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 term, investing in Bitcoin through ETFs may not be beneficial. The trading volume of Bitcoin ETFs in Hong Kong is far lower than in the US. Undoubtedly, US capital is gradually taking control of the cryptocurrency market. Bitcoin ETFs will divide the market into two parts: the 'white market' operating under centralized financial regulation and limited to speculative trading, and the 'black market' retaining original blockchain activities and trading opportunities but facing regulatory pressure for being 'illegal.'
MicroStrategy has achieved efficient arbitrage between stocks, bonds, and Bitcoin through its capital structure design. It closely ties stock and Bitcoin price volatility to obtain long-term low-risk returns. However, MicroStrategy raises its value through unlimited debt issuance, which requires a long-term Bitcoin bull market to maintain. Therefore, the success rate of Citron Research shorting MicroStrategy is higher than directly shorting Bitcoin, even though MicroStrategy bets that Bitcoin prices will grow slowly and steadily without large fluctuations.
Trump's cryptocurrency-friendly policies will not only maintain the dollar's status as a global reserve currency but will also strengthen the dollar's dominant position in cryptocurrency pricing. Trump holds the hegemony of the dollar in one hand and Bitcoin in the other—the most powerful weapon against loss of trust in fiat currency—strengthening both while hedging risks.
1. US capital gradually enters the cryptocurrency market
1.1 Hong Kong and US ETF data
According to Glassnode data on December 3, 2024, the holdings of the US Bitcoin spot ETF are just 13,000 BTC short of surpassing those of Satoshi Nakamoto, with 1.083 million BTC and 1.096 million BTC respectively. The total net asset value of the US Bitcoin spot ETF reached $10.391 billion, accounting for 5.49% of Bitcoin's total market capitalization. Meanwhile, according to a report from Aastocks on December 3, the total trading volume of three Bitcoin spot ETFs in Hong Kong in November was about 1.2 billion HKD.
Source: Glassnode
US capital is deeply involved in and influencing the global cryptocurrency market, even dominating its development. Bitcoin ETFs have turned Bitcoin from an alternative asset into a mainstream asset, but have also weakened Bitcoin's decentralized characteristics. ETFs promote the influx of traditional capital, firmly putting Wall Street in control of Bitcoin's pricing.
1.2 Bitcoin ETF: Clearly Distinct
Classifying Bitcoin as a commodity means it must adhere to the same tax regulations as stocks, bonds, and other commodities. However, the impact of Bitcoin ETFs is not entirely the same as that of other commodity ETFs like gold, silver, and oil. Currently approved or proposed Bitcoin ETFs have different levels of recognition for Bitcoin:
1. The commodity ETF path involves holding physical assets (e.g., copper warehouses or gold bank vaults), with authorized entities handling transfers and records. Investors purchase shares (e.g., fund shares) to buy or redeem based on the fund.
However, regarding Bitcoin ETFs, the process of buying and redeeming shares is conducted through cash settlement, which is a point of contention for those like Cathie Wood who hope for physical settlement. However, this is practically impossible since US custodians are centralized financial institutions handling cash transactions. This makes the early stages of Bitcoin ETFs completely 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 a centralized regulatory framework, it must give up its decentralized characteristics, such as being able to replace fiat currency or being untraceable. Therefore, Bitcoin can only become part of financial products like futures, options, and ETFs when it meets regulatory standards.
The emergence of Bitcoin ETFs marks a complete failure of Bitcoin ETFs in countering fiat currency, and the decentralization of Bitcoin ETFs has become meaningless, relying entirely on the legitimacy and custody of platforms like Coinbase to ensure the legality, transparency, and traceability of the entire trading chain.
The ETF has caused a split between the 'black' and 'white' parts of Bitcoin:
White part: Under a centralized regulatory framework, the widespread creation of financialized products reduces market price volatility, and as legitimate participants increase, the speculative volatility of Bitcoin commodities will gradually decrease. After Bitcoin becomes an ETF, the critical demand factor (the decentralization and anonymity of Bitcoin) in the supply-demand relationship in the white part is lost, leaving only the speculative trading financial properties. 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 part: The main reason for the extreme volatility of the cryptocurrency market lies in its opacity and anonymity, making it easily manipulatable. At the same time, the black part of the market still retains a high level of openness, preserving the intrinsic value vitality of the blockchain, with more trading opportunities. However, with the emergence of the white part of the 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 US presidential election, compared to the restrictive policies of regulatory agencies like the SEC, Federal Reserve, and FDIC during the Biden administration, indicates that the new US government may adopt a more aggressive stance towards cryptocurrency. According to data from Chaos Labs, here are the key cabinet nominations of Trump's new government:
Source: @chaos_labs
Howard Lutnick (Secretary of Commerce nominee and transition team leader): Cantor Fitzgerald CEO Howard Lutnick is a vocal supporter of cryptocurrency. His company is actively exploring blockchain and digital asset fields, including a strategic investment in Tether.
Scott Bessent (Treasury Secretary nominee): Bessent is a veteran hedge fund manager who supports cryptocurrency, believing it represents freedom and will exist long-term. He is more supportive of cryptocurrency than former Treasury Secretary nominee Paulson.
Tulsi Gabbard (Director of National Intelligence nominee): Gabbard advocates for 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 is a public advocate for Bitcoin, viewing it as a tool against fiat currency depreciation and a potential ally in the cryptocurrency industry.
Pam Bondi (Attorney General nominee): Bondi has not made a clear statement on cryptocurrency, and her policy stance remains unclear.
Michael Waltz (National Security Advisor nominee): Waltz is a strong supporter of cryptocurrency, emphasizing its role in enhancing economic competitiveness and technological independence.
