Original author: YBB Capital Researcher Ac-Core
TL;DR
In the long run, Bitcoin through ETFs is not a benefit; there is a huge gap between the trading volume of Hong Kong Bitcoin ETFs and U.S. Bitcoin ETFs. There is no doubt that American capital is gradually entangling the crypto market. Bitcoin ETFs divide the market into black and white parts, where the white part only retains a single financial attribute of speculative trading under the centralized financial regulatory framework, while the black part has more native blockchain vitality and trading opportunities but faces regulatory pressure due to being 'not legal.'
MicroStrategy achieves efficient arbitrage among stocks, bonds, and Bitcoin through capital structure design, closely linking its stock price with Bitcoin price fluctuations to realize relatively low-risk returns over the long term. However, MicroStrategy is engaging in unlimited bond issuance to raise its value with unlimited leverage, which requires a prolonged Bitcoin bull market to maintain its value. Thus, Citron's short-sell odds against MicroStrategy are higher than those against Bitcoin, but MicroStrategy is confident that Bitcoin's price trajectory will show slow steady increases without significant fluctuations.
Trump's crypto-friendly policies 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 holds the dominance of the dollar in his left hand without compromise, while in his right hand he clings to Bitcoin, the strongest weapon against the loss of trust in national fiat currency, simultaneously consolidating and hedging risks.
1. The gradual entanglement of U.S. capital in 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 Bitcoins away from surpassing Satoshi Nakamoto, with holdings of 1,083,000 and 1,096,000 respectively. The total net asset value of U.S. Bitcoin spot ETFs reaches $103.91 billion, accounting for 5.49% of the total Bitcoin market capitalization. Meanwhile, according to a December 3 report by Aastocks, 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.
Image source data: Glassnode
American capital is deeply intervening and influencing the global crypto market, even dominating the development of the crypto industry. ETFs have pushed Bitcoin from an alternative asset into a mainstream asset, but they have also weakened Bitcoin's decentralized nature. ETFs have brought a large influx of traditional capital, but have also firmly placed Bitcoin's pricing power under Wall Street's control.
1.2 The 'black and white division' of Bitcoin ETFs
Classifying Bitcoin as a commodity means it must follow the same rules as other commodities like stocks and bonds under tax law. However, the impact of launching a Bitcoin ETF is not entirely equivalent to the launch of other commodity ETFs, such as gold ETFs, silver ETFs, and oil ETFs. Currently approved or authorized Bitcoin ETFs differ from the market's recognition of Bitcoin itself:
The path to commodity ETF transformation is akin to a person (the trustee) holding physical assets or commodities in their left hand needing to have them custodied by an intermediary (like a warehouse for copper and a bank vault for gold) while authorized institutions complete transfers and records. The right hand will have share holders buying and selling shares after initiating shares (like fund shares).
However, in the aforementioned process, the front end (design, development, sales, and after-sales service, etc.) will involve physical delivery, spot delivery, and cash settlement. But currently, the front end of the Bitcoin ETFs approved by the U.S. SEC (the share subscription and redemption stages) is a cash settlement method, which is also the point that Cathie Wood (Wood Sister) has been arguing about and hopes to achieve physical delivery, but this is practically impossible.
Since cash custodians in the United States are institutions operating under traditional centralized financial frameworks for cash subscription and redemption transactions, this also means that the first half of the Bitcoin ETF is completely centralized.
At the end of the Bitcoin ETF, it is difficult to confirm a centralized regulatory framework. The reason is that to recognize Bitcoin, it needs to become a commodity under the existing centralized financial framework, and it will never recognize Bitcoin's non-replaceable fiat currency, non-traceable, and other decentralized attributes. Therefore, Bitcoin can only engage in various financial derivative products, such as futures, options, and ETFs, under fully compliant regulatory conditions.
Therefore, the emergence of Bitcoin ETFs means a complete failure of the Bitcoin ETF's part to counter fiat currency, and the decentralization of the Bitcoin ETF part is meaningless; the front end must completely rely on the legitimacy of custodians like Coinbase, ensuring the entire buying and selling transaction chain is legal, public, and traceable.
