Conversation with Wall Street hedge fund veteran: The liquidity train has started, Bitcoin is entering a macro upward cycle

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Source: “Milk Road” Podcast

整理：Felix, PANews

Bitcoin Opportunity Fund Co-Manager James Lavish recently appeared on the “Milk Road” podcast to discuss why, despite the crypto market experiencing one of the most turbulent and chaotic periods, Bitcoin’s long-term prospects may be stronger than ever before. PANews has summarized the highlights of the conversation.

Host: You mentioned that this period has been more difficult than many other times in your 30-year financial career. What exactly makes it difficult? Is it purely the percentage decline, or like the sharp moves on October 10 and February 5?

James Lavish: The deleveraging event in October caught everyone off guard. Actually, there were some signs beforehand; if you look back, many OGs sold tens of thousands or even over a million Bitcoin last year. They held these assets for years, some even for a decade or more. Suddenly, they made tens of millions, some even hundreds of millions or billions of dollars, and then they said, “I’m done, I want to buy land, I want to fully realize sovereignty, regardless of currency, I want my assets.” Such events kept happening when Bitcoin was between $100k and $125k. Then the deleveraging event in October surprised everyone, and it never really recovered afterward, causing the market to lose confidence. Then you saw a series of reactions around tariffs. It was a wave after wave, then war broke out. The overall market trend exceeded expectations.

First, at the end of last year, gold and silver surged significantly, providing plenty of material for people like Peter Schiff to attack Bitcoin and crypto. But interestingly, when the war broke out, Bitcoin held up, while what are considered safe-haven assets (like gold and silver) actually started to decline. Additionally, there was a flow of funds around AI. The top seven companies in the S&P 500, except for Apple which initially didn’t delve into AI, all gained huge profits from AI. Those stocks soared, then suddenly funds rotated into other stocks. So, it’s been a very interesting period.

Economically, the Federal Reserve is about to have a new chair, and they are almost openly opposing the current government (White House), refusing to ease rates. It’s hard to see the economic direction clearly because the top, wealthiest groups are the ones driving economic growth.

In contrast, from 2021 to 2025, the economy is mainly driven by fiscal policy and the reckless spending of the “Baby Boomer” (wealthy) generation. Meanwhile, younger generations find it hard to buy homes or keep up with the economy because they live on wages, have no assets, and then AI explodes. AI is now swallowing jobs. I don’t think it will destroy the economy; at least initially, it will boost it, but people must embrace it and adapt around it. Many companies are laying off thousands, and this will only intensify. All of this keeps the market operating in uncertainty, including interest rates, the economy, unemployment, war, and the changes AI is bringing or will bring. The market has been fluctuating around these factors.

The most interesting part is that every time there’s major negative headline news (especially in the Middle East), the market might drop a few percentage points but quickly rebounds, returning near all-time highs. When you try to capitalize on market movements but also want to keep your core beliefs from being swept away by negative hype, it becomes an extremely interesting but also very challenging market to navigate.

Host: What do you think is the biggest overall risk facing Bitcoin right now? Don’t mention quantum computing; talk about liquidity, downside risks, regulatory clarity, etc. What do you see as obstacles now, or what are your concerns for the future?

James Lavish: I think the biggest risk Bitcoin faces right now is the lag in understanding and adoption. There’s too much noise around Bitcoin, and the media is full of negative reports. Overall, we’re still in our own little bubble, and most people don’t truly understand or trust it; some even wrongly associate it with criminals, money laundering, and human trafficking.

Interestingly, I used to think investors could buy in before Wall Street takes over, but Wall Street has already started entering. Strategy plans to buy 1 million Bitcoin; BlackRock launched a Bitcoin ETF, Fidelity is involved, and other ETF managers are also participating; now giants like JPMorgan, Morgan Stanley, and even Vanguard are offering Bitcoin to their clients.

Large institutions are beginning to hold Bitcoin on their balance sheets and portfolios, while retail investors are still messing around, buying and selling at bad times—buying during hype, selling in panic. I’ve seen it painfully myself; I introduced Bitcoin to some people long ago, and they finally bought near the all-time high, then when it dropped below $100k, they said “I don’t get it,” and exited, suffering 30%, 40%, 50% losses along the way. All because they didn’t understand. It’s not that they’re not smart; it’s very typical. So, the ongoing misunderstanding among the general public is what hampers Bitcoin’s development.

Institutions will continue building their positions and products, preparing for more ordinary people to enter. When we get through this uncertain period and Bitcoin moves back toward $100k, you’ll see the “hot money” that previously flowed into gold and silver re-enter Bitcoin. That “hot money” is what I’ve written about: those at the bottom of the K-shaped economy trying to catch up. They chase trends, what they think is hot. It used to be meme stocks, then bored apes, then various cryptocurrencies, then gold and silver—who knows what’s next. Maybe betting on Polymarket, or placing thousands of dollars on the last two holes of a golf tournament, trying to make quick money. It’s crazy, but that’s our world now. For newcomers, patience and understanding will be key.

