Author: YBB Capital Researcher Ac-Core
TL;DR
In the long run, Bitcoin's transition through ETFs is not beneficial. There is a huge gap in trading volume between Bitcoin ETFs in Hong Kong and those in the US. Undoubtedly, US capital is gradually enveloping the crypto market. Bitcoin ETFs will divide the market into black and white parts; the white part, under centralized financial regulation, retains only the single financial attribute of speculative trading, while the black part has more inherent blockchain activity and trading opportunities but must face regulatory pressure due to being 'unlegalized';
MicroStrategy achieves efficient arbitrage between stocks, bonds, and Bitcoin through capital structure design, closely linking its stock with Bitcoin price fluctuations to realize low-risk returns over the long term. However, MicroStrategy is essentially issuing unlimited debt on assets, elevating its own value with unlimited leverage, which requires a long-term bull market for Bitcoin to sustain its value. Therefore, Citron's shorting of MicroStrategy has higher odds than directly shorting Bitcoin, but MicroStrategy is confident that the future price trend of Bitcoin will be a slow increase without significant fluctuations.
Trump's crypto-friendly policies will not only preserve the dollar's status as a global reserve currency but will also strengthen the dollar's pricing power in the crypto market. Trump is firmly holding the dollar's hegemonic position in his left hand while gripping Bitcoin, the strongest weapon against the trust deficit in national fiat currencies, with his right hand, reinforcing and hedging risks.
1. US Capital Gradually Enveloping the Crypto Market
1.1 Data on Hong Kong and US ETFs
According to Glassnode data on December 3, 2024, the holdings of US Bitcoin spot ETFs are just 13,000 coins away from surpassing Satoshi Nakamoto, with holdings of 1,083,000 and 1,096,000 coins respectively. The total net asset value of US Bitcoin spot ETFs reaches $103.91 billion, accounting for 5.49% of Bitcoin's total market value. Meanwhile, according to Aastocks reported on December 3, the Hong Kong Stock Exchange shows that the total trading volume of three Bitcoin spot ETFs in Hong Kong was approximately 1.2 billion HKD in November.
Source Data: Glassnode
US capital is deeply intervening and influencing the global crypto market, even dominating the development of the crypto industry. ETFs have turned Bitcoin from an alternative asset into a mainstream asset, but have also weakened Bitcoin's decentralized characteristics. ETFs have brought a massive influx of traditional capital but have also allowed Wall Street to firmly control Bitcoin's pricing power.
1.2 The 'Black and White Division' of Bitcoin ETFs
Classifying Bitcoin as a commodity means that tax laws must follow the same rules as other commodities like stocks and bonds. However, the impact of launching a Bitcoin ETF is not entirely equivalent to launching other commodity ETFs, such as gold ETFs, silver ETFs, or crude oil ETFs. The currently approved or sanctioned Bitcoin ETFs differ from the market's recognition of Bitcoin itself:
The path to commodity ETFification is akin to a person holding physical assets or commodities (the trustee) needing to have them custodied by an intermediary (like a warehouse for copper and a vault for gold) and requiring authorized institutions to complete transfers and records, while there will be holders of shares (like fund shares) on the other side who buy and sell shares with funds.
However, in the above process, the front end (design, development, sales, and after-sales service, etc.) will involve physical delivery, spot delivery, and cash delivery. However, currently, the front end (subscription and redemption of shares) of the Bitcoin ETFs approved by the US SEC adopts a cash delivery method, which is also the issue that Cathie Wood (Wood Sister) has been arguing about, hoping to achieve physical delivery, but this is practically impossible to realize.
Because the cash custodians in the US are all institutions operating cash subscription and redemption transactions under the traditional centralized financial framework, this means that the first half of Bitcoin ETFs is entirely centralized.
At the end of the Bitcoin ETF, a centralized regulatory framework is difficult to confirm. The reason is that if Bitcoin is to be recognized, it must become a commodity under the existing centralized financial framework and will never be recognized as a substitute for fiat currency, nor as having non-traceable decentralized attributes. Therefore, Bitcoin can only engage in various financial product derivatives, such as futures, options, and ETFs, under fully compliant regulatory conditions.
Thus, the emergence of Bitcoin ETFs signifies a complete failure of Bitcoin ETFs to counter fiat currency. The partial decentralization of Bitcoin ETFs has become meaningless, relying entirely on the legitimacy and custody of platforms like Coinbase, ensuring that the entire trading chain is legal, open, and traceable.
The black and white of Bitcoin will be completely divided due to ETFs:
Currently, the white part: within a centralized regulatory framework, the extensive financial products derived from it reduce market price volatility, and as legitimate participants become more widespread, the speculative volatility of Bitcoin as a commodity will gradually decrease. After Bitcoin transitions through an ETF, the white portion has lost its important demand side (Bitcoin's decentralization, anonymity), leaving only a single speculative trading financial attribute. Meanwhile, under a legalized regulatory structure, it also means needing to pay more taxes, which makes Bitcoin's original function of asset transfer and tax evasion no longer exist. In other words, endorsement has shifted from decentralized chains to centralized governments.
