Author: YBB Capital Researcher Ac-Core
TL;DR
In the long run, Bitcoin through ETFs is not necessarily favorable; the trading volume of Bitcoin ETFs in Hong Kong is significantly lower than that in the U.S., and it is undeniable that U.S. capital is gradually coercing the crypto market. Bitcoin ETFs divide the market into black and white parts, where the white part, under the framework of centralized financial regulation, retains only the single financial attribute of speculative trading, while the black part has more intrinsic blockchain vitality and trading opportunities, but faces regulatory pressure due to being "unlegalized";
MicroStrategy has achieved efficient arbitrage among stocks, bonds, and Bitcoin through capital structure design, closely linking the volatility of its stock with the price of Bitcoin, thus achieving relatively low-risk returns over the long term. However, MicroStrategy is effectively issuing infinite debt to raise its value, which requires a prolonged Bitcoin bull market to maintain its value. Thus, Citron's short position against MicroStrategy carries a higher risk than directly shorting Bitcoin, but MicroStrategy is confident that the future price direction of Bitcoin will be a slow upward trend without large fluctuations;
Trump's crypto-friendly policy will not only retain the dollar's position as a global reserve currency but will also strengthen the dollar's pricing power in the crypto market. Trump is firmly holding onto the dollar's supremacy with one hand while grasping Bitcoin—the strongest weapon against the loss of trust in national fiat currency—with the other, solidifying both sides and hedging risks.
I. U.S. Capital Gradually Coercing the Crypto Market
1.1 Hong Kong and U.S. ETF Data
According to Glassnode data on December 3, 2024, the holdings of U.S. Bitcoin spot ETFs are just 13,000 coins away from surpassing Satoshi Nakamoto, with their respective holdings being 1,083,000 and 1,096,000 coins. The total net asset value of U.S. Bitcoin spot ETFs has reached $103.91 billion, accounting for 5.49% of Bitcoin's total market value. Meanwhile, according to Aastocks' report on December 3, data from the Hong Kong Stock Exchange shows that the total trading volume of three Bitcoin spot ETFs in Hong Kong in November was approximately 1.2 billion HKD.
Source Data: Glassnode
U.S. capital is deeply intervening and influencing the global crypto market, even dominating the development of the crypto industry. ETFs are pushing Bitcoin from an alternative asset to a mainstream asset but are also weakening Bitcoin's decentralization characteristics. ETFs have brought a large 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 in tax law it must follow the same rules as other commodity classes like stocks and bonds. However, the impact of the Bitcoin ETF's launch is not entirely equivalent to the launch of other commodity ETFs, such as gold ETFs, silver ETFs, and crude oil ETFs. Currently approved or authorized Bitcoin ETFs differ from the market's recognition of Bitcoin itself:
The path to commodity ETFization is akin to a person holding physical assets or commodities in their left hand (the trustee) needing to have them custodially held by an intermediary (like a copper warehouse and a gold bank vault), and requires authorized institutions to complete transfers and recordkeeping, while a shareholder will buy and sell shares after the issuance (e.g., mutual fund shares) with funds to purchase shares.
However, in the aforementioned process, the front end (design, development, sales, and after-sales services, etc.) will involve physical delivery, spot delivery, and cash delivery. But currently, the Bitcoin ETF approved by the U.S. SEC's front end (the share purchase and redemption phase) is in cash delivery, which has been a point of contention for Cathie Wood, who hopes to achieve physical delivery, but this is practically impossible.
Because the cash custodians in the U.S. are institutions operating under the traditional centralized financial framework, this also means that the first half of the Bitcoin ETF is entirely centralized.
At the end of the Bitcoin ETF, the 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 retain its non-traceable decentralized properties. Therefore, Bitcoin can only derive various financial product derivatives, such as futures, options, and ETFs, under the conditions of full compliance with regulations.
Thus, the emergence of Bitcoin ETFs signifies a complete failure of Bitcoin ETFs to counter fiat currencies; the decentralization aspect of Bitcoin ETFs has lost all meaning, requiring complete reliance on the legitimacy of custodians similar to Coinbase, ensuring the entire trading chain is legal, public, and traceable.
The black-and-white division of Bitcoin will be completely delineated by ETFs:
The current white part: Under the framework of centralized regulation, through extensive financial products derivatives, market price volatility is reduced, and as legitimate participants become more widespread, the speculative volatility of Bitcoin commodities will gradually decrease. After Bitcoin goes through ETFs, the white part in the market's supply-demand relationship has already lost its important demand side (the decentralization and anonymity attributes of Bitcoin), leaving only the single financial attribute for speculative trading. Simultaneously, under the legalization regulatory framework, it also means that more taxes must be paid, which negates Bitcoin's original functions of asset transfer and tax evasion. That is, endorsement has shifted from a decentralized chain to a centralized government.
