What if this is the bottom?

Foreword

A few days ago, influenced by rumors that Kevin Warsh might be nominated as the Federal Reserve Chairman, the price of Bitcoin quickly fell to $82,000, and then further dropped to around $74,500. This volatile price movement made me realize that even among the most seasoned traders in the global macroeconomic field, there is still a persistent unease—a wariness of the contradictory nature of a "hawkish Federal Reserve Chairman who wants to cut interest rates." This contradiction itself reflects the two dualities in the composition of currency devaluation.

The theory of currency devaluation trading sounds simple: printing money, currency devaluation, and appreciation of hard assets. But this "cheap money" rhetoric masks a more fundamental question, and this question determines the success or failure of Bitcoin: How will interest rates change?

Most Bitcoin proponents conflate monetary expansion with the appreciation of hard assets, believing that funds will automatically flow into scarce stores of value.

This viewpoint overlooks a crucial mechanism: cheap money doesn't necessarily mean funds will flow to hard currency if the yield curve isn't understood. When interest rates fall, duration-sensitive assets, especially those with cash flows, become more attractive, posing strong competition for attention and funding to Bitcoin. This suggests that the path from currency devaluation to Bitcoin dominance isn't actually linear, but rather depends on whether the current financial system can function or collapses. In other words, Bitcoin is a devaluation bet with a risk premium duration. This is the difference between "negative Rho Bitcoin" and "positive Rho Bitcoin" that I've written about before; they represent two very different arguments that require diametrically opposed market conditions to materialize. Understanding Rho: Interest Rate Sensitivity In options terminology, Rho measures sensitivity to changes in interest rates. Applied to Bitcoin, it reveals two distinct paths: "Negative Rho Bitcoin" performs better when interest rates fall. This reflects the continuity theory, albeit in a more extreme form: the current financial system persists, central banks maintain credibility, and lower interest rates (potentially negative) make "risky assets" like Bitcoin more attractive relative to their (potentially negative) opportunity costs, becoming the fastest-growing investment option. Imagine 2020-2021: the Federal Reserve lowers interest rates to zero, real interest rates are deeply negative, and Bitcoin surges, becoming the most attractive alternative to holding cash. Conversely, "positive Rho Bitcoin" performs better when interest rates rise or volatility around the risk-free rate itself surges. This is the "rupture" theory, which posits that the fundamental assumptions of the financial system are broken, the concept of the risk-free interest rate itself is challenged, and all traditional assets must reprice their cash flows. For assets like Bitcoin that do not generate cash flows, the impact of this repricing is negligible, while longer-term assets suffer catastrophic losses. Bitcoin's current price is stuck, directionless, and lacking significant breakouts, perhaps indicating that investors are unsure which theory is more important. For most Bitcoin purists, the answer is unsettling because the concept of inflation, and the closely related relationship between deflation and interest rates, is often severely misunderstood. To determine which Bitcoin theory prevails, it's necessary to distinguish between two different types of deflation: Good deflation occurs when increased productivity leads to lower prices. AI-driven automation, supply chain optimization, and improved manufacturing processes can all increase output while reducing costs. This type of deflation (sometimes called supply-side deflation) is compatible with positive real interest rates and stable financial markets. It is more beneficial to growth assets than hard currency. Bad deflation occurs when credit tightening leads to lower prices. This type of deflation is catastrophic: debt defaults, bank failures, and cascading liquidations. This kind of demand-driven deflation would destroy the Treasury market because it requires negative nominal interest rates to prevent a complete collapse. Stanley Druckenmiller famously said, "The way to create deflation is to create asset bubbles," explaining how hyperdeflation destroys duration assets and makes hard currency a necessity. We are currently experiencing benign deflation in the tech sector while avoiding hyperdeflation in the credit markets. This is the worst possible environment for Bitcoin: enough to maintain the attractiveness of growth assets and the credibility of Treasury bonds, but not enough to trigger a systemic collapse. This is the perfect breeding ground for extreme distrust in the Bitcoin market. When cheap money doesn't flow into hard currency, currency devaluation (money supply exceeding productive output) is happening. As we mentioned earlier, the rise in precious metal prices due to a weaker dollar reflects this trend. The surge in both silver and gold prices to record highs confirms the declining purchasing power of the dollar for physical commodities. However, Bitcoin did not follow the rise in precious metal prices because Bitcoin, with its negative interest rates, faces structural resistance: when interest rates are only moderate or low, rather than experiencing a catastrophic collapse, Bitcoin must compete with other duration