The former black portion: The main reason for the crypto market's volatility is its opacity and anonymity, making it susceptible to manipulation. Meanwhile, the black portion of the market is more open, with greater inherent value and activity from blockchain, and more trading opportunities. However, due to the emergence of the white portion, those unwilling to transition to white will be permanently excluded from the centralized regulatory framework and lose pricing power, akin to paying fines to the SEC.
2. Trump's Crypto All-Star Cabinet Picks
2.1 Cabinet Candidates
In the 2024 US presidential election, Trump's victory, compared to the restrictive policies of the SEC, Federal Reserve, and FDIC during the Biden administration, may result in a more open attitude towards crypto by the US government. According to Chaos Labs data, Trump's new government cabinet nominations are as follows:
Source: @chaos_labs
Howard Lutnick (Nominee for Secretary of Commerce and Transition Team Leader):
Lutnick, as the CEO of Cantor Fitzgerald, publicly supports cryptocurrencies. His company actively explores the blockchain and digital asset space, including a strategic investment in Tether.
Scott Bessent (Nominee for Secretary of the Treasury):
Bessent is an experienced hedge fund manager who supports cryptocurrencies, believing they represent freedom and will exist long-term. He is more friendly towards cryptocurrencies than previous Treasury Secretary candidate Paulson.
Tulsi Gabbard (Nominee for Director of National Intelligence):
Gabbard focuses on privacy and decentralization, supports Bitcoin, and invested in Ethereum and Litecoin in 2017.
Robert F. Kennedy Jr. (Nominee for Secretary of Health and Human Services):
Kennedy publicly supports Bitcoin, viewing it as a tool against the depreciation of fiat currency, and may become an ally in the crypto industry.
Pam Bondi (Nominee for Attorney General):
Bondi has not made a clear statement on cryptocurrencies, and her policy direction remains unclear.
Michael Waltz (Nominee for National Security Advisor):
Waltz actively supports cryptocurrencies, emphasizing their role in enhancing economic competitiveness and technological independence.
Brendan Carr (Nominee for FCC Chairman):
Carr is known for anti-censorship and supporting technological innovation, which may provide technical infrastructure support for the crypto industry.
Hester Peirce & Mark Uyeda (Potential SEC Chairman Candidates):
Peirce is a staunch supporter of cryptocurrencies and advocates for regulatory clarity. Uyeda is critical of the SEC's hardline stance on cryptocurrencies and calls for clear regulatory rules.
2.2 Crypto-friendly policies are financial tools to hedge against the insufficient trust in the dollar as a global reserve.
Will the White House's promotion of Bitcoin undermine people's trust in the US dollar as the global reserve currency, thereby weakening the dollar's status? American scholar Vitaliy Katsenelson suggests that in a time when market sentiment towards the dollar has already been disturbed, the White House's promotion of Bitcoin could shake people's trust in the dollar as the global reserve currency, thus weakening the dollar's status. As for the current fiscal challenges, “what can truly keep America great is not Bitcoin, but controlling debt and deficits.”
Perhaps Trump's actions may serve as a hedge against the risk of the US government losing its dominant position over the dollar in the future. In the context of economic globalization, all countries hope to achieve the international circulation, reserve, and settlement of their national currencies. However, in this issue, monetary sovereignty, free capital movement, and fixed exchange rates involve a trilemma. The significant value of Bitcoin is that it provides a new solution for national institutional contradictions and economic sanctions in the context of economic globalization.
Source: @realDonaldTrump
On December 1, 2024, Trump stated on social media platform X that the era of BRICS countries attempting to break away from the dollar has ended. He demanded that these countries commit to not creating a new BRICS currency or supporting any other currency that might replace the dollar, or face 100% tariffs and lose access to the US market.
Today's Trump seems to be holding the dollar's hegemonic position firmly in his left hand while grasping Bitcoin, the strongest weapon against the trust deficit in national fiat currencies, with his right hand, reinforcing both the dollar's international settlement power and the crypto market's pricing power.
3. The Tug of War Between MicroStrategy and Citron Capital
On November 21, during US stock trading hours, well-known short-selling firm Citron Research announced on social media platform X that it plans to short 'Bitcoin-heavy stock' MicroStrategy (MSTR), which led to a sharp decline in MicroStrategy's stock price, falling over 21% from its intraday high.
The next day, MicroStrategy Executive Chairman Michael Saylor responded in an interview with CNBC, stating that the company not only profits from trading based on Bitcoin's volatility but also leverages Bitcoin investments through the ATM mechanism. Therefore, as long as the Bitcoin price continues to rise, the company can maintain profitability.