Brendan Carr (FCC Chairman candidate): Carr is known for opposing censorship and supporting technological innovation, potentially providing infrastructure support for the cryptocurrency industry.
Hester Peirce and Mark Uyeda (potential candidates for SEC Chairman): Peirce is a strong supporter of cryptocurrency, advocating for clearer regulations. Uyeda criticizes the SEC's tough stance on cryptocurrency, 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's promotion of Bitcoin shake people's confidence in the dollar as the global reserve currency, thereby weakening the dollar's position? American scholar Vitaliy Katsenelson believes that given the disrupted market sentiment surrounding the dollar, the White House's promotion of Bitcoin may indeed weaken people's confidence in the dollar's status as a global reserve currency, thus undermining the dollar's influence. Regarding current fiscal challenges, Katsenelson believes, "What truly keeps America strong is not Bitcoin, but controlling debt and deficits."
Perhaps, Trump's move could become a means to hedge against the risk of losing the dollar's dominant position. In the context of economic globalization, countries are striving for the international circulation, reserve, and settlement of their currencies, but the dilemma lies in the impossible trinity of monetary sovereignty, free capital movement, and fixed exchange rates. The significant value of Bitcoin lies in its provision of new solutions for national institutional contradictions and economic sanctions in the context of economic globalization.
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 US dollar has ended. He demanded these countries commit to not creating a new BRICS currency and not supporting any other currency that could replace the dollar, or they would face a 100% tariff and lose access to the US market.
Trump now seems to hold the hegemony of the dollar in one hand and Bitcoin in the other— the most powerful tool against declining trust in national fiat currencies. By doing so, he simultaneously consolidates the global settlement power of the dollar and the pricing power of the cryptocurrency market.
3. The tug-of-war between MicroStrategy and Citron Research
On November 21, during US stock trading, the well-known short-selling agency Citron Research announced on social media platform X its plan to short 'Bitcoin-heavy stock' MicroStrategy (MSTR). This news caused MicroStrategy's stock price to plummet significantly, 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 profits not only from Bitcoin's volatility but also invests 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, MicroStrategy's stock premium, leveraged Bitcoin investment strategy through the ATM mechanism, and the views of short-sellers can be summarized as follows:
1. Source of stock premium: A large part of MSTR's premium comes from the ATM mechanism. Citron Research believes that 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, stating 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 investment through bond issuance, profiting from Bitcoin's volatility. The company flexibly raises funds through the ATM mechanism, avoiding discounted issuance of traditional financing methods, while executing large-scale stock sell-offs utilizing 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, transferring the volatility, risks, and performance of debt to common stock. Through this operation, the company can obtain returns far exceeding borrowing costs and the gains from rising Bitcoin prices. For example, Saylor pointed out that by financing Bitcoin investments at a 6% interest rate, if Bitcoin rises by 30%, the company will actually achieve 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 considerable long-term profits. For instance, two weeks ago, MSTR raised $4.6 billion through the ATM mechanism at a trading premium of 70%, earning $3 billion worth of Bitcoin in five days, equivalent to about $12.5 per share. Long-term earnings are expected to reach $33.6 billion.
5. The risk of Bitcoin price decline: Saylor believes that purchasing MSTR stock means investors accept the risk of Bitcoin price declines. To achieve high returns, corresponding risks must be taken. He expects Bitcoin to 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 surged 516%, far exceeding Bitcoin's 132% increase during the same period, and even outpacing AI leader Nvidia's 195% rise. Saylor believes MSTR has become one of the fastest-growing and most profitable companies in the US.
In response to Citron's short-selling actions, MSTR CEO Michael Saylor stated that Citron does not understand where MSTR's premium relative to Bitcoin comes from and explained:
"If we fund Bitcoin investments at a 6% interest rate, and Bitcoin rises by 30%, then the actual profit we earn is an 80% Bitcoin spread (function of stock premium, conversion premium, and Bitcoin premium)."
"MicroStrategy issued $3 billion in convertible bonds, calculating that this $3 billion investment will generate $125 per share in earnings over 10 years based on an 80% Bitcoin spread."
This means that as long as Bitcoin's price continues to rise, MicroStrategy can remain profitable:
"Two weeks ago, we completed $4.6 billion in ATM transactions, at a 70% premium. This means we made $3 billion worth of Bitcoin in five days, about $12.5 per share. If we predict returns will reach $33.6 billion in 10 years, or about $150 per share."
In summary, MicroStrategy's operational model is to efficiently build capital, arbitraging between stocks, bonds, and Bitcoin, closely linking its stock price to Bitcoin price fluctuations to ensure long-term low-risk profits. However, the essence of MicroStrategy lies in its ability to issue unlimited debt and use unlimited leverage to boost its own value. This requires a long-term Bitcoin bull market to maintain its value. Nevertheless, Citron's short position on MicroStrategy has a much higher success rate than shorting Bitcoin, and MicroStrategy still believes that Bitcoin's price will continue to grow steadily and slowly without major fluctuations.
4. Conclusion
Source: Tradesanta
The US is continuously strengthening its control over the cryptocurrency industry, with market opportunities gradually shifting towards centralization, and the decentralized crypto utopia is slowly compromising, with power being 'transferred' to the central government. Any drug has side effects; the influx of funds into ETFs is merely a temporary relief, like a painkiller that cannot cure the underlying disease.
In the long run, promoting Bitcoin through ETFs may not necessarily be a good thing, as the trading volume of Bitcoin ETFs in Hong Kong is significantly lower than in the US. From the perspective of capital flow, US capital is gradually dominating the cryptocurrency market. Currently, while China leads in Bitcoin mining, it is still at a disadvantage in capital markets and policy direction. Perhaps in the future, the long-term impact of Bitcoin ETFs will accelerate the normalization of cryptocurrency trading, but this is both a beginning and an end.
