TL; DR
In the long run, Bitcoin through ETFs is not favorable. The trading volume of Hong Kong's Bitcoin ETFs shows a significant gap compared to that of the U.S. Bitcoin ETFs. Undoubtedly, U.S. capital is gradually engulfing the crypto market. Bitcoin ETFs divide the market into black and white parts; the white part remains merely speculative trading in the centralized financial regulatory framework, while the black part has more inherent blockchain activity and trading opportunities but faces regulatory pressure due to its 'illegality.'
MicroStrategy has achieved efficient arbitrage between stocks, bonds, and Bitcoin through capital structure design, closely linking its stock with Bitcoin price fluctuations, thus achieving lower-risk returns in the long term. However, MicroStrategy is issuing unlimited debt to elevate its value, which requires a long-term Bitcoin bull market to maintain its value. Therefore, Citron's shorting of MicroStrategy has a higher odds ratio than directly shorting Bitcoin, but MicroStrategy is confident that the future price of Bitcoin will show slow upward trends without significant volatility.
Trump's crypto-friendly policies will not only maintain the dollar's status as the global reserve currency but also strengthen the dollar's pricing power in the crypto market. Trump firmly holds onto the dominant position of the dollar with one hand while not letting go of Bitcoin, the strongest weapon against the loss of trust in national fiat currency, consolidating and hedging risks in both directions.
01
U.S. capital is gradually engulfing the crypto market.
1) Data on Hong Kong and U.S. ETFs
According to Glassnode data on December 3, 2024, the holdings of the U.S. Bitcoin spot ETF are only 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 the U.S. Bitcoin spot ETF reaches $10.39 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 was about HKD 1.2 billion in November.
Source of data: Glassnode
U.S. capital is deeply involved in and influencing the global crypto market, even dominating the development of the crypto industry. ETFs have transformed Bitcoin from an alternative asset into a mainstream asset, but they have also weakened Bitcoin's decentralization characteristics. ETFs have led to a large influx of traditional capital, yet Bitcoin's pricing power is firmly controlled by Wall Street.
2) The 'black and white division' of Bitcoin ETFs
Characterizing 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 Bitcoin ETFs is not completely equivalent to launching other commodity ETFs, such as gold ETFs, silver ETFs, and crude oil ETFs. The currently approved or authorized Bitcoin ETFs differ from the market's recognition of Bitcoin itself:
The path to commodity ETFization is like a person holding physical assets or commodities in the left hand (trustee) needing to have them custodied by an intermediary (like a copper warehouse and a gold bank vault), and needing authorized institutions to complete transfers, records, etc. On the right hand, after initiating shares (such as fund shares), there will be shareholders to buy and sell subscriptions using funds to purchase shares.
But in the above process, the front end (design, development, sales, and after-sales service, etc.) will involve physical delivery, spot delivery, and cash settlement. However, the current Bitcoin ETF approved by the SEC in the United States uses cash settlement for the front end (the subscription and redemption of shares), 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.
Because the cash custodians in the United States are institutions operating under the traditional centralized financial framework for cash subscription and redemption transactions, this means that the first half of the Bitcoin ETF is completely centralized.
At the end of the Bitcoin ETF, the centralized regulatory framework is difficult to confirm. The reason is that to recognize Bitcoin, it must become a commodity under the existing centralized financial framework and will never recognize Bitcoin's decentralized attributes such as substitutability for fiat currency and non-traceability. Therefore, Bitcoin can only engage in various financial products derivatives such as futures, options, and ETFs when fully compliant with regulations.
So the emergence of Bitcoin ETFs signifies the complete failure of Bitcoin ETFs in partially countering fiat currency. The decentralization aspect of Bitcoin ETFs has become meaningless, as the front end must completely rely on the legality of custodians like Coinbase, ensuring that the entire buying and selling transaction chain is legal, public, and traceable.
The black and white of Bitcoin will be thoroughly divided due to ETFs:
The current white portion: Under the centralized regulatory framework, through extensive financial products derivatives, market price fluctuations are reduced, and as legal 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 of Bitcoin), leaving only a single speculative trading financial attribute. At the same time, under the legalized regulatory framework, this also means that more taxes need to be paid, rendering Bitcoin's original asset transfer and tax evasion functions null and void. That is, the endorsement has shifted from decentralized chains to centralized governments.
The former black part: The main reason for the crypto market's volatility is its opacity and anonymity, which makes it susceptible to manipulation. At the same time, the black market will be more open, with more inherent value and vitality of blockchain, and 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.
02
Trump's all-star cabinet nominees for crypto
1) Cabinet candidates
In the 2024 U.S. presidential election, Trump's victory could lead to a more developed attitude towards crypto holdings compared to the restrictive policies of regulatory agencies such as the SEC, Federal Reserve, and FDIC during the Biden administration. According to Chaos Labs data, the cabinet nomination content of Trump's new government is as follows:
Source of the image: @chaos_labs
Howard Lutnick (Transition Team Leader and Commerce Secretary nominee): Lutnick, as the CEO of Cantor Fitzgerald, publicly supports cryptocurrencies. His company actively explores blockchain and digital asset fields, including strategic investment in Tether.
Scott Bessent (Treasury Secretary nominee): Bessent is a senior hedge fund manager who supports cryptocurrencies, believing they represent freedom and will exist long-term. He is more favorable towards cryptocurrencies compared to former Treasury Secretary candidate Paulson.
Tulsi Gabbard (National Intelligence Director nominee): Gabbard centers her principles on privacy and decentralization, supports Bitcoin, and previously invested in Ethereum and Litecoin in 2017.
