The Decentralization's Demise and the Concentration of Power: The U.S. Capital is About to Complete the Rights Transfer of the Crypto Utopia

Author: YBB Capital Researcher Ac-Core

TL;DR

• In the long run, Bitcoin through ETFs is not beneficial. There is a huge gap in trading volume between Hong Kong Bitcoin ETFs and US Bitcoin ETFs, and it is undeniable that US capital is gradually taking over the crypto market. Bitcoin ETFs divide the market into two parts: the white part, which remains a single financial attribute of speculative trading under the framework of centralized financial regulation, and the black part, which has more native blockchain activity and trading opportunities but faces regulatory pressure due to being "not legalized."

• MicroStrategy has achieved efficient arbitrage between stocks, bonds, and Bitcoin through capital structure design, closely linking the volatility of its stock with Bitcoin prices, thus achieving lower-risk returns in the long term. However, MicroStrategy is issuing unlimited debt to raise its value, which requires a long-term Bitcoin bull market to maintain its value. Therefore, Citron's shorting of MicroStrategy has a higher payout than directly shorting Bitcoin, but MicroStrategy is confident that the future price trend of Bitcoin will be a slow rise without significant fluctuations.

• Trump's crypto-friendly policies will not only maintain the dollar's status as the global reserve currency but will also strengthen the dollar's pricing power in the crypto market. Trump is firmly holding onto the dollar's dominant position with one hand while grasping Bitcoin, the strongest weapon against the loss of trust in national fiat currencies, thus consolidating both sides and hedging risks.

I. US Capital Gradually Taking Over the Crypto Market

1.1 Hong Kong and US ETF Data

According to Glassnode data on December 3, 2024, the holdings of US Bitcoin spot ETFs are only 13,000 coins away from surpassing Satoshi Nakamoto, with holdings of 1,083,000 coins and 1,096,000 coins respectively. The total net asset value of US Bitcoin spot ETFs has reached $103.91B, accounting for 5.49% of Bitcoin's total market value. Meanwhile, according to Aastocks 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 approximately HKD 1.2 billion in November.

Source of data: Glassnode

US 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 to a mainstream asset, but they have also weakened Bitcoin's decentralized characteristics. ETFs have brought a large influx of traditional capital, but they have also firmly placed Bitcoin's pricing power in the hands of Wall Street.

1.2 The "Black and White Division" of Bitcoin ETFs

Qualifying Bitcoin as a commodity means that it must adhere to the same rules as other commodities like stocks and bonds under tax law. However, the impact of launching Bitcoin ETFs 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 ETFization is akin to a person holding physical assets or commodities (the trustee) needing to have them custodied by an intermediary (like a copper warehouse or a gold bank vault), and authorized institutions must complete transfers and records, while share holders will buy and sell shares after initiating them (like fund shares).

In the above process, the front end (design, development, sales, and after-sales service, etc.) involves physical delivery, spot delivery, and cash delivery. However, the front end of the Bitcoin ETFs approved by the US SEC is cash settlement, which is also the point of contention for Cathie Wood, who hopes to achieve physical delivery, but this is practically impossible.

Because the cash custodians in the US are institutions operating under the traditional centralized financial framework, this means that the first half of Bitcoin ETFs is completely centralized.

• At the end of Bitcoin ETFs, the centralized regulatory framework is difficult to confirm. The reason is that if Bitcoin is recognized, it must become a commodity under the existing centralized financial framework, and it will never recognize Bitcoin's decentralized attributes such as being a substitute for fiat currency and non-traceability. Therefore, Bitcoin can only derive various financial products, such as futures, options, and ETFs, if it fully complies with regulatory conditions.

Thus, the emergence of Bitcoin ETFs signifies a complete failure of Bitcoin ETFs to counter fiat currencies, and the decentralization of Bitcoin ETFs has become meaningless. The front end must rely entirely on the legitimacy of custodians like Coinbase, ensuring that the entire trading chain is legal, public, and traceable.

The black and white of Bitcoin will be completely divided by ETFs:

The current white part: Under the centralized regulatory framework, through a wide range of financial products, the market's 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 has lost its important demand side (the decentralization and anonymity of Bitcoin) in the market's supply and demand relationship, leaving only a single financial attribute of speculative trading. At the same time, under the legalized regulatory framework, it also means that more taxes must be paid, making Bitcoin's original asset transfer and tax evasion functions no longer exist. That is, the endorsement has shifted from a decentralized chain to a centralized government.

The former black part: The main 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, with more native blockchain value vitality and more trading opportunities. However, due to the emergence of the white part, those unwilling to turn white 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 US presidential election, Trump's victory compared to the restrictive policies of the SEC, Federal Reserve, and FDIC during the Biden administration may lead the US government to adopt a more developed attitude towards crypto. According to Chaos Labs data, the nominations for Trump's new government cabinet are as follows:

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 blockchain and digital asset fields, including strategic investments 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 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 openly supports Bitcoin, viewing it as a tool against the devaluation of fiat currency, and could become an ally in the crypto industry.

Pam Bondi (Attorney General Nominee):
Bondi has not clearly stated her position 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 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.

2.2 Crypto-Friendly Policies as Financial Tools to Hedge Against the Lack of Trust in the Dollar as a Global Reserve

Will the White House's promotion of Bitcoin undermine people's trust in the dollar as the global reserve currency, thereby weakening the dollar's position? American scholar Vitaliy Katsenelson suggests that as market sentiment towards the dollar has already been disturbed, the White House's promotion of Bitcoin may shake people's trust in the dollar as the global reserve currency, thus 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 US 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 currencies. However, in this issue, there exists a trilemma of monetary sovereignty, free capital flow, 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.

Source: @realDonaldTrump

On December 1, 2024, Trump stated on social media platform X that the era of BRICS countries trying to break away from the dollar has ended. He demanded that these countries