Written by: Jeff Park
Translated by: Block unicorn
Preface
A few days ago, influenced by rumors of Kevin Walsh possibly being nominated as the Federal Reserve Chairman, the price of Bitcoin quickly dropped to $82,000, and then briefly fell to around $74,500. This erratic price movement made me realize that even among the most seasoned traders in the global macroeconomic field, there remains 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 two dualities that constitute currency devaluation.
The theory of currency devaluation trading sounds simple: print money, currency devaluation, hard assets appreciate. However, this notion of "cheap money" obscures a more fundamental question that determines the success or failure of Bitcoin: how will interest rates change?
Most Bitcoin advocates conflate monetary expansion with hard asset appreciation, believing that funds will automatically flow into scarce stores of value. This perspective overlooks a key mechanism: without understanding the trajectory of the yield curve, cheap money does not necessarily mean that funds will flow into hard currency. When interest rates decline, duration-sensitive assets, especially those with cash flows, become more attractive, thus creating strong competition for Bitcoin's attention and funding composition. This indicates that the path from currency devaluation to Bitcoin's dominance is not linear; rather, it depends on whether the current financial system can continue to function or will completely collapse.
In other words, Bitcoin is a devaluation bet with a risk premium duration.
This is the distinction I have previously written about between "negative Rho Bitcoin" and "positive Rho Bitcoin," which represent two entirely different arguments that require completely opposite 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 distinctly different paths:
"Negative Rho Bitcoin" performs better when interest rates decline. This reflects the continuity theory, although its performance is more extreme: the current financial system persists, central banks maintain credibility, and lower interest rates (which may even go negative) make "risk assets" like Bitcoin more attractive relative to (possibly negative) opportunity costs, becoming the fastest investment choice. Consider 2020-2021: the Federal Reserve's interest rate dropped to zero, real interest rates were deeply negative, and Bitcoin soared, becoming the most attractive alternative to holding cash.
Conversely, "Positive Rho Bitcoin" performs better when interest rates rise or when volatility around the risk-free rate itself surges. This is the "breakdown" theory, where the foundational assumptions of the financial system are shattered, and the very concept of the risk-free rate is challenged, necessitating a repricing of cash flows for all traditional assets. For assets like Bitcoin that do not generate cash flows, the impact of this repricing is minimal, while longer-duration assets suffer catastrophic losses.
Bitcoin's current price is trapped, directionless, and lacks significant breakthrough volatility, which may indicate that investors are uncertain about which theory is more important. For most Bitcoin maximalists, the answer is unsettling, as the concept of inflation, along with its closely related relationship with deflation and interest rates, is often severely misunderstood.
Two Types of Deflation
To determine which Bitcoin theory prevails, it is necessary to distinguish between two different types of deflation:
When productivity increases lead to falling prices, benign deflation occurs. AI-driven automation, supply chain optimization, and improvements in manufacturing processes can increase output while lowering costs. This type of deflation (sometimes referred to as supply-side deflation) is compatible with positive real interest rates and stable financial markets. It favors growth assets rather than hard currency.
When credit tightening leads to falling prices, malignant deflation occurs. This type of deflation is catastrophic: debt defaults, bank failures, and chain liquidations. This demand-driven deflation destroys the treasury market, as it requires negative nominal interest rates to prevent complete collapse. Stanley Druckenmiller once said, "The way to create deflation is to create asset bubbles," explaining how malignant deflation can destroy duration assets and make hard currency a necessity.
We are currently experiencing benign deflation in the tech industry while avoiding malignant deflation in the credit market. This is the worst environment for Bitcoin: sufficient to maintain the attractiveness of growth assets while preserving the credibility of treasuries, but not enough to trigger systemic collapse. This is the perfect breeding ground for extreme distrust in the Bitcoin market.
When Cheap Money Does Not Flow to Hard Currency
Currency devaluation (where the money supply exceeds productive output) is occurring. As previously mentioned, precious metal prices have risen due to a weakening dollar, reflecting this trend. Both silver and gold prices have soared to historic highs, confirming that the dollar's purchasing power against physical goods is declining.
However, Bitcoin has not followed the rise in precious metal prices because negative interest rate Bitcoin faces structural resistance: when interest rates are only moderate or low, rather than in a catastrophic collapse, Bitcoin must compete for funding allocation with other duration-sensitive assets. And these competitors are extremely large.
