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 run, investing in Bitcoin through ETFs may not be profitable. The trading volume of Bitcoin ETFs in Hong Kong is far lower than that in the U.S. Undoubtedly, U.S. capital is gradually taking control of the crypto market. Bitcoin ETFs will divide the market into two parts: the "white market" operating under centralized financial regulation, limited to speculative trading, and the "black market" retaining native blockchain activities and trading opportunities but facing regulatory pressure due to being "illegal."
MicroStrategy has achieved efficient arbitrage between stocks, bonds, and Bitcoin through its capital structure design. It closely associates stock and Bitcoin price fluctuations to obtain long-term low-risk returns. However, MicroStrategy's use of unlimited debt issuance to elevate its value requires a long-term Bitcoin bull market to sustain. Thus, Citron Research's success rate in shorting MicroStrategy is higher than directly shorting Bitcoin, even though MicroStrategy bets that Bitcoin prices will grow slowly and steadily without significant fluctuations.
Trump's cryptocurrency-friendly policies will not only maintain the dollar's status as the global reserve currency but also strengthen the dollar's dominant position in cryptocurrency pricing. Trump holds the dollar hegemony in one hand and Bitcoin in the other—a powerful weapon against the loss of trust in fiat currency, simultaneously strengthening both and hedging risks.
1. U.S. capital gradually entering the cryptocurrency 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 BTC short of surpassing Satoshi Nakamoto's holdings, with 1,083,000 BTC and 1,096,000 BTC respectively, and the total net asset value of U.S. Bitcoin spot ETFs has reached $10.391 billion, accounting for 5.49% of Bitcoin's total market value. 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 HK$1.2 billion.
Source: Glassnode
U.S. capital is deeply involved in and influencing the global crypto market, even dominating its development. Bitcoin ETFs have transformed Bitcoin from an alternative asset into a mainstream asset, but have also weakened Bitcoin's decentralized characteristics. ETFs have driven the influx of traditional capital, firmly placing Wall Street in control of Bitcoin's pricing power.
1.2 Bitcoin ETF: Clear Distinction
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 ETFs for other commodities like gold, silver, and oil. Currently, the approved or proposed Bitcoin ETFs vary in their recognition of Bitcoin:
1. The commodity ETF pathway involves holding physical assets (e.g., copper warehouses or gold bank vaults), managed by authorized institutions that handle transfers and records, with investors purchasing shares (e.g., fund shares) to buy or redeem based on the fund.
However, regarding Bitcoin ETFs, the process of purchasing and redeeming shares is conducted through cash settlement, which is a point of contention for those like Cathie Wood who wish to conduct physical settlements. However, this is practically impossible because the custodians in the U.S. are centralized financial institutions that handle 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 an alternative to fiat currency and being untraceable. Therefore, Bitcoin can only become part of financial products like futures, options, and ETFs if it meets regulatory standards.
The emergence of Bitcoin ETFs marks the complete failure of Bitcoin ETFs against fiat currency, as 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 transaction chain.
Due to the ETF, the "black" part of Bitcoin has split from the "white" part:
White Section: Under a centralized regulatory framework, the broad 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 white section of the supply-demand relationship loses the critical demand factor (Bitcoin's decentralization and anonymity), leaving only the speculative trading financial attributes. 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 Section: The extreme volatility of the cryptocurrency market is mainly due to its opacity and anonymity, making it highly susceptible to manipulation. At the same time, the black section of the market maintains a high level of openness, retaining the native value vitality of blockchain, with more trading opportunities. However, with the emergence of the white section market, those unwilling to transition to the white market will forever be excluded from the centralized regulatory framework and lose pricing power, similar to paying fines to the SEC.
