Original title: The Demise of Decentralization and the Consolidation of Power: U.S. Capital Poised to Complete the Transfer of Authority in the Crypto Utopia
Author: YBB Capital researcher Ac-Core
Key points
In the long run, investing in Bitcoin through ETFs may not be advantageous. The trading volume of Bitcoin ETFs in Hong Kong is far lower than that in the U.S. Undoubtedly, U.S. capital is gradually taking control of the cryptocurrency market. Bitcoin ETFs will split the market into two parts: the "white market" operating under centralized financial regulation, limited to speculative trading, and the "black market" retaining native blockchain activities and trading opportunities but facing regulatory pressure due to being "illegal."
MicroStrategy has achieved efficient arbitrage between stocks, bonds, and Bitcoin through its capital structure design. It closely associates the price fluctuations of stocks and Bitcoin to gain long-term low-risk returns. However, MicroStrategy uses unlimited debt issuance to elevate its own value, which requires a long-term bull market in Bitcoin to sustain. Therefore, Citron Research's success rate in shorting MicroStrategy is higher than that of directly shorting Bitcoin, even though MicroStrategy bets that Bitcoin's price will grow slowly and steadily without significant fluctuations.
Trump's cryptocurrency-friendly policies will not only maintain the dollar's status as the global reserve currency but also strengthen the dollar's dominance in cryptocurrency pricing. Trump holds the dollar's hegemony in one hand and Bitcoin in the other— the most powerful weapon against the loss of trust in fiat currencies, simultaneously strengthening both and hedging against risks.
1. U.S. capital gradually entering the cryptocurrency market
1.1 Hong Kong and U.S. ETF data
According to Glassnode data from December 3, 2024, the holdings of the U.S. Bitcoin spot ETF are only 13,000 BTC away from surpassing Satoshi Nakamoto's holdings, with 1,083,000 BTC and 1,096,000 BTC respectively. The total net asset value of the U.S. Bitcoin spot ETF has reached $10.391 billion, accounting for 5.49% of Bitcoin's total market cap. Meanwhile, according to Aastocks' report on December 3, the total trading volume of three Bitcoin spot ETFs in Hong Kong in November was approximately 1.2 billion HKD.
Source: Glassnode
U.S. capital is deeply involved in and influencing the global cryptocurrency market, even dominating its development. Bitcoin ETFs have transformed Bitcoin from an alternative asset into a mainstream asset but have also weakened Bitcoin's decentralized nature. ETFs have driven the influx of traditional capital, allowing Wall Street to firmly control Bitcoin's pricing power.
1.2 Bitcoin ETFs: Clear black and white
Classifying Bitcoin as a commodity means it must follow the same tax regulations as stocks, bonds, and other commodities. However, the impact of Bitcoin ETFs is not entirely the same as that of ETFs for other commodities like gold, silver, and oil. The Bitcoin ETFs that have been approved or proposed have different levels of recognition for Bitcoin:
1. Commodity ETF paths involve holding physical assets (e.g., copper warehouses or gold bank vaults), handled by authorized institutions for transfer and record-keeping, with investors purchasing shares (e.g., fund shares) to buy or redeem based on the fund.
However, for Bitcoin ETFs, the process of buying and redeeming shares is cash-settled, which is a point of contention for those like Cathie Wood, who wish for physical settlement. However, this is actually impossible, as U.S. custodians are centralized financial institutions that handle cash transactions. This renders the early stages of Bitcoin ETFs entirely centralized.
2. The final process of Bitcoin ETFs is difficult to verify under a centralized regulatory framework. For Bitcoin to be recognized as a commodity under such a framework, it must abandon its decentralized features, such as being a substitute for fiat currency and being untraceable. Therefore, Bitcoin can only become part of financial products such as futures, options, and ETFs if it meets regulatory standards.
The emergence of Bitcoin ETFs marks the complete failure of Bitcoin ETFs to counter fiat currencies; the decentralization of Bitcoin ETFs has become meaningless, entirely relying on the legitimacy and custody of platforms like Coinbase to ensure the legality, transparency, and traceability of the entire trading chain.
The split between Bitcoin's "black" and "white" parts is due to ETFs:
White section: Under a centralized regulatory framework, broad creation of financial products reduces market price volatility, and with an increase in legitimate participants, the speculative volatility of Bitcoin commodities will gradually decrease. After Bitcoin becomes an ETF, the white section of the supply-demand relationship in the market loses a key demand factor (Bitcoin's decentralization and anonymity), leaving only the speculative trading financial attributes. At the same time, under a legalized regulatory framework, this also means that more taxes need to be paid, eliminating Bitcoin's original asset transfer and tax avoidance functions. Essentially, the endorsement has shifted from decentralized on-chain to centralized government.