Bitcoin's Three Major Survival Competitors
In a low to moderate interest rate environment, Bitcoin faces competition from three major asset classes that absorb funds that might otherwise flow to hard currency:
1. AI and Capital-Intensive Growth (Total Market Value Exceeds $10 Trillion)
The construction of AI infrastructure is the most capital-intensive growth opportunity since electrification. Just Nvidia alone has a market capitalization exceeding $2 trillion. The broader AI value chain (including semiconductors, data centers, edge computing, and power infrastructure) has a total market value approaching $10 trillion, while the more extensive AI value chain that includes software may be even larger.
This is benign deflation: prices are falling due to productivity growth, not credit contraction. AI is expected to bring exponential output growth while marginal costs continue to decline. Since capital can fund the creation of real cash flow production miracles, why invest in zero-yield Bitcoin? Even more regrettably, the AI industry has the most robust demand for unlimited capital, and this rapidly evolving arms race, which has become large-scale and high-stakes, is closely tied to national security.
In a low-interest-rate environment, growth assets like these, especially with government subsidies, may attract significant capital inflows because their future cash flows can be discounted at favorable rates. Bitcoin has no cash flow to discount, only scarcity. When the alternative is funding the infrastructure for artificial general intelligence (AGI), Bitcoin struggles to attract investors.
2. Real Estate (Over $45 Trillion in the U.S. Alone)
The U.S. residential real estate market exceeds $45 trillion, while the global real estate market approaches $350 trillion. When interest rates decline, mortgage costs decrease, making housing more affordable, which drives up home prices. Additionally, housing can generate rental income and enjoys significant tax advantages.
This falls into the realm of malignant deflation: if falling home prices are due to credit tightening rather than productivity decline, it signals a systemic crisis. However, in a low-interest-rate environment, housing remains a primary store of wealth for the middle class. It possesses physicality, leverage, and is closely tied to society, characteristics that Bitcoin lacks.
3. U.S. Treasury Market ($27 Trillion)
The U.S. Treasury market remains the largest and most liquid capital pool globally. With outstanding debt reaching $27 trillion (and still growing), backed by the Federal Reserve and denominated in the global reserve currency. When interest rates decline, duration extends, and treasury returns can be quite substantial.
The key point is: true deflation would lead to a collapse of the treasury market. At that point, negative nominal interest rates would become inevitable, and the concept of a risk-free benchmark would cease to exist. But we are far from that situation. As long as treasuries can provide positive nominal yields and the Federal Reserve's backing credibility remains intact, they can absorb vast amounts of institutional capital that Bitcoin will never reach: pension funds, insurance companies, foreign central banks, and so on.
The Reality of Zero-Sum Games
The total market value of these three markets (AI growth, real estate, and treasuries) exceeds $100 trillion. For Bitcoin to succeed in a negative Rho environment, it does not mean that all three markets must collapse, but their attractiveness relative to zero-yield investments must decline.
This situation can occur in two ways: either interest rates must drop significantly into negative territory (making the opportunity cost of holding assets extremely high, to the point where you must "pay to save"), or these markets must begin to collapse (rendering their cash flows unreliable).
Currently, we see neither. Instead, we find ourselves in a system where:
AI is creating real productivity growth (benign deflation, favorable to growth assets)
Real estate remains stable in a controlled interest rate environment (malignant deflation is contained, favorable to the real estate market).
Treasury yields are positive, and the Federal Reserve's credibility remains solid (benign deflation favors duration assets).
Bitcoin is caught in the middle, unable to compete with those assets that generate cash flows while discount rates remain in the "golden zone" (where discount rates are neither low enough to render zero yields irrelevant nor high enough to disrupt the system).
Why Kevin Walsh Matters
This raises the question of monetary policy architecture. Appointing someone like Kevin Walsh, who has suggested that "inflation is a choice," to lead the Federal Reserve would signify a fundamental shift in the Fed's policy paradigm, moving away from the post-2008 model of "low rates for the sake of low rates."
This is the message he will convey in the summer of 2025:
Walsh represents a new Federal Reserve-Treasury agreement that acknowledges the moral hazard of implementing quantitative easing while paying interest on reserve balances (IORB). This is essentially capital theft disguised as monetary policy. The Federal Reserve creates reserves, deposits them at the Fed, and pays banks interest on funds that never enter the productive economy. This is a subsidy to the financial sector, of no benefit to real economic growth.
