TradFi Volatility Cycle: Benefits for Crypto by Arthur Hayes

Arthur Hayes, the co-founder of the cryptocurrency exchange BitMEX, believes that Bitcoin acts as a “release valve” for the fiat currency that traditional financial governments print in order to artificially suppress market volatility.

In his essay titled Volatility Supercycle, Hayes elaborated on how the practice of politicians printing money to create a stable economic surface leads to increased volatility in the crypto space, subsequently driving the value of digital assets to unprecedented heights.

Controlling Volatility in Traditional Finance

Hayes claims that policymakers struggle to manage any degree of volatility in financial markets due to the over-leveraged nature of the system. He has consistently argued that the Federal Reserve (Fed) prints additional money when crises arise, a reflexive response stemming from the authorities’ reluctance to acknowledge the unpredictability of future events.

Using the analogy of holding an inflated ball underwater, Hayes argues that the effort required to maintain the status quo of volatility increases exponentially as time progresses. He warns that the total amount of money needed to be printed from now until the next reset of the financial system will vastly exceed the total printed since 1971.

According to Hayes, while the manipulation of volatility in traditional financial systems is extreme on a global scale, it is particularly pronounced in the Pax Americana, as the U.S. prioritizes the bond market, which underpins the dollar (USD)—the world’s reserve currency. Other countries are preoccupied with controlling the volatility of their own currencies against the USD, as it directly affects their global trading capabilities.

Beneficial Impacts on Bitcoin

Since the 2008 financial crisis, bank credit levels have never fully been depleted. Hayes argues that this fiat credit cannot be removed without risking the collapse of the financial system. Consequently, banks have multiplied their credit creation efforts to “suppress” volatility.

Following the Federal Reserve’s recent interest rate cut, which eased monetary conditions, U.S. banks are anticipated to issue more credit. As this credit supply increases, the fiat currency printed to prevent volatility will likely flow into the crypto market, subsequently boosting asset values in the upcoming months.

Hayes further emphasized that every investor’s objective should be to acquire Bitcoin (BTC) at the lowest possible cost, as the volatility of Bitcoin compared to fiat currency is inherently an asset.