considered the possibility that even if he wins all of this, Democrats and the public might take to the streets to challenge it, and Harris might not accept the results. It’s actually quite interesting. At Maelstrom, I enjoy teaching young people how to manage risk and make decisions amid uncertainty, using implied probabilities to make judgments. We even conducted some election games internally, offering $5,000 to $10,000 prizes for each winner. However, if someone loses, they have to pay into a public fund. This means we buy drinks for everyone after the meeting. So, betting and failing to make the right judgment both come at a cost. As for when I decide to pay the bets, it’s based on the moment the loser realizes they’ve lost; that’s when we know the game is over. When Harris or Trump says on TV, “I lost, the other side won,” the election is over. So, street protests or court challenges to the election are actually irrelevant. If the actual losing candidate says, “I lost,” then we know it’s all over. As for when that will happen, who knows?
Laura: What if Trump doesn’t acknowledge that he lost until now?
Arthur: I think in the 2020 election, he might realize the results and later say, “Oh, a lot happened, maybe there were false voters,” or he might imply to his supporters that the election process was not quite normal. But ultimately, he did acknowledge the election results.
Laura: That’s right. He acknowledged the results on January 7, 2021, which is an important date. However, you might have heard on Joe Rogan’s show that he actually didn’t say he lost, and then Joe laughed at him, and he said, “I didn’t lose.” But I understand your point.
No Trading on Election Night, Leaning Towards Current Holdings for Long-Term Gains
Laura: So I see you mentioned that you are currently in a long position, and you also mentioned in an interview with CoinDesk that 5% of Maelstrom’s funds are in the Ethena ecosystem, right? Then you said you would move funds once the election results are clear. So is the remaining 95% what you referred to as those long positions?
Arthur: That’s right, it’s all Bitcoin, Ethereum, and some token projects.
Laura: Okay. So you’re not actually trading during the election? Will you trade on election night? Because I think there might be a lot of volatility then.
Arthur: Absolutely not. I might stretch in the morning and get ready to play tennis. No matter who the winner is, the result is the result, and the market will continue to print money. I’m not worried. There may indeed be some medium to short-term volatility, especially when people do not accept the results. But ultimately, the American public is not voting on whether to tighten but rather choosing to continue printing money and deciding who to give it to, whether they like Trump or Harris. That’s the real decision they face.
Laura: Very interesting, because most of my questions are about how to trade the election. So why don’t you do that?
Arthur: What’s the point? You might be sitting here trying to figure out how to earn a few more percentage points, but if you’re wrong, you could end up losing in the trade, like the Trump trade over the past month. Once he appears in the media, the prediction market also says Trump will win. I know people often don’t quite understand what the prediction market is saying. In fact, the result is much closer to the 68% probability seen on the surface; it’s actually within the margin of error of any poll, whether for Trump or Harris.
For whatever reason, the financial market believes Trump will win. Strong dollar, tariffs, low taxes, deregulation, etc., the market is clearly rising. We just experienced the Fed’s rate cut at the end of September, which provided further liquidity to the market. Therefore, the market has already priced in the possibility of Trump winning. Even if Trump wins, the S&P 500 index could rise another 100% in the next 12 months. But if you’re just doing a short-term trade for a week, even if you judge that Trump will win, you could still lose. You enter the market at this time, and then Trump wins, but the market could drop 5%. That’s a possibility, or the market could remain stable after Trump wins. You took that risk but didn’t get a reasonable return.
A better risk direction is that I think Harris will win, and the market will react negatively to that. Therefore, I would consider taking a tactical short position because the market has not priced in a short position for the short term. The market has not priced in the possibility of the winner or loser not accepting the results. The market is also not prepared for a Harris victory; people are confused about how she will print money and distribute it. She will still do it, but the process will be a bit more complex. If I really had to trade, I would choose this direction. Although I’m not optimistic about this asymmetric return expectation, if I had to place a bet, I would do so. The prediction market may have biases. So the only way to profit is if the probability of Harris winning is higher than the current expectation of the prediction market.
