Arthur Hayes, co-founder of BitMEX, has argued that prolonged U.S. military involvement in Iran-related operations could ultimately create a supportive backdrop for Bitcoin and other risk assets.
Hayes, in his recent commentary on the issue, has argued that “the longer we are in conflict, the higher the fiscal costs are likely to rise.” Military conflicts generally demand higher government expenditure, which in turn causes a rise in the government’s budget deficits. This can eventually impact monetary policy.
Hayes’ recent commentary on the issue has come at a time when financial markets across the globe are witnessing low sentiments and volatile trading.
Geopolitics might change Fed’s view
According to Hayes, based on the history of previous conflicts in the Middle East, the period of heightened defense spending in the United States tends to be followed by changes in the Federal Reserve’s monetary policy.
As deficits continue to widen and the economy suffers, Hayes believes the Federal Reserve may react to this situation by cutting interest rates to ease the effects of the economic slowdown.
This may have the overall effect of weakening the U.S. dollar and increasing liquidity in the system, which in turn may positively affect alternative assets.
Bitcoin, in particular, tends to react favourably to changes in monetary policy and increases in liquidity, particularly when investors seek assets that may outperform in an environment with lower interest rates.
Other risk assets, for example, equities and growth assets, may benefit from this environment if investors begin to anticipate changes in monetary policy.
Hayes’ view hinges on prolonged fiscal strain from conflict
Hayes’ argument, though, is based on the idea that the conflict will last long enough to have a big effect on macroeconomic conditions and fiscal balances.
In the near future, geopolitical risks that are on the rise may make things more volatile and make people less willing to take risks.
Hayes’ main point, though, also talks about how geopolitics, fiscal policy, and crypto assets are becoming more connected.
Bitcoin is becoming more and more linked to global liquidity cycles, but macro events like wars may have more and more of an effect on its price.