The once black part: The major reason for the crypto market's volatility lies in its opacity and anonymity, making it susceptible to manipulation. At the same time, the black part of the market will be more open, possessing more intrinsic value vitality from blockchain, leading to more trading opportunities. However, due to the emergence of the white part, those unwilling to transition to the white part will forever be excluded from the centralized regulatory framework and lose pricing power, akin to paying fines to the SEC.
II. Trump's Crypto All-Star Cabinet Candidates
2.1 Cabinet Candidates
In the 2024 U.S. presidential election, Trump's victory may lead to a more developed attitude towards cryptocurrency holdings compared to the restrictive policies of regulatory agencies like the SEC, Federal Reserve, and FDIC during the Biden administration. According to Chaos Labs data, the content of Trump's new government cabinet nominations is as follows:
Source: @chaos_labs
Howard Lutnick (Transition Team Leader and Commerce Secretary Nominee): Lutnick, as CEO of Cantor Fitzgerald, openly supports cryptocurrency. His company actively explores the fields of blockchain and digital assets, including strategic investment in Tether.
Scott Bessent (Treasury Secretary Nominee): Bessent is a seasoned hedge fund manager, supports cryptocurrency, and believes it represents freedom and will exist long-term. He is more friendly towards cryptocurrency than former Treasury Secretary nominee Paulson.
Tulsi Gabbard (Director of National Intelligence Nominee): Gabbard emphasizes privacy and decentralization, supports Bitcoin, and invested in Ethereum and Litecoin in 2017.
Robert F. Kennedy Jr. (Secretary of Health and Human Services Nominee): Kennedy publicly supports Bitcoin and sees it as a tool against the devaluation of fiat currency, potentially becoming an ally of the crypto industry.
Pam Bondi (Attorney General Nominee): Bondi has not made a clear statement regarding cryptocurrency, and her policy direction remains unclear.
Michael Waltz (National Security Advisor Nominee): Waltz actively supports cryptocurrency, emphasizing its role in enhancing economic competitiveness and technological independence.
Brendan Carr (FCC Chairman Nominee): Carr is known for his anti-censorship stance and support for technological innovation, which may provide technical infrastructure support for the crypto industry.
Hester Peirce & Mark Uyeda (Potential SEC Chair Candidates): Peirce is a strong supporter of cryptocurrency, advocating for regulatory clarity. Uyeda criticizes the SEC's hardline stance on cryptocurrencies and calls for clear regulatory rules.
2.2 Crypto-Friendly Policies as Financial Tools to Hedge Against Insufficient Trust in the Dollar as a Global Reserve Currency
Will the future promotion of Bitcoin by the White House shake people's trust in the U.S. dollar as the global reserve currency, thereby weakening the dollar's position? U.S. scholar Vitaliy Katsenelson proposed that at a time when market sentiment towards the dollar has already been disturbed, the White House's promotion of Bitcoin could undermine people's trust in the dollar as the global reserve currency, thereby weakening its position. Regarding current fiscal challenges, "What can truly keep America great is not Bitcoin, but controlling debt and deficits."
Perhaps Trump's actions may become a hedge against the risk of the U.S. government losing its dominant position over the dollar. In the context of economic globalization, all countries hope to achieve the international circulation, reserve, and settlement of their national fiat currency. However, in this issue, there is a trilemma involving currency sovereignty, free capital flow, and fixed exchange rates. The significant value of Bitcoin lies in providing a new solution for national institutional contradictions and economic sanctions in the backdrop of economic globalization.
Source: @realDonaldTrump
On December 1, 2024, Trump stated on social platform X that the era of BRICS countries attempting to detach from the dollar has ended. He demanded that these countries commit to not creating a new BRICS currency and not supporting any other currency that could replace the dollar, or face 100% tariffs and lose access to the U.S. market.
Today's Trump seems to be holding onto the dollar's supremacy with one hand while grasping Bitcoin—the strongest weapon against the loss of trust in national fiat currencies—with the other, reinforcing both the dollar's international settlement rights and the pricing power in the crypto market.
III. MicroStrategy and Citron Capital's Long/Short Battle
On November 21, during the U.S. stock trading session, the well-known short-selling firm Citron Research posted on social platform X that it plans to short "Bitcoin-heavy stock" MicroStrategy (MSTR), causing a significant drop in MicroStrategy's stock price, which at one point corrected more than 21% from its intraday high.
