Alright, speculate and guess all you want, but here's where the name really came from...
Back in 1832, a french pirate named Jacque something or other was on a voyage to the phillipines where he had picked up a balisong. He continued on his journey to the Americas where he was owed a small sum of money for a wager on pig racing. His ship sank a few hundred miles off the coast of Mexico, with all his booty. But, fortunately he had his balisong in his boot at the time. He swam for days, swallowing gallons of sea water. The salt in his blood stream dried out his brain and caused insanity, as drinking large quanties of salt water often does. When he crawled on shore, all he saw where monarch butterflies. This is, of course, because monarchs winter in Mexico. He huddled by a rock on the beach, paranoid of all the eyes he saw on their wings. He held there for days, surviving only by licking the rock periodically. But, he realized that if he continued to lick the rock every day, it would eventually wear down to a small marble, and his valuable hiding place would be gone. So he got up all his of courage, and charged the monarchs with his balisong in hand. Let me tell you friends, it was a long and bloody battle. Monarchs fell by the hundreds as the sharp blade whipped through the air. After 3 days of fighting, he was certain he had killed every one of them. He lay down on the piles of butterfly corpses, weary, starving and beaten. Shortly after, a band of Mexican thieves wandered by and found his body. They stripped him down to nothing and left him to die. As they walked away, they pondered what had happened to the man, and why all the dead insects. Soon, they returned home, forgetting about the incident almost entirely. They sifted through all of Jacque's things. One man opened up the balisong and said, "Hey man, check out this knife... Kind of looks like a butterfly."