The prediction market is basically saying that if I conduct 100 elections, Trump will win more than 60 times, and Harris will win 37 times. This does not tell you the actual probabilities of Harris and Trump winning. It’s like flipping a coin; I know the fair probability is 50%, but if I flip it 100 times, I won’t get exactly 50 heads and 50 tails. There will be fluctuations in this distribution. Only by flipping the coin infinitely can you get a truly fair 50%. So right now we only have one event and one possible distribution. We don’t have enough parallel universes to repeat the experiment and get real probabilities. Therefore, the prediction market distorts people’s thinking, leading them to mistakenly believe “Trump will definitely win,” but that’s not the case. I think people’s understanding of these markets is incorrect because they don’t understand statistics.
Laura: Well, what I mean is, the reason you only consider trading Harris is that you feel the prediction market is not accurate.
Arthur: The prediction market is accurate in its function; the problem lies in people’s interpretation. I think the market misunderstands the information conveyed by the prediction market. They say “Trump will win,” yes, maybe he can win, but his winning probability is not 68%, it’s 50%. Therefore, the best bet is to choose the possibility of Harris winning and the market declining. It’s not to say this will definitely happen, but if I had to trade, I would choose this direction. Because right now the polls are almost evenly split; I just saw Harris leading Trump by one percentage point. But everyone should know that the popular vote and the electoral college are two different things, and usually, if the gap is small, Republicans have an advantage. So the prediction market might be because people are overconfident or misunderstand the electoral college. There are indeed many misunderstandings. Most people do not understand math and statistics, nor do they understand the U.S. electoral system. These misunderstandings lead people to believe “Trump will win,” and thus the market rises. This situation may occur, but it’s not a trading strategy I would adopt.
Solana is the High Beta Version of Bitcoin
Laura: Okay, we’ve discussed the overall market. Do you have specific expectations for some major cryptocurrencies? For example, do you think Bitcoin will perform differently from other coins, like ETH or SOL?
Arthur: I believe Bitcoin leads the market. If you're going to place bets in this environment, you need to ensure you have the best liquidity. Because if you make a wrong judgment, you need to be able to exit your position immediately to avoid huge losses. Therefore, if you're going to bet, you would choose Bitcoin or major coins like ETH or SOL. I would speculate with these coins rather than with small coins. If Bitcoin rises to $85,000 because of Trump's victory, people will become wealthier and then go buy other things, like the Dogecoin and Shiba Inu I hold, haha, in short, there will be a follow-on effect. But if you're going to speculate on the election, it's best to stick with major coins because they have better liquidity. If you predict incorrectly, whether it's a misjudgment of the outcome or a misreading of the market reaction, you need to be able to exit quickly to minimize slippage losses.
Laura: So even though Bitcoin is currently close to its historical high, you still think it will perform the best?
Arthur: Yes, I believe liquidity will flow into Bitcoin after the election. Clearly, if Bitcoin rises, then other coins will see larger percentage gains. People often have a "nominal price fallacy," for example, thinking that Bitcoin at $72,000 makes buying a coin worth $1 seem cheaper, believing it has more room to rise. This mentality leads investors to buy those coins that appear cheap. Therefore, if you want to position yourself in advance, you would think Bitcoin will rise, and people will turn to those coins that look "cheaper," creating what is known as a "rotation effect."
Laura: So in the lead-up to the election, if people do not anticipate this situation, can they directly buy small coins?
Arthur: They can, but the problem is that from a trader's perspective, most people haven't really thought it through. When they trade, they often do not consider the consequences of failure. If they make a wrong choice, the liquidity of altcoins can evaporate quickly, leading to losses of 10%, 20%, or 30% because you simply cannot exit your position. Bitcoin is different; it is easier to exit even during a market downturn. Even if you think altcoins will perform well, short-term trading based on election results is still not suitable because if you are wrong, exiting the trade can result in heavy losses, while Bitcoin's losses are relatively controllable, allowing you to "keep the green mountains."