Robert F. Kennedy Jr. (Health and Human Services Secretary nominee): Kennedy publicly supports Bitcoin, viewing it as a tool against the devaluation of fiat currency and potentially becoming an ally in the crypto industry.
Pam Bondi (Attorney General nominee): Bondi has not made a clear statement on cryptocurrencies; 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 Chairman candidates): Peirce is a staunch supporter of cryptocurrencies, advocating for regulatory clarity. Uyeda criticizes the SEC's tough stance on cryptocurrencies and calls for clear regulatory rules.
2) Crypto-friendly policies are financial tools to hedge against the lack of trust in the dollar as a global reserve.
Will the White House's promotion of Bitcoin shake people's trust in the dollar as the global reserve currency, thereby weakening the dollar's position? U.S. scholar Vitaliy Katsenelson suggested that at a time when the market sentiment towards the dollar has 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. Regarding the current fiscal challenges, "what can truly keep the U.S. great is not Bitcoin, but controlling debt and deficits."
Perhaps Trump's actions may serve as a hedge against the risks of the U.S. government losing its dominant position over the dollar. In the context of economic globalization, all countries hope to achieve international circulation, reserve, and settlement of their own fiat currencies. However, in this issue, monetary sovereignty, capital freedom of movement, and fixed exchange rates face the trilemma. The significant value of Bitcoin is that it provides a new solution for national institutional conflicts and economic sanctions in the context of economic globalization.
Source of the image: @CitronResearch
Overall, MicroStrategy (MSTR)'s stock premium and its strategy to achieve profits through the ATM (At The Market) mechanism, the leveraged operations in Bitcoin investment, and the views of shorting institutions summarize as follows:
1) The source of stock premiums:
Most of MSTR's premium comes from the ATM mechanism. Citron Research believes MSTR's stock has become an alternative investment to Bitcoin and that its stock price has shown unreasonable premiums compared to Bitcoin, leading to their decision to short MSTR. However, Michael Saylor refuted this viewpoint, arguing that shorts overlook MSTR's significant profit model.
2) MicroStrategy's leveraged operations:
Leverage and Bitcoin investment: Saylor points out that MSTR invests in Bitcoin through debt 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 volumes to realize large-scale stock sales and gain arbitrage opportunities from stock premiums.
3) Advantages of the ATM mechanism:
The ATM model allows MSTR to flexibly raise funds and transfer the volatility, risks, and performance of debt to common stock. Through this operation, the company can achieve returns far exceeding borrowing costs and Bitcoin price increases. For example, Saylor points out that by financing at a 6% interest rate to invest in Bitcoin, if Bitcoin rises 30%, the company's actual return is about 80%.
4) Specific profit cases:
By issuing $3 billion in convertible bonds, the company expects to achieve earnings of $125 per share within 10 years. If Bitcoin prices continue to rise, Saylor predicts that the company's long-term earnings will be substantial. For instance, two weeks ago, MSTR raised $4.6 billion through the ATM mechanism, trading at a 70% premium, and earned $3 billion in Bitcoin within five days, equivalent to $12.5 per share, with long-term earnings expected to reach $33.6 billion.
5) The risk of Bitcoin decline:
Saylor believes that purchasing MSTR stock means investors have accepted the risk of a decline in Bitcoin prices. To achieve high returns, one must take on corresponding risks. He predicts that Bitcoin will rise 29% annually in the future, while MSTR's stock price will rise 60% per year.
6) MSTR's market performance:
Since the beginning of this year, MSTR's stock price has risen 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 the U.S.
Regarding Citron's shorting, MSTR CEO stated that Citron does not understand where MSTR's premium relative to Bitcoin comes from and explained:
"If we invest in Bitcoin with financing at a 6% interest rate, when Bitcoin prices rise by 30%, we are actually receiving an 80% premium on the Bitcoin price (a function of stock premiums, conversion premiums, and Bitcoin premiums)."
"The company issued $3 billion in convertible bonds, and according to the 80% Bitcoin price difference, this $3 billion investment could yield $125 per share in 10 years."
This means that as long as Bitcoin prices continue to rise, the company can keep making profits: "Two weeks ago, we did $4.6 billion in ATM transactions and traded at a 70% price difference, meaning we earned $3 billion in Bitcoin within five days, approximately $12.5 per share. If calculated over 10 years, profits will reach $33.6 billion, about $150 per share."
In summary, MicroStrategy's operational model has achieved efficient arbitrage between stocks, bonds, and Bitcoin through structured capital design, tightly binding its stock to Bitcoin price fluctuations to ensure low-risk profits for the company over the long term. However, the essence of MicroStrategy lies in issuing unlimited debt and using limitless leverage to elevate its value, which requires a long-term Bitcoin bull market to maintain its value. Undoubtedly, Citron's shorting of MicroStrategy has a higher odds ratio than shorting Bitcoin directly, thus MicroStrategy is also confident that the future price of Bitcoin will show a slow upward trend without significant volatility.
03
Summary
Source of the image: Tradesanta
The U.S. is continuously strengthening its control over the crypto industry, and market opportunities are gradually shifting towards centralization. The decentralized crypto utopia is gradually compromising towards centralization and handing over power. A cure may be poison; the funds continuously pouring into ETFs are merely palliative capsules that cannot cure the disease.
In the long run, Bitcoin through ETFs is not favorable. The trading volume of Hong Kong's Bitcoin ETFs shows a huge gap compared to that of the U.S. Bitcoin ETFs. Currently, U.S. capital is gradually engulfing the crypto market. Even though China is an absolute leader in the mining field, it still holds a disadvantage 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.
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
Original author: YBB Capital
Original link: https://medium.com/ybbcapital/the-demise-of-decentralization-and-the-consolidation-of-power-u-s-b5086ec57be4