Black section: The extreme volatility in the cryptocurrency market is primarily due to its opacity and anonymity, making it highly susceptible to manipulation. Meanwhile, the black section of the market maintains a high level of openness, preserving the native value vitality of blockchain, with more trading opportunities. However, with the emergence of the white section market, those unwilling to transition to the white market will forever be excluded from the centralized regulatory framework, losing pricing power, much like paying fines to the SEC.
2. Trump's cryptocurrency-friendly cabinet nominees
2.1 Cabinet nominees
Trump's victory in the 2024 U.S. presidential election, compared to the restrictive policies of regulatory agencies like the SEC, Federal Reserve, and FDIC during the Biden administration, suggests that the new U.S. government may take a more aggressive stance on cryptocurrency. According to data from Chaos Labs, here are the key cabinet nominations of Trump's new administration:
Source: @chaos_labs
Howard Lutnick (nominated Secretary of Commerce and head of the transition team): Howard Lutnick, CEO of Cantor Fitzgerald, is a vocal supporter of cryptocurrencies. His company is actively exploring blockchain and digital assets, including strategic investments in Tether.
Scott Bessent (nominated Secretary of the Treasury): Bessent is a seasoned hedge fund manager who supports cryptocurrencies, believing they represent freedom and will endure in the long term. He is more supportive of cryptocurrencies than former Treasury Secretary nominee Paulson.
Tulsi Gabbard (nominated Director of National Intelligence): Gabbard advocates for privacy and decentralization, supports Bitcoin, and invested in Ethereum and Litecoin in 2017.
Robert F. Kennedy Jr. (nominated Secretary of Health and Human Services): Kennedy is a public advocate for Bitcoin, viewing it as a tool against the depreciation of fiat currencies and potentially an ally in the cryptocurrency industry.
Pam Bondi (nominated Attorney General): Bondi has not made a clear statement on cryptocurrencies, and her policy position remains unclear.
Michael Waltz (nominated National Security Advisor): Waltz is a strong supporter of cryptocurrencies, emphasizing their role in enhancing economic competitiveness and technological independence.
Brendan Carr (FCC Chair nominee): Carr is known for opposing censorship and supporting technological innovation, potentially providing infrastructure support for the crypto industry.
Hester Peirce and Mark Uyeda (potential candidates for SEC Chair): Peirce is a strong supporter of cryptocurrencies, advocating for clearer regulations. Uyeda criticizes the SEC's tough stance on cryptocurrencies, calling for clear regulatory rules.
2.2 Cryptocurrency-friendly policies can prevent the decline of the dollar's global reserve status
Will the White House promotion of Bitcoin shake people's confidence in the dollar as the global reserve currency, thereby undermining the dollar's position? U.S. scholar Vitaliy Katsenelson believes that given the market sentiment surrounding the dollar has already been disturbed, the White House's promotion of Bitcoin could indeed weaken people's confidence in the dollar's status as the global reserve currency, thus diminishing the dollar's influence. Regarding current fiscal challenges, Katsenelson argues that "what truly keeps America strong is not Bitcoin, but controlling debt and deficits."
Perhaps Trump's move could serve as a means to hedge against the risk of the U.S. losing its dollar dominance. In the context of economic globalization, countries strive to achieve international circulation, reserve, and settlement of their currencies, but the dilemma lies in the impossible triangle of monetary sovereignty, free flow of capital, and fixed exchange rates. The important value of Bitcoin is that, in the context of economic globalization, it provides new solutions to national systemic contradictions and economic sanctions.
Source: @realDonaldTrump
On December 1, 2024, Trump posted on social media platform X, stating that the era of BRICS countries attempting to decouple from the dollar has ended, demanding that these countries promise not to create new BRICS currencies and not to support any other currencies that could replace the dollar, or they would face 100% tariffs and lose access to the U.S. market.
Trump now seems to hold the hegemony of the dollar in one hand and Bitcoin in the other— the most powerful tool against the declining trust in national fiat currencies. By doing so, he simultaneously strengthens the dollar's global settlement power and the pricing power in the cryptocurrency market.
3. The tug-of-war between MicroStrategy and Citron Research
On November 21, during U.S. stock trading, the well-known short-selling firm Citron Research announced on social media platform X that it plans to short "Bitcoin-heavy stock" MicroStrategy (MSTR). This news caused MicroStrategy's stock price to plummet, dropping over 21% from its intraday high.
The next day, MicroStrategy Executive Chairman Michael Saylor responded in an interview with CNBC, stating that the company profits not only from Bitcoin's volatility but also from investing in Bitcoin using the ATM (At The Market) mechanism. Therefore, as long as Bitcoin prices continue to rise, the company can remain profitable.