Laura: Haha, that's interesting; I've actually never traded. Now back to Ethereum, it has always been the second-largest cryptocurrency after Bitcoin, but it hasn't performed well this year, and its market cap ratio is quite low. SOL has attracted a lot of attention. What do you think about this?
Arthur: I haven't specifically calculated the data, but I believe Solana's validator profit margin growth may be higher than Ethereum's. After the collapse of FTX, Solana's on-chain profitability has significantly improved, which has driven its price up. Additionally, Solana's unlocking speed has slowed, trading volume has increased, and validator earnings have improved a lot. Ethereum, on the other hand, has not changed much. In the future, Solana's profit growth rate may slow down, while Ethereum may gain more traffic support in layer two network expansion, which could drive its price.
Laura: So before the election, would you be more inclined to trade Solana?
Arthur: Yes, Solana is the high beta version of Bitcoin, with greater volatility and good liquidity. If Bitcoin performs well, Solana's gains may be even larger. Ethereum is relatively slow in movement, and the current market narrative leans more towards Solana; its volatility is suitable for short-term speculation. Moreover, Ethereum is currently seen as "old and slow," and the trading mentality is more inclined towards Solana. Additionally, factors like Solana's active community and good UI experience also make people more inclined to invest in it.
Laura: Especially because Solana's community is very active?
Arthur: Yes, the Solana community is active, has a user-friendly UI, and good liquidity. It rose from $7 to $180, and many people profited from it. People often expect past trends to continue into the future, so when Bitcoin rises, Solana is seen as the high beta Bitcoin.
Laura: I also want to ask about the notion of "L2 parasitic Ethereum." Do you think this viewpoint is correct?
Arthur: I don't think that's a correct viewpoint. Although more data is needed to support my view, L2 still requires Ethereum's security. Many complex transactions are offloaded to the L2 layer; while some argue that they capture most of the value, L2 ultimately still needs Ethereum's security. If the market cap of L2's native tokens does not reach several times that of Ethereum, it cannot provide equivalent security. In a proof-of-stake system, Ethereum remains an irreplaceable security pillar. The more overall transaction volume L2 has, the more security fees they will spend on the Ethereum mainnet, which is why L2 still needs to rely on Ethereum. So I think this notion of "L2 parasitism" overlooks the importance of Ethereum to L2.
Laura: What about L2 on Solana? There have been reports that Anatoly and others want to call them "network expansions." What do you think about that?
Arthur: I haven't looked into it deeply, but Solana is already very fast, and its current performance is sufficient to support most applications, so there is no immediate need for L2. Creating L2 might just be a way to attract VC funding.
Will Trump's Victory Improve DeFi Regulation? Unlikely
Laura: Okay, so during the upcoming election, do you think there will be any significant changes in the DeFi space?
Arthur: Some people believe that Trump's election will be more favorable for cryptocurrency regulation, and thus DeFi will benefit because more Americans can participate. But I don't think so. Trump did not make much substantial progress during his previous four-year term. Even if the Republicans win both houses, there are many within the party who are dissatisfied with him, making it difficult for him to achieve major policy reforms. Overall, I think the expectation that "Trump will bring friendly regulation to promote DeFi" is a self-deluding fantasy.
Laura: What do you think about Trump's promises?
Arthur: Politicians always make promises during campaigns, but they rarely fulfill them once in office. The reality is that a president's attention is usually focused on defense and other more pressing international issues, such as Russia and Ukraine. These issues will take precedence over cryptocurrency policy.