You just asked about liquidity—why is all this so important? Let’s take the US as an example, because aside from China, it’s the largest source of liquidity. The US stock market is closely linked to everything happening now. We currently have $39 trillion in debt, plus hundreds of billions in unreserved liabilities, totaling nearly $200 trillion. The debt is so high that we run trillions of dollars in deficits every year. Our debt doubles every 10 years, and by the mid-2030s, it’s projected to soar to $100 trillion, which is staggering. These numbers are incomprehensible to most people. Why does this matter? Because we will never pay off this debt. The Treasury Secretary admits it’s not something that can be paid back, only managed. The way to manage debt is to ensure there’s enough liquidity in the system to keep funding the deficits. With so much debt, a high debt-to-GDP ratio, and ongoing deficits, you can choose from four “doors”:

First door: Austerity (cutting spending). You saw the Doge committee try to cut costs and eliminate fraud, but resistance was overwhelming. Both parties try to trick each other into cutting spending, but they won’t cut Social Security, Medicare, Medicaid, or defense (which is again involved in another war). They also won’t default on debt (meaning not paying interest, about $1 trillion, half of the deficit). So, they won’t take this route.

Second door: Raising taxes. If you’ve heard of the Laffer Curve, it shows that beyond a certain point, increasing taxes on productivity will plateau and decline because high taxes hinder growth. Companies stop investing, hiring, R&D. We’ve seen this in Europe; it doesn’t work.

Third door: Default on debt and write it off. Emerging markets have done this and suffered heavily. Once defaulted, you can no longer issue debt in your own currency because trust is lost. We will never do this because we issue debt in our own currency.

This brings us to the fourth door, which is the easiest and the one we’re walking every day: print more money and use that money to pay off debt. This is called fiscal dominance. Basically, it involves bank loans, the Federal Reserve expanding its balance sheet, or directly printing money to buy its own debt—quantitative easing (QE). The Fed has two directions: QE (printing money to buy US Treasuries and MBS) or QT (quantitative tightening, pulling liquidity out). They barely did QT for a while, then gradually reduced it until stopping altogether. Now they’re back in the market, doing what we call “mild QE” (QE-lite), mainly buying short-term treasuries and injecting liquidity into banks to keep the system running.

All this means we need liquidity to manage all this debt. The math is simple: you need to create more dollars. What happens when you create more dollars? It’s like Monopoly—if your friends suddenly get a lot of money from the bank, the money on the board increases, and asset prices go up. That’s what you see every day: houses, land, gold, stocks, and Bitcoin all rising over time. If you’re an investor holding these assets, especially Bitcoin, it’s a huge comfort. If you’ve been enduring this volatility, it’s okay—these are uncertain times, normal for assets in adoption.

Remember, Bitcoin is only 16 or 17 years old. Gold’s total market cap is around $30 trillion, while Bitcoin exceeds $1 trillion. Gold has existed as a currency and store of value for thousands of years; Bitcoin is about one-thirtieth to one-twentieth of that size, which is astonishing. So, be patient—the liquidity train is coming. Currently, in the US, the liquidity we see is just a trickle, but if a once-in-a-century crisis occurs (which seems to happen every five to ten years in my career—like the LTCM crisis in 1998, the dot-com bubble in 2000, 9/11 in 2001, the 2008 financial crisis, etc.), a crisis will definitely come again. Be prepared: if the market drops, don’t panic. They have no choice but to inject more liquidity to stabilize the situation. That’s the math.

Host: Last time you were on, everyone was talking about Bitcoin reaching $150k or $160k by the end of the year or this quarter. Based on everything you know now, considering the liquidity you just mentioned, what’s your timeline for reaching $150k? Not financial advice—you can give a specific date or month.

James Lavish: If we don’t rebound back to $125k by the end of this year, or reach $150k next year, I’d be very surprised. I’m an eternal optimist, but based on global trends and the huge demand for liquidity, although Bitcoin sometimes lags behind gold, looking at their relative positions now, I definitely wouldn’t short Bitcoin and go long gold. I fully expect the market to stabilize at this level, especially once there’s some certainty around the Middle East situation.

Why do I say that? First principles. The current government doesn’t want a weak market to drag into the November midterms because people will be frustrated with living costs. They absolutely don’t want inflation caused by an oil crisis to explode; the government needs peace and stability to win midterms, and they will push for that.

Second, a new Fed chair is about to take office. Will they cut rates immediately? No—that would make it seem like the Fed is fully driven by politics. But it gives room for other dovish Fed officials, who are more worried about recession than inflation from non-energy sources, and they’re willing to accept 2-3% inflation to keep the markets functioning.

Third, the Treasury Secretary has been talking about ways to extend the bond curve. We might see “twist operations,” increasing liquidity to buy long-term debt, escaping the cycle of rolling over debt every 90 days. All of this requires liquidity in the market, which is why they’re already doing mild QE. So, I’m very optimistic. Unless a black swan event causes a correlated sell-off across all assets, I think the probability of a rise from here is higher. If a sell-off does happen, it’s an excellent opportunity because the Treasury and Fed will have no choice but to inject liquidity to stabilize the markets.

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