2. Trump's Cryptocurrency-Friendly Cabinet Nominees
2.1 Cabinet Nominees
Trump's victory in the 2024 U.S. presidential election, compared to the restrictive policies of regulatory agencies like the SEC, the Federal Reserve, and the FDIC during the Biden administration, suggests that the new U.S. government may take a more aggressive stance towards cryptocurrencies. According to data from Chaos Labs, here are the key cabinet nominations of Trump's new government:
Source: @chaos_labs
Howard Lutnick (nominated Secretary of Commerce and head of the transition team): Cantor Fitzgerald CEO Howard Lutnick is a vocal supporter of cryptocurrencies. His company is actively exploring the blockchain and digital asset space, including strategic investments in Tether.
Scott Bessent (nominated Secretary of the Treasury): Bessent is an experienced hedge fund manager who supports cryptocurrencies, believing they represent freedom and will exist in the long term. He is more supportive of cryptocurrencies than former Secretary of the Treasury nominee Paulson.
Tulsi Gabbard (nominated Director of National Intelligence): Gabbard advocates for privacy and decentralization, supports Bitcoin, and invested in Ethereum and Litecoin in 2017.
Robert F. Kennedy Jr. (nominated Secretary of Health and Human Services): Kennedy is a public advocate for Bitcoin, viewing it as a tool against the depreciation of fiat currency and has the potential to be an ally in the cryptocurrency industry.
Pam Bondi (nominated Attorney General): Bondi has not made a clear statement on cryptocurrencies, and her policy stance remains unclear.
Michael Waltz (nominated National Security Advisor): Waltz is a strong supporter of cryptocurrencies, emphasizing their role in enhancing economic competitiveness and technological independence.
Brendan Carr (FCC Chairman nominee): Carr is known for opposing censorship and supporting technological innovation, potentially providing infrastructure support for the crypto industry.
Hester Peirce and Mark Uyeda (potential candidates for SEC chair): Peirce is a strong supporter of cryptocurrencies, advocating for clearer regulations. Uyeda criticizes the SEC's tough stance on cryptocurrencies and calls for clearer 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 undermine confidence in the dollar as the global reserve currency, thereby weakening its position? U.S. scholar Vitaliy Katsenelson believes that given the market sentiment surrounding the dollar has already been disrupted, the White House's promotion of Bitcoin could indeed weaken confidence in the dollar's status as the global reserve currency, thereby diminishing its influence. Regarding current fiscal challenges, Katsenelson argues that "what truly keeps America strong is not Bitcoin, but controlling debt and deficits."
Perhaps Trump's move could serve as a means to hedge against the risk of the U.S. losing its dollar dominance. In the context of globalization, countries strive to achieve international circulation, reserve, and settlement of their currencies, but the dilemma lies in the impossible triangle of monetary sovereignty, free capital flow, and fixed exchange rates. The significant value of Bitcoin is that, in the context of globalization, it provides new solutions to the contradictions of national systems and economic sanctions.
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 dollar has ended, demanding these countries commit to not creating new BRICS currencies and not supporting any other currencies that could replace the dollar, or face 100% tariffs and lose access to the U.S. market.
Trump now seems to hold the hegemony of the dollar in one hand and Bitcoin in the other—powerful tools against the declining trust in national fiat currencies. By doing so, he simultaneously consolidates the dollar's global settlement power and the pricing power of the cryptocurrency market.
3. The Tug of War Between MicroStrategy and Citron Research
On November 21, during U.S. stock market trading, the well-known short-selling institution Citron Research announced on social media platform X its plan to short "Bitcoin-heavy stock" MicroStrategy (MSTR). This news led to a sharp decline in MicroStrategy's stock price, which at one point fell 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 Bitcoin's volatility but also invests in Bitcoin using the ATM (At The Market) mechanism. Therefore, as long as the price of Bitcoin continues to rise, the company can maintain profitability.