Laura: Well, I'm looking forward to seeing the comments after this episode airs. However, you previously mentioned that Harris might continue the Biden administration's policies on cryptocurrency. In fact, we have reported on Unchained that there are indeed some names mentioned in Harris's circle who might replace Gary Gensler as SEC chair. One is Chris Bremer, who has actively spoken in support of cryptocurrency in Congress; the other is Erica Williams, who was the head of the Public Company Accounting Oversight Board and also seems to support cryptocurrency. So, um…
Arthur: I'm skeptical about that. Gensler was previously a professor at MIT and even taught a course on cryptocurrency; many believed he would support cryptocurrency upon taking office. But once he entered the government, he became a political figure, taking orders from those who could help him advance, like Elizabeth Warren, because he wants the position of Treasury Secretary. These candidates may have had a positive attitude towards cryptocurrency before entering the government, but once they are in the system, their priorities will be completely different. So people underestimate the impact of the government system.
Laura: Hmm, yes, perhaps none of them will ultimately get that position.
Bitcoin's Rise Benefits Meme Coins, Which Meme Coins to Watch
Laura: Next, let's talk about other parts of the market. What are your expectations for meme coins during the election?
Arthur: I believe meme coins have a high beta relationship with Bitcoin. If Bitcoin performs well, funds may flow into meme coins. However, for now, I will focus more on Bitcoin's performance and consider meme coin investments once Bitcoin breaks through further. If Trump wins the election and it is favorable for Bitcoin, waiting for the market reaction before entering the meme coin market would be safer.
Laura: You previously mentioned liking the coin Goat; I'm very fascinated by that story. It was generated by AI and involves a 1990s internet legend. What are your thoughts on Goat and AI coins?
Arthur: I think AI coins are currently a new category, and Goat is the "king" of this category. Similar to the position of CryptoPunk in NFTs, Goat has a unique backstory. If it can continue to succeed, other AI derivative coins may just be following the trend. So, Goat's story, background, and the concept of being generated by AI indeed make it attractive.
Laura: So basically, you're saying Goat is almost like the Bitcoin of these types of coins, right? In other words, if another crypto AI coin is to rise, it needs to have some differentiation, similar to how Ethereum is positioned relative to Bitcoin, right?
Arthur: Yes, if you want to use that classification.
Laura: Oh, you also mentioned another meme coin, but I didn't catch the name.
Arthur: It's called "Smoking Chicken Fish," a pseudo-religious meme coin featuring a chicken body with a fish head, holding a Marlboro red cigarette, which is quite funny. Their slogan is "Ramen," similar to "Amen" in religion, just changed to ramen because the chicken is cooking in the soup, like a humorous belief.
Laura: Is this also promoted by AI?
Arthur: No, this is just a standard meme coin. It's just a matter of whether this meme concept will spread online; I think it has potential.
Laura: Oh, I see. I noticed "Smoking Chicken Fish" already has 20,000 followers on X; it seems to be gaining attention. What's its current market cap?
Arthur: About $60 million in market cap.
Laura: That's quite high. When you invested, it wasn't even at $100 million, right?
Arthur: Yes, I just thought the concept was fun; I liked its creativity.
Potential Impact of the Federal Reserve Meeting on Cryptocurrency, Possible Quantitative Easing to Boost Liquidity
Laura: Okay, let's talk about the Federal Reserve meeting right after the election. What are your expectations? How will it affect your views on traditional and crypto markets?
Arthur: Well, it's indeed an interesting topic. A few weeks ago, I attended a commodity investor conference in New York, where someone mentioned that the reserve levels in the U.S. banking system might have dropped low enough that the Federal Reserve needs to restart quantitative easing (QE). Since the 2008 financial crisis, the banking system has maintained high reserves to cope with potential financial pressures, and now, due to quantitative tightening (QT), reserve levels are gradually decreasing. Insufficient bank reserves can lead to market pressure, and the recent spike in repo rates is a signal.