Source: @CitronResearch
Overall, MicroStrategy (MSTR)'s stock premium and its strategy to realize profits through the ATM (At The Market) mechanism, its leverage operations in Bitcoin investment, and the views of short-selling institutions can be summarized as follows:
Sources of Stock Premium:
Most of MSTR's premium comes from the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment to Bitcoin, and the stock price has shown an unreasonable premium compared to Bitcoin, leading them to decide to short MSTR. However, Michael Saylor countered this viewpoint, arguing that the shorts overlook MSTR's important profit model.
Leverage operations of MicroStrategy:
Leverage and Bitcoin investment: Saylor points out that MSTR leverages Bitcoin investments through debt issuance and financing, relying on Bitcoin's volatility for profits. The company flexibly raises funds through the ATM mechanism to avoid discounted issuances in traditional financing while utilizing high trading volumes to achieve large-scale stock sales, gaining arbitrage opportunities from stock premiums.
Advantages of the ATM mechanism:
The ATM model allows MSTR to flexibly raise funds and transfer debt volatility, risk, and performance to common stock. Through this operation, the company can achieve returns far exceeding borrowing costs and Bitcoin's appreciation. For instance, Saylor points out that by financing with an interest rate of 6% to invest in Bitcoin, if Bitcoin rises by 30%, the actual return for the company is about 80%.
Specific Profit Cases:
By issuing $3 billion in convertible bonds, the company expects earnings of $125 per share in 10 years. If the price of Bitcoin continues to rise, Saylor predicts that the company's long-term profits will be substantial. For example, two weeks ago, MSTR raised $4.6 billion through the ATM mechanism, trading at a 70% premium, earning $3 billion in Bitcoin in five days, equivalent to $12.5 per share, with long-term profits expected to reach $33.6 billion.
Risks of Bitcoin decline:
Saylor believes that purchasing MSTR stock means that investors have accepted the risk of Bitcoin price declines. To achieve high returns, one must bear corresponding risks. He predicts that Bitcoin will rise by 29% annually in the future, while MSTR's stock price will rise by 60% annually.
Market performance of MSTR:
Since the beginning of this year, MSTR's stock price has risen by 516%, far exceeding Bitcoin's 132% increase during the same period, even surpassing AI leader Nvidia's 195% increase. Saylor believes MSTR has become one of the fastest-growing and most profitable companies in the US.
Regarding Citron's short-selling, MSTR CEO stated that Citron does not understand where MSTR's premium relative to Bitcoin comes from and explained:
“If we finance funds at an interest rate of 6% to invest in Bitcoin, when the Bitcoin price rises by 30%, we actually get an 80% spread on Bitcoin prices (a function of the composite stock premium, conversion premium, and Bitcoin premium).”
“The company issued $3 billion in convertible bonds, with an 80% premium on Bitcoin prices, which means this $3 billion investment could yield $125 per share in 10 years.”
This means that as long as the Bitcoin price continues to rise, the company can continue to be profitable:
“Two weeks ago, we raised $4.6 billion through ATM and traded at a 70% spread, which means we earned $3 billion in Bitcoin in five days. About $12.5 per share. If calculated over ten years, the yield would reach $33.6 billion, approximately $150 per share.”
In summary, MicroStrategy's operational model achieves efficient arbitrage between stocks, bonds, and Bitcoin through the design of capital structuring, and closely binds its stock price to Bitcoin price fluctuations to ensure low-risk profits for the company over long periods. However, the essence of MicroStrategy is to issue unlimited debt on assets and raise its value with unlimited leverage, which requires a long-term bull market for Bitcoin to sustain its value. Undoubtedly, Citron's shorting of MicroStrategy has much greater odds than shorting Bitcoin directly, so MicroStrategy is also confident that the future price trend of Bitcoin will be a slow increase without significant fluctuations.
4. Summary
Source: Tradesanta
The US is continuously strengthening its control over the crypto industry, and market opportunities are gradually shifting towards centralization. The decentralized crypto utopian world is gradually compromising toward centralization and 'handing over' power. Like medicine, the funds continually pouring into ETFs are merely a pain relief capsule that cannot cure the underlying issues.
In the long run, Bitcoin's transition through ETFs is not beneficial. There is a significant gap between the trading volume of Bitcoin ETFs in Hong Kong and those in the US. Undoubtedly, US capital is gradually enveloping the crypto market. Currently, even though China is an absolute leader in the mining sector, it still remains at a disadvantage in terms of capital markets and policy direction. Perhaps the long-term impact of Bitcoin ETFs will accelerate the normalization of trading in crypto assets; this is both a beginning and an end.
Reference Content:
Fu Peng: Discussing SEC and Bitcoin ETFs - Clear Distinctions in Centralization
