The Money Multiplier Paradox Under Capital Tightness: Why Are Cryptocurrencies the First to Be Affected?

The current market is facing a fundamental turning point. The core reason driving this shift is not complicated: massive capital expenditures in artificial intelligence are breaking the long-standing era of abundant funding, and the money multiplier mechanism plays a key role in this process. Understanding how the money multiplier works is essential to truly grasp why high-risk, highly speculative assets like cryptocurrencies are among the first to suffer.

Over the past decade, the market has been immersed in an era of liquidity excess. The relatively modest capital demands of the internet and cloud computing industries led to a flood of surplus funds into various speculative assets, including cryptocurrencies. During this period, the money multiplier continued to expand—each new unit of money supply was amplified through the banking system, generating multiple economic effects. But now, this mechanism is reversing.

The Bidirectional Drive Between AI Capital Expenditures and the Money Multiplier

To understand the current market predicament, one must first understand how the money multiplier operates. Governments inject funds through fiscal stimulus, banks lend to businesses and individuals, and these funds circulate within the real economy, creating a multiplying effect that ultimately drives up the prices of financial assets. Past quantitative easing policies exploited this mechanism.

The capital expenditure cycle in artificial intelligence has, to some extent, played a similar role. Large tech companies raise funds via debt issuance or asset sales, investing these in data centers, chip procurement, and other tangible projects, which also produce a money multiplier effect, fueling economic growth and asset prices. As long as there is still a large pool of idle funds in the market, this process can run smoothly, and asset prices will rise across the board.

However, a turning point is approaching.

From Capital Surplus to Capital Competition: A Fundamental Shift in Asset Prices

The key issue is: as idle funds gradually deplete, every dollar flowing into AI must be diverted from other sectors. In this zero-sum game, an intense competition for capital becomes inevitable.

When funds become scarce, the market is forced to make ruthless choices—rigorously evaluating the most effective uses of capital. Discount rates rise, and the cost of capital increases accordingly. What does this mean? It means the expansion cycle of the money multiplier has ended and may even be reversing.

In an environment of capital scarcity, highly speculative assets will face disproportionate hits. This mirrors the previous era of excess capital—back then, these assets received an overabundance of funding. Now, the situation has reversed: the once fortunate are now the casualties. We can call this process “reverse quantitative easing”: rapid tightening of capital replaces the easing environment, forcing portfolios to undergo painful rebalancing.

Fiscal stimulus typically avoids this dilemma because the Federal Reserve often becomes the ultimate buyer of government bonds, preventing crowding out of other capital uses. But AI capital expenditures lack such a “moat.”

The Wealthiest Investors Are Also “Bottom-Fishing” for Survival

Reports indicate that the world’s most wealthy investors—including Saudi sovereign funds and SoftBank—are nearly out of idle funds. During the bull market of the past decade, they accumulated large asset positions. Now, when companies like OpenAI request new funding commitments, they face a very different situation: they must sell some assets first to raise new capital.

What are they likely to sell? The most probable are holdings with the “lowest confidence”—recently underperforming Bitcoin, SaaS stocks facing industry headwinds, underperforming hedge fund shares. These hedge funds, in turn, are also forced to sell assets to meet investor redemptions.

This chain reaction of selling is deadly: falling asset prices → collapsing market confidence → tightening financing conditions → broader sell-offs. This cascade propagates through the financial markets, ultimately leading to a systemic asset purge.

Why Cryptocurrencies Are the Biggest Victims of Liquidity Tightening

In this capital contest, cryptocurrencies are in the most vulnerable position. They are the most sensitive barometer of liquidity conditions and the first “low-priority” assets to be sacrificed.

When discount rates rise, the present value of long-term cash flows diminishes, meaning assets with no immediate cash flow—like Bitcoin—are hit hardest. Conversely, assets capable of generating near-term cash flows are favored.

This explains why stocks of storage chip manufacturers like SNDK and MU outperform other sectors. While rising chip prices are a factor, the more critical reason is that these companies currently and recently have very strong profits. Although everyone knows the cyclical nature of the chip industry and that future earnings will eventually decline, in the current discount rate environment, near-term cash flows are king.

Rising Discount Rates and the Systemic Decline of Speculative Assets

When capital supply cannot keep pace with demand, not only are cryptocurrencies affected, but all highly speculative retail favorites struggle to maintain their gains. Even sectors with improving fundamentals face difficulties under capital shortages.

Meanwhile, yields on sovereign bonds and credit bonds are rising, further tightening the financing environment for risk assets. In this new era of shrinking money multipliers and tightening liquidity, blind optimism and relentless bullishness are no longer viable.

The market is undergoing a painful but necessary reassessment. Capital is becoming rational, rigorously evaluating the real returns of each investment. Cryptocurrencies are at the forefront of this liquidation, precisely because they most reflect extreme liquidity shifts. This explains why their recent downward trajectory seems bottomless—they are not only under pressure from their own issues but also from the systemic impact of the contraction of the money multiplier across the entire financial system.

Only by truly understanding the reversal of the money multiplier can we grasp why, in this era of capital competition, assets like cryptocurrencies—sensitive to liquidity—are destined to be the biggest casualties.