Let's take another look at the marginal buyers of U.S. Treasuries. In the past, it was countries like China and Japan, but now it is mainly hedge funds, especially those based in the Cayman Islands, Luxembourg, and the UK. They purchase government bonds through arbitrage and finance through the banking system. However, as U.S. government debt increases, banks' balance sheets are becoming tighter. Therefore, either the government needs to reduce spending (which is nearly impossible), or the Federal Reserve needs to stop QT and even restart QE. This would have a positive impact on risk markets.
Laura: That's so interesting! I feel like I've just learned a lot of new knowledge. Most people focus on interest rates, but if there is QE, the market might be pushed up again. This aligns with the viewpoint you've been articulating, right?
Arthur: Yes, this trend will happen sooner or later. The only question is when the Federal Reserve will restart QE. Right now, the only ones buying U.S. Treasuries are those hedge funds engaging in arbitrage trades, not those who genuinely have a long-term holding intention. The funding chain in the market is very tight, and the Federal Reserve tends to intervene quickly to avoid market turmoil.
People are too focused on the election results, but regardless of who is elected, the fiscal structural issues in the U.S. remain. In the face of growing debt, the Federal Reserve's solution has consistently been to "print money." So, if you can invest with appropriate positions and low leverage, seizing the market's low points, regardless of who is elected, a real bull market will still come.
Laura: Okay, since this is your viewpoint, what are your thoughts on trading? Do you still hope to hold long positions, or…?
Arthur: You might want to hold long positions, but you also need to be able to withstand short-term market volatility. For example, if you hold a Bitcoin position and Trump loses the election or there is social unrest in the U.S., and Bitcoin drops from $75,000 to $50,000, you shouldn't sell your position just because of these fluctuations. We know they will print money and that these structural issues will not be resolved. Then Bitcoin might rise to $250,000. You wouldn't want to be forced to sell because you used too much leverage two days before the election, missing out on future bull market opportunities due to fiat currency depreciation.
Laura: You just mentioned how to allocate positions reasonably; how do you consider that?
Arthur: If you check cryptocurrency prices on your phone before going to bed and feel uneasy about it, then your position is too large.
Laura: I like that advice.
Japan's Rate Hike May Strengthen Yen and Impact Global Markets
Laura: I also want to ask, earlier we saw Japan starting to reverse its arbitrage trades, but the market did not react. I wonder what you think will happen in the future. Do you think this situation has ended? Will the market continue to be affected? What are your thoughts?
Arthur: I don't know exactly when it will happen, but Japan's interest rates will rise, and the USD/JPY exchange rate will approach 100. Japanese capital will flow to the West and then return domestically to support the Japanese economy. However, I can't tell you how long this will take because we just saw the Liberal Democratic Party of Japan lose its majority on Sunday. This is the party that has been in power since 1945, after escaping U.S. colonial rule. They always manage to win. Since 2009, they have only lost once, but now they are no longer the majority party.
So the question is, what will exert political pressure on the Bank of Japan to normalize interest rates, that is, to raise rates? We have a Bank of Japan meeting on Thursday, and I don't know if this issue will be mentioned then. We will wait to see what Ueda (the current Governor of the Bank of Japan, Kazuo Ueda) says regarding his views on the normalization of Bank of Japan interest rates. Currently, the USD/JPY is around 153, very close to the pre-collapse high of 162. Therefore, the Bank of Japan may surprise the market with a rate hike because the current political chaos means there are no specific political figures pressuring them to slow down this process.
Arthur: Ueda was appointed as the Governor of the Bank of Japan to reverse previous policies, such as yield curve control and expanding the balance sheet. That is his job. So the question is how long it will take him to achieve this goal. He has stated that he will be very patient in doing so, but given the current political chaos, this may be the Bank of Japan's opportunity to raise rates because political figures cannot exert pressure on him to stop this process.
Laura: It seems we can only wait and see.
Arthur: Yes, this is a very complex but very important situation, and the U.S. election is actually not that important.
Laura: I like this unconventional ending. Thank you very much for joining our program.
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