The black and white of Bitcoin will be completely divided due to ETFs:
The current white part: Under the centralized regulatory framework, the extensive derivation of financial products reduces price volatility in the market, 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 and demand relationship has lost its important demand side (the decentralization and anonymity attributes of Bitcoin), leaving only a single speculative trading financial attribute. At the same time, under the legalized regulatory framework, it also means that more taxes must be paid, rendering Bitcoin's original functions of transferring assets and tax evasion obsolete, effectively shifting endorsement from decentralized chains to centralized governments.
The once black part: The main reason why the crypto market experiences extreme volatility is its opacity and anonymity characteristics, making it susceptible to manipulation. At the same time, the black part of the market is also more open, possessing more native value vitality from blockchain and offering more trading opportunities. However, due to the emergence of the white part, those unwilling to transition to white will forever be excluded from the centralized regulatory framework and lose pricing power, akin to paying fines to the SEC.
2. Trump's Crypto All-Star Cabinet Candidates
2.1 Cabinet Candidates
In the 2024 U.S. presidential election, Trump's victory compared to the restrictive policies of regulatory agencies like the SEC, Federal Reserve, and FDIC under the Biden administration might lead the U.S. government to adopt a more developed stance towards crypto. According to Chaos Labs data, the nominations for Trump's new government cabinet are as follows:
Image source: @chaos_labs
Howard Lutnick (Transition Team Leader and Commerce Secretary Nominee): Lutnick, as CEO of Cantor Fitzgerald, publicly supports cryptocurrencies. His company actively explores the blockchain and digital asset space, including strategic investments in Tether.
Scott Bessent (Treasury Secretary Nominee): Bessent is a seasoned hedge fund manager, supports cryptocurrencies, and believes they represent freedom and will endure long-term. He is more favorable towards cryptocurrencies than former Treasury Secretary candidate Paulson.
Tulsi Gabbard (Director of National Intelligence Nominee): Gabbard, with a focus on 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, viewing it as a tool against the depreciation of fiat currency, potentially becoming an ally of the crypto industry.
Pam Bondi (Attorney General Nominee): Bondi has not made a clear statement on cryptocurrencies, and her policy direction remains unclear.
Michael Waltz (National Security Advisor Nominee): Waltz actively supports cryptocurrencies, emphasizing their 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, potentially providing technical infrastructure support for the crypto industry.
Hester Peirce Mark Uyeda (Potential SEC Chair Candidates): Peirce is a strong supporter of cryptocurrencies and advocates for clearer regulation. Uyeda criticizes the SEC's tough stance on cryptocurrencies and calls for clear regulatory rules.
2.2 Crypto-Friendly Policies as Financial Tools to Hedge Against Insufficient Trust in Dollar as Global Reserve
Will the future promotion of Bitcoin by the White House shake people's trust in the dollar as a global reserve currency, thereby weakening the dollar's position? American 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 shake people's trust in the dollar as a global reserve currency, weakening its position. As for the current fiscal challenges, 'what truly can 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 in the dollar. In the context of economic globalization, all countries aspire to realize the international circulation, reserve, and settlement of their national fiat currencies. However, in this issue, there exists a trilemma among monetary sovereignty, the free flow of capital, and fixed exchange rates. The significant value of Bitcoin is that it provides a new solution to the contradictions of national systems and economic sanctions in the context of economic globalization.
Image source: @realDonaldTrump
On December 1, 2024, Trump stated on social platform X that the era of BRICS countries trying to decouple from the dollar is over. He demanded that these countries commit to not creating new BRICS currencies and not supporting any other currencies that could potentially replace the dollar, or face 100% tariffs and lose access to the U.S. market.
Today's Trump seems to hold the dominance of the dollar in his left hand without compromise, while in his right hand he clings to Bitcoin, the strongest weapon against the loss of trust in national fiat currency, simultaneously consolidating the international settlement power of the dollar and the pricing power of the crypto market.
3. The Long and Short Battle Between MicroStrategy and Citron Capital
During the U.S. stock trading session on November 21, the well-known short-selling firm Citron Research announced on social platform X that it planned to short 'Bitcoin-heavy stock' MicroStrategy (MSTR). This news caused a significant drop in MicroStrategy's stock price, which adjusted more than 21% from its intraday high.
