Bitwise investment director Matt Hougan argued that the bursting of the AI bubble could first trigger a sharp sell-off in Bitcoin, but that subsequent rescue measures could support a strong rally.
According to The Block, Hougan assessed three different scenarios for how AI could affect the economy in a note he sent to clients on October 14. He said he sees long-term supportive factors for Bitcoin whether AI investment accelerates growth, the bubble bursts, or the economic gains remain limited.
Why does he expect a rally after a crash?
In Hougan’s potential crash scenario, data center operators are unable to repay their debts, insurance companies holding AI-related bonds come under pressure, and the economy is pushed into a recession reminiscent of the 2008 crisis.
The Bitwise executive puts the likelihood of a government bailout in such a situation at nearly 100%, given AI’s geopolitical importance. He believes that a rapid expansion of the money supply after the initial wave of selling could trigger a strong recovery in Bitcoin.
Hougan says that if the AI push he describes as the largest infrastructure investment in U.S. history collapses, the scale of the resulting bailout could also be enormous. The rally outlook here is based not so much on the crisis itself as on the monetary response to the crisis.
What changes if AI accelerates growth?
In the second scenario, AI boosts productivity and economic growth while making software, legal, design, pharmaceutical, and diagnostic services cheaper. Hougan argues that, in response, assets with limited supply, such as gold and Bitcoin, could gain value.
In the milder third scenario, the economy continues along with 3% growth and 4% interest rates; debts from AI investments are repaid, and conditions come close to a soft landing. Hougan says that even under these conditions, ETF inflows, growing adoption through financial advisors, and the resources companies and governments allocate to Bitcoin could support demand.
He expects a rally but does not rule out a sharp drop
Hougan also believes that crisis-response support measures could come into play if the Fed raises interest rates enough to cause a recession. If rates are not raised and inflation increases, he suggests that more investors could turn to Bitcoin as a store of value.
However, this outlook does not mean prices will rise uninterrupted. Hougan points out that Bitcoin fell 50% in a few days during the COVID panic in 2020, emphasizing that some scenarios could involve a difficult period before a recovery.
The threat of quantum computers, coordinated government pressure, and a renewed turn toward fiscal austerity in Western countries are also among the risks that could weaken the bullish thesis. Hougan considers these possibilities unlikely but does not rule them out entirely.
Not investment advice.