Source: @CitronResearch
In summary, MicroStrategy's stock premium, its leverage Bitcoin investment strategy through the ATM mechanism, and the views of short-sellers can be summarized as follows:
1. Sources of Stock Premium: A large portion of MSTR's premium comes from the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment to Bitcoin, exhibiting 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 Leverage Operations: Leverage and Bitcoin Investments: Saylor pointed out that MSTR leverages its Bitcoin investments through bond financing, relying on Bitcoin's volatility for profit. The company flexibly raises funds through the ATM mechanism, avoiding discounted issues common in traditional financing methods, while executing large-scale stock sell-offs utilizing high trading volumes to capitalize on arbitrage opportunities from stock premiums.
3. Advantages of the ATM Mechanism: The ATM model allows MSTR to flexibly raise funds, transferring the volatility, risk, and performance of debt to common stock. Through this operation, the company can achieve returns far exceeding borrowing costs and the increase in Bitcoin prices. For instance, Saylor pointed out that by financing Bitcoin investments at a 6% interest rate, if Bitcoin rises by 30%, the company would actually gain 80% in returns.
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 the price of Bitcoin continues to rise, Saylor expects the company to achieve considerable long-term profits. For example, two weeks ago, MSTR raised $4.6 billion through the ATM mechanism, with a trading premium of 70%, and earned $3 billion worth of Bitcoin in five days, equivalent to about $12.5 per share. Long-term gains are expected to reach $33.6 billion.
5. Risk of Bitcoin Price Decline: Saylor believes that purchasing MSTR stock means investors accept the risk of Bitcoin price decline. To obtain high returns, one must accept corresponding risks. He expects Bitcoin to rise by 29% annually, while MSTR's stock price will rise by 60% annually.
6. MSTR's Market Performance: Since the beginning of this year, MSTR's stock price has surged by 516%, far exceeding Bitcoin's 132% increase during the same period, even surpassing AI leader NVIDIA's 195% gain. Saylor believes MSTR has become one of the fastest-growing and most profitable companies in the U.S.
In response to Citron's short-selling activities, MSTR CEO Michael Saylor stated that Citron does not understand where MSTR's premium over Bitcoin comes from and explained:
"If we fund Bitcoin investments at a 6% interest rate and Bitcoin rises by 30%, then we are actually earning an 80% Bitcoin spread (a function of stock premium, conversion premium, and Bitcoin premium)."
"MicroStrategy issued $3 billion in convertible bonds, which, based on an 80% Bitcoin spread, is expected to generate earnings of $125 per share over 10 years."
This means that as long as the price of Bitcoin continues to rise, MicroStrategy can maintain profitability:
"Two weeks ago, we completed a $4.6 billion ATM transaction with a 70% premium. This means we earned $3 billion worth of Bitcoin in five days, approximately $12.5 per share. If we predict earnings will reach $33.6 billion in 10 years, or about $150 per share."
In summary, MicroStrategy's operational model efficiently builds capital, arbitraging between stocks, bonds, and Bitcoin, closely tying its stock price to Bitcoin's 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 elevate its value. This requires a long-term Bitcoin bull market to sustain its value. Nevertheless, Citron's short position on MicroStrategy offers a much higher success rate than shorting Bitcoin directly, even though MicroStrategy remains confident that Bitcoin's price will continue to grow steadily and slowly, without significant fluctuations.
4. Conclusion
Source: Tradesanta
The U.S. is continuously strengthening its control over the cryptocurrency industry, with market opportunities gradually shifting towards centralization. The decentralized crypto utopia is slowly compromising, with power being "transferred" to the central government. Every drug has side effects, and the influx of funds into ETFs is only a temporary relief, like painkillers that cannot cure the underlying disease.
In the long run, the promotion of Bitcoin through ETFs may not necessarily be a good thing, as trading volumes for Hong Kong's Bitcoin ETFs are significantly lower than those in the U.S. From the perspective of capital flow, U.S. capital is gradually taking control of the crypto market. Currently, although China leads in Bitcoin mining, it remains at a disadvantage in capital markets and policy orientation. Perhaps in the future, the long-term impact of Bitcoin ETFs will accelerate the normalization of crypto asset trading, but this marks both a beginning and an end.