The next day, MicroStrategy Executive Chairman Michael Saylor responded in an interview with CNBC that the company not only profits from Bitcoin's volatility trading but also leverages investments in Bitcoin through the ATM mechanism. Therefore, as long as the Bitcoin price continues to rise, the company can remain profitable.
Image source: @CitronResearch
Overall, the stock premium of MicroStrategy (MSTR) and its strategy to achieve profits through the ATM (At The Market) mechanism, along with the leveraged operations in Bitcoin investment and the views of short-selling institutions, can be summarized as follows:
Source of stock premium:
The premium of MSTR mostly comes from the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment to Bitcoin, and that the stock price has shown an unreasonable premium compared to Bitcoin, leading to their decision to short MSTR. However, Michael Saylor countered this viewpoint, arguing that short-sellers overlook MSTR's important profit model.
MicroStrategy's leveraged operations:
Leverage and Bitcoin investment: Saylor pointed out that MSTR leverages its investment in Bitcoin through bond issuance and financing, relying on Bitcoin's volatility for profit. The company flexibly raises funds through the ATM mechanism to avoid discounted issuance in traditional financing while utilizing high trading volume to achieve large-scale stock sales, obtaining arbitrage opportunities from stock premiums.
The advantages of the ATM mechanism:
The ATM model allows MSTR to flexibly raise funds and transfer debt volatility, risks, and performance onto common stock. Through this operation, 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 company actually obtains a return of about 80%.
Specific profit case:
By issuing $3 billion in convertible bonds, the company expects an earnings per share of $125 within 10 years. If the Bitcoin price continues to rise, Saylor predicts that the company's long-term earnings 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 within five days, equivalent to $12.5 per share, with long-term earnings expected to reach $33.6 billion.
The risks of Bitcoin decline:
Saylor believes that buying MSTR stock means investors have accepted the risk of a decline in Bitcoin prices. To obtain high returns, one must take on corresponding risks. He predicts that Bitcoin will rise by 29% annually in the future, while MSTR's stock price will rise by 60% each year.
Market performance of MSTR:
Since the beginning of the year, MSTR's stock price has increased 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 America's fastest-growing and most profitable companies.
Regarding Citron's short-selling, MSTR CEO stated that Citron does not understand where the premium of MSTR relative to Bitcoin comes from and explained:
“If we invest in Bitcoin with financing at a 6% interest rate, when the Bitcoin price increases by 30%, what we actually get is an 80% Bitcoin price spread (a function of stock premium, conversion premium, and Bitcoin premium).”
“The company issued $3 billion in convertible bonds, calculating based on an 80% Bitcoin price spread, that this $3 billion investment could bring $125 of earnings per share within 10 years.”
This means that as long as the Bitcoin price continues to rise, the company can continue to profit:
“Two weeks ago, we made $4.6 billion through the ATM, trading at a 70% price spread, meaning we earned $3 billion in Bitcoin within five days. Approximately $12.5 per share. If calculated over 10 years, the profit will reach $33.6 billion, equivalent to about $150 per share.”
In summary, MicroStrategy's operational model achieves efficient arbitrage among stocks, bonds, and Bitcoin through structured capital design, closely linking its stock price with Bitcoin price fluctuations to ensure low-risk profits over the long term. However, MicroStrategy's essence is engaging in unlimited bond issuance with unlimited leverage, requiring a long-term Bitcoin bull market to maintain its value. Undoubtedly, Citron's short-sell odds against MicroStrategy are far greater than those against Bitcoin, so MicroStrategy is also confident that Bitcoin's price trajectory will show slow steady increases without significant fluctuations.
4. Conclusion
Image source: Tradesanta
The U.S. is continually strengthening its control over the crypto industry, and market opportunities are increasingly shifting toward centralization, while the decentralized crypto utopia is gradually compromising and 'surrendering' power. Like a drug with side effects, the inflow of funds into ETFs merely serves as a palliative without a cure.
In the long run, Bitcoin through ETFs is not a benefit; there is a huge gap between the trading volume of Hong Kong Bitcoin ETFs and U.S. Bitcoin ETFs. Undoubtedly, American capital is gradually entangling the crypto market. Currently, even though China holds an absolute leadership position in mining, 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; this is both a beginning and an end.
Reference: Fu Peng: Discussing SEC and Bitcoin ETF - Clear Division of Centralization and Decentralization