The next day, MicroStrategy Executive Chairman Michael Saylor responded in a CNBC interview, stating that the company profits not only from trading on Bitcoin's volatility but also leverages the ATM mechanism to invest in Bitcoin. Therefore, as long as Bitcoin prices continue to rise, the company can remain profitable.
Source: @CitronResearch
Overall, the stock premium of MicroStrategy (MSTR) and its strategy to profit through the ATM (At The Market) mechanism, along with the 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 MSTR's stock has become a substitute investment for Bitcoin, and the stock price has an unreasonable premium compared to Bitcoin, leading them to decide to short MSTR. However, Michael Saylor rebutted this view, arguing that the shorts overlook MSTR's important profit model.
MicroStrategy's Leverage Operations:
Leverage and Bitcoin Investment: Saylor pointed out that MSTR relies on Bitcoin's volatility to profit by leveraging investments through debt issuance and financing. The company flexibly raises funds through the ATM mechanism to avoid discounted issuance in traditional financing, while using high trading volumes to achieve large-scale stock sales and gain 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 onto common stock. By doing so, the company can achieve returns far exceeding borrowing costs and Bitcoin price increases. For example, Saylor pointed out that by financing Bitcoin investments at a 6% interest rate, 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 to achieve earnings of $125 per share over 10 years. If Bitcoin prices continue to rise, Saylor predicts the company's long-term returns will be substantial. For instance, two weeks ago, MSTR financed $4.6 billion through the ATM mechanism at a 70% premium, earning $3 billion in Bitcoin in five days, equivalent to $12.5 per share, with expected long-term returns reaching $33.6 billion.
The Risks of Bitcoin Decline:
Saylor believes that buying MSTR stock means investors have accepted the risk of Bitcoin price declines. To achieve high returns, one must bear corresponding risks. He expects Bitcoin to rise by 29% each year in the future, while MSTR's stock price will rise by 60% each year.
MSTR's Market Performance:
Since the beginning of this year, MSTR's stock price has increased by 516%, far exceeding Bitcoin's 132% increase during the same period, and even surpassing AI leader Nvidia's 195% increase. Saylor believes MSTR has become one of the fastest-growing and most profitable companies in the U.S.
Regarding Citron's short position, MSTR's CEO stated that Citron does not understand where MSTR's premium relative to Bitcoin comes from and explained:
"If we finance Bitcoin investments at a 6% interest rate, when Bitcoin prices rise by 30%, what we actually get is an 80% Bitcoin price differential (a function of combined stock premiums, conversion premiums, and Bitcoin premiums)."
"The company issued $3 billion in convertible bonds, which, based on an 80% Bitcoin price differential, could yield $125 per share in returns over 10 years."
This means that as long as the price of Bitcoin continues to rise, the company can continue to profit:
"Two weeks ago, we did $4.6 billion in ATM and traded at a 70% premium, which means we made $3 billion in Bitcoin in five days. About $12.5 per share. If calculated over 10 years, the returns will reach $33.6 billion, approximately $150 per share."
In summary, MicroStrategy's operational model achieves efficient arbitrage among stocks, bonds, and Bitcoin through structured capital design, tightly binding its stock price fluctuations to Bitcoin's price changes to ensure the company's low-risk profitability over the long term. However, the essence of MicroStrategy is in issuing infinite debt, raising its value with infinite leverage, which requires a prolonged Bitcoin bull market to sustain that value. Undoubtedly, Citron's short of MicroStrategy has a much greater payout than shorting Bitcoin directly, so MicroStrategy is also confident that the future price direction of Bitcoin will be a slow upward trend without large fluctuations.
IV. Summary
Source: Tradesanta
The U.S. is continually strengthening its control over the crypto industry, and market opportunities are increasingly shifting towards centralization. The decentralized crypto utopia is gradually compromising and "handing over" power. While ETFs pouring in are like pain relief capsules that can't cure the disease, they still pose a risk.
In the long run, Bitcoin through ETFs is not necessarily favorable; the trading volume of Bitcoin ETFs in Hong Kong is significantly lower than that in the U.S. According to the circulation volume of capital, U.S. capital is gradually coercing the crypto market. Even though China leads absolutely in the mining sector, it still lags in capital markets and policy direction. Perhaps the long-term impact of Bitcoin ETFs will accelerate the normalization of crypto asset trading, which is both a beginning and an end.
Reference Content: Fu Peng: Let's Talk About the SEC and Bitcoin ETF - Clearly Centralized