assets for capital allocation. And these competitors are extremely large. Bitcoin's Three Major Survival Competitors In a low-to-medium interest rate environment, Bitcoin faces competition from three asset classes that absorb funds that might otherwise flow to hard currency: 1. Artificial Intelligence and Capital-Intensive Growth (Total Market Cap Exceeds $10 Trillion) Artificial intelligence infrastructure construction represents the most capital-intensive growth opportunity since electrification. Nvidia alone has a market capitalization exceeding $2 trillion. The broader AI value chain, encompassing semiconductors, data centers, edge computing, and power infrastructure, has a combined market capitalization approaching $10 trillion, while the even larger AI value chain, including software, is likely much larger. This is benign deflation: prices are falling due to productivity growth, not credit contraction. AI promises exponential output growth while marginal costs continue to decline. Since capital can fund productive miracles that generate real cash flow, why invest in zero-yield Bitcoin? Even more regrettably, the AI ​​industry has the strongest demand for unlimited capital, and this rapidly evolving, massive, and unavoidable arms race is closely tied to national security. In a low-interest-rate environment, growth assets like these, especially with government subsidies, can attract significant inflows because their future cash flows can be discounted at preferential rates. Bitcoin has no discounted cash flow, only scarcity. When other options are to fund infrastructure for Artificial General Intelligence (AGI), Bitcoin struggles to attract investors. 2. Real Estate (Over $45 Trillion in the US alone) The US residential real estate market is worth over $45 trillion, while the global real estate market is close to $350 trillion. When interest rates fall, mortgage costs decrease, making housing more affordable and driving up prices. Furthermore, housing generates rental income and enjoys significant tax benefits. This falls into the realm of hyperdeflation: if falling house prices are due to credit tightening rather than declining productivity, it foreshadows a systemic crisis. However, in a low-interest-rate environment, housing remains a primary store of wealth for the middle class. It is tangible, leveraged, and closely connected to society, characteristics that Bitcoin lacks. 3. US Treasury Market ($27 Trillion) The US Treasury market remains the world's largest and most liquid capital pool. Outstanding debt stands at a staggering $27 trillion (and still growing), guaranteed by the Federal Reserve and denominated in global reserve currencies. When interest rates fall, duration lengthens, and Treasury returns can be substantial. The key point is: true deflation would cause the Treasury market to collapse. At that point, negative nominal interest rates would be inevitable, and the concept of a risk-free benchmark would cease to exist. But we are far from that scenario. As long as Treasury bonds offer positive nominal yields and the Federal Reserve's backing remains intact, they can absorb vast amounts of institutional capital that Bitcoin can never reach: pension funds, insurance companies, foreign central banks, and so on. The reality of a zero-sum game: The combined market capitalization of these three markets (AI growth, real estate, and Treasury bonds) exceeds $100 trillion. For Bitcoin to succeed in a negative Rho environment, it doesn't mean these three markets must collapse, but their attractiveness relative to zero-yield investments must decrease. This could happen in two ways: either interest rates fall sharply into negative territory (making the opportunity cost of holding assets so high that you have to "pay to save"), or these markets begin to collapse (making their cash flows unreliable). We are not seeing either. Instead, we are in a system where: Artificial intelligence is creating genuine productivity growth (benign deflation, beneficial to growth assets); real estate remains stable in a controlled interest rate environment (malignant deflation is under control, beneficial to the real estate market); and Treasury yields are positive, and the Federal Reserve's credibility remains strong (benign deflation, beneficial to duration assets). Bitcoin is caught in the middle, unable to compete with assets that generate cash flow while discount rates remain in the "golden zone" (i.e., discount rates are neither low enough that zero yield is irrelevant, nor high enough to disrupt the system). This raises the question of monetary policy architecture. Appointing someone like Kevin Warsh, who famously argued that "inflation is an option," to lead the Federal Reserve would mark a fundamental shift in the Fed's policy paradigm, moving away from the "low interest rates for the sake of low interest rates" model adopted after 2008. This is the message he conveyed in the summer of 2025: Warsh represented a new Fed-Treasury agreement that acknowledged the moral hazard of implementing quantitative easing while paying interest on outstanding reserves (IORB). This is, in effect, capital theft disguised as monetary policy. The Fed creates reserves, holds them at the Fed, and pays interest to banks on funds that never enter the productive economy. This is a subsidy to the financial sector that does nothing to promote real economic growth. A Warsh-led Federal Reserve might emphasize: Higher structural interest rates to prevent financial repression; Reduced intervention in the balance sheet (no