Source: @CitronResearch
In summary, the stock premium of MicroStrategy, its leveraged Bitcoin investment strategy through the ATM mechanism, and the viewpoint of short sellers can be summarized as follows:
1. Source of stock premium: A significant portion of MSTR's premium comes from the ATM mechanism. Citron Research believes MSTR's stock has become a substitute investment for Bitcoin, and its stock price shows an unreasonable premium relative to Bitcoin, which is why they decided to short MSTR. However, Michael Saylor refuted this view, saying that short sellers overlook MSTR's important profit model.
2. MicroStrategy's leveraged operations: Leverage and Bitcoin investment: Saylor pointed out that MSTR leverages its Bitcoin investments through debt financing, profiting from Bitcoin's volatility. The company flexibly raises funds through the ATM mechanism, avoiding discounted issuance from traditional financing methods while executing large-scale stock sell-offs with high trading volume to gain arbitrage opportunities from stock premiums.
3. Advantages of the ATM mechanism: The ATM model allows MSTR to flexibly raise funds, shifting the volatility, risk, and performance of the debt onto common stock. Through this operation, the company can achieve returns far exceeding borrowing costs and the appreciation of Bitcoin prices. For example, Saylor points out that financing Bitcoin investment at a 6% interest rate, if Bitcoin rises by 30%, the company effectively gains an 80% return.
4. Specific profit example: By issuing $3 billion in convertible bonds, the company expects to achieve earnings of $125 per share over the next 10 years. If Bitcoin prices continue to rise, Saylor expects the company to achieve substantial long-term profits. For example, two weeks ago, MSTR raised $4.6 billion through the ATM mechanism, with a trading premium of 70%, and earned $3 billion worth of Bitcoin in five days, equivalent to about $12.5 per share. Long-term profits are expected to reach $33.6 billion.
5. Risk of Bitcoin price decline: Saylor believes that purchasing MSTR stock means investors accept the risk of Bitcoin price decline. To achieve high returns, corresponding risks must be taken. He predicts that Bitcoin will rise by 29% annually, while MSTR's stock price will rise by 60% annually.
6. MSTR's market performance: So far this year, MSTR's stock price has soared by 516%, far exceeding Bitcoin's 132% increase during the same period and even surpassing the 195% increase of AI leader Nvidia. Saylor believes MSTR has become one of the fastest-growing and most profitable companies in America.
In response to Citron's short-selling actions, MSTR CEO Michael Saylor stated that Citron does not understand where MSTR's premium over Bitcoin comes from and explained:
"If we finance Bitcoin investments at a 6% interest rate and Bitcoin rises by 30%, then we actually earn an 80% Bitcoin spread (a function of stock premium, conversion premium, and Bitcoin premium)."
"MicroStrategy issued $3 billion in convertible bonds, calculating an $80% Bitcoin spread, this $3 billion investment is expected to generate earnings of $125 per share over 10 years."
This means that as long as Bitcoin's price continues to rise, MicroStrategy can remain profitable:
"Two weeks ago, we completed a $4.6 billion ATM transaction with a 70% premium. This means we earned $3 billion worth of Bitcoin in five days, approximately $12.5 per share. If we predict earnings will reach $33.6 billion in 10 years, or approximately $150 per share."
In summary, MicroStrategy's operational model efficiently builds capital, arbitraging between stocks, bonds, and Bitcoin, closely linking its stock price to Bitcoin's price fluctuations to ensure long-term low-risk profits. However, the essence of MicroStrategy lies in its ability to issue unlimited debt and use infinite leverage to elevate its own value. This requires a long-term Bitcoin bull market to sustain its value. Nevertheless, Citron's short position on MicroStrategy has a much higher success rate than shorting Bitcoin directly, although MicroStrategy still believes that Bitcoin's price will continue to grow steadily and slowly, without significant fluctuations.
4. Conclusion
Source: Tradesanta
The U.S. continues to strengthen its control over the cryptocurrency industry, with market opportunities gradually shifting toward centralization. The decentralized crypto utopia is slowly compromising, and power is being "handed over" to the central government. Any medication has side effects; the influx of funds into ETFs is merely a temporary relief, akin to painkillers that cannot cure the underlying disease.
In the long term, promoting Bitcoin through ETFs may not be beneficial. The trading volume of Bitcoin ETFs in Hong Kong is significantly lower than that in the U.S. From a capital flow perspective, U.S. capital is gradually taking control of the cryptocurrency market. Although China currently leads in Bitcoin mining, it still lags in capital markets and policy direction. Perhaps in the future, the long-term impact of Bitcoin ETFs will accelerate the normalization of cryptocurrency asset trading, but this is both a beginning and an end.