A Federal Reserve led by Walsh might emphasize:
Higher structural interest rates to prevent financial repression
Reduced intervention in the balance sheet (no more large-scale quantitative easing)
Strengthened coordination with the Treasury on debt management
Reevaluation of the IORB mechanism and its fiscal costs
This sounds terrible for negative Rho Bitcoin: moderate interest rates, reduced liquidity, and more orthodox monetary policy. And it may indeed be the case (although I suspect the neutral rate is still below current rates, and Walsh would likely agree with that; we should expect rate cuts, but perhaps not close to zero).
But it is extremely favorable for positive Rho Bitcoin, as it accelerates the liquidation process. If you believe that the trajectory of debt growth is unsustainable, if you think that fiscal dominance will ultimately override monetary orthodoxy, and if you believe that the risk-free rate will eventually prove to be fictitious, then you will want Walsh. You want to see the disguise stripped away. You want the market to confront reality rather than languish for another decade. You want risk pricing to be driven by industrial policy rather than monetary policy.
Positive Rho Scenario
The positive Rho value of Bitcoin means that the foundational assumptions of the financial system are shattered. It is 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, a conflict between the Federal Reserve and the Treasury, or a split in reserve currencies. When the benchmark for pricing all assets loses credibility, traditional valuation models will collapse.
Duration assets will suffer catastrophic repricing. If discount rates soar or currency devalues, long-term cash flows will become nearly worthless. Over $100 trillion in duration-sensitive assets (government bonds, investment-grade bonds, dividend stocks) will experience the most severe repricing event since the 1970s.
Bitcoin's lack of cash flow becomes an advantage. It has no profit expectations, no coupons to be devalued, and no yield curve to anchor market expectations. Bitcoin does not need to be repriced based on a failed benchmark because it was never priced based on a benchmark in the first place. It only needs to maintain its scarcity when everything else is proven to be excessive or unreliable.
In this scenario, precious metals respond to the crisis first, while Bitcoin reflects the aftermath of the crisis. The spot devaluation of commodities we see today will converge with tomorrow's yield curve devaluation. Milton Friedman's dichotomy (where monetary expansion leads to inflation and becomes the dominant factor in asset pricing) will merge into a unified force.
Ideological Insights
Returning to our previous framework: metal prices tell you that spot devaluation is occurring; Bitcoin will tell you when the yield curve itself is breaking.
Various signs have already emerged: the maddening K-shaped economy is leading people toward destruction, while socialism is rising rapidly, precisely because the three major competitors of Bitcoin capital are threatening the welfare of the global middle class: housing affordability, income inequality caused by artificial intelligence, and the gap between asset and labor income—all of which threaten Bitcoin's survival. Moreover, these three factors are nearing a critical point, and once society rejects the failed social contract of financial and labor devaluation, a fundamental transformation is imminent.
This is where the ideology of the Federal Reserve begins to take effect. A Federal Reserve Chairman who truly understands that monetary policy does not exist in isolation but works hand in hand with the Treasury to shape national industrial capacity, capital formation, and global competitiveness will not pursue low interest rates at all costs. This reflects the worldview before the Volcker era and before the implementation of quantitative easing: interest rates are a strategic tool, not a sedative. 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 Federal Reserve restore financial repression, lowering interest rates to near-zero levels to maintain asset prices and fiscal solvency, thereby reigniting the theory of negative interest rates for Bitcoin? Or will debt, geopolitical, and industrial realities force the Federal Reserve to confront the fiction of the risk-free rate itself, ultimately leading to a scenario of positive interest rates for Bitcoin?
This convergence signifies a systemic shift: Rho becomes a leading indicator (while a weak dollar becomes a lagging indicator) because deflation has explanatory power.
When the artificially manufactured "eternity" itself fails, when coordination replaces disguise, and the benchmarks for pricing everything are ultimately revealed to be entirely political rather than unsustainable eternality, Bitcoin's true moment will arrive.
Honestly, I don't know if this is truly the bottom right now, and of course, no one can really claim to know (although technical analysts will always try to do so). But one thing I do know is that, historically, bottoms are almost always accompanied by a fundamental shift in market mechanisms that fundamentally reshapes investor behavior and expectations. While it 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, and we will welcome the most innovative Federal Reserve Chairman, reshaping the "central bank interdependence" social contract with a weaponized Treasury, then I can think of nothing more poetic, more exhilarating, and more satisfying as a harbinger of the imminent takeoff.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