more massive quantitative easing); Enhanced coordination with the Treasury on debt management; and a reassessment of the IORB mechanism and its fiscal costs. This sounds terrible for Bitcoin with negative Rho: moderate interest rates, reduced liquidity, and more orthodox monetary policy. And this may indeed be the case (although I suspect the neutral rate is still below current rates, and Warsh would likely agree; we should expect rate cuts, but perhaps not close to zero). But it's extremely beneficial for positive Rho Bitcoin because it accelerates the liquidation process. If you believe the debt growth trajectory is unsustainable, if you believe fiscal dominance will eventually supersede monetary orthodoxy, if you believe the risk-free rate will eventually prove to be a fabrication, then you want Walsh. You want to see the facade ripped off. You want the market to face reality, not linger for another decade. You want risk pricing driven by industrial policy, not monetary policy. A Positive Rho Scenario for Bitcoin: A positive Rho value for Bitcoin means the fundamental assumptions of the financial system are shattered. Not a gradual decline, but a complete collapse. This means: The risk-free rate becomes unreliable. This could be due to a sovereign debt crisis, conflict between the Federal Reserve and the Treasury, or a split in the reserve currency system. When all benchmarks for asset pricing lose credibility, traditional valuation models collapse. Duration-intensive assets will suffer a catastrophic repricing. If discount rates soar or currencies depreciate, long-term cash flows will become virtually worthless. Over $100 trillion of duration-intensive assets (Treasuries, investment-grade bonds, dividend-paying stocks) will experience the most dramatic repricing event since the 1970s. Bitcoin's lack of cash flow becomes an advantage. It has no earnings expectations, no coupons to depreciate, and no yield curve to anchor market expectations. Bitcoin doesn't need to be repriced against a broken benchmark because it wasn't priced against one in the first place. It only needs to maintain its scarcity when everything else proves to be surplus or unreliable. In this scenario, precious metals were the first to respond to the crisis, while Bitcoin reflects the post-crisis situation. The commodity spot depreciation we see today will converge with the yield curve depreciation tomorrow. Milton Friedman's dichotomy (monetary expansion leads to inflation and becomes the dominant factor in asset pricing) will converge into a unified force. Ideological Insights Returning to our previous framework: metal prices tell you that spot devaluation is happening; Bitcoin tells you when the yield curve itself will break. Signs are already emerging: the maddening K-shaped economy is leading people to destruction, while socialism is rapidly rising, precisely because Bitcoin capital's three major competitors are threatening the well-being of the global middle class: housing affordability, income inequality caused by artificial intelligence, and the gap between asset and labor income—all threatening Bitcoin's survival. Moreover, these three factors are nearing a tipping point; once society rejects this failed social contract of financial and labor devaluation, some fundamental change is imminent. This is precisely where the Fed's ideology begins to take effect. A Federal Reserve chairman who truly understands that monetary policy is not an isolated entity, but rather works hand-in-hand with the Treasury to shape national industrial capacity, capital formation, and global competitiveness, will not recklessly pursue low interest rates. This was the worldview before the Volcker era and before the implementation of quantitative easing: interest rates are a strategic tool, not a tranquilizer. Capital pricing should serve productive growth, not subsidize abstract financial concepts. This stance makes the "awkward middle ground" less stable, as trillion-dollar questions become unavoidable: Will the Fed reinstate financial repression, lowering interest rates to near zero to maintain asset prices and fiscal solvency, thus reigniting the theory of Bitcoin's negative interest rates? Or will debt, geopolitics, and industrial realities force the Fed to confront the very fabrication of the risk-free rate, ultimately leading to a situation where Bitcoin has positive interest rates? This convergence is a systemic shift: Rho becomes a leading indicator (while dollar weakness becomes a lagging indicator) because deflation has explanatory power. When the artificially created "eternity" itself fails, when coordination replaces pretense, and the benchmark for pricing everything is finally revealed to be purely political, rather than an unsustainable eternity, Bitcoin's true moment will arrive. Frankly, I don't know if we're truly at the bottom now, and of course, no one can truly claim to know (though technical analysts always try). But one thing I do know is that historically, bottoms have almost always been accompanied by a fundamental shift in market mechanisms that fundamentally reshapes investor behavior and expectations. While this may be difficult to perceive at the time, it becomes obvious in hindsight. So, if you tell me that, in hindsight, this marks the arrival of a new world order, that we will have a most innovative Federal Reserve chairman who reshapes the social contract of "central bank interdependence" with a weaponized Treasury, then I can't think of a more poetic, exhilarating, or satisfying omen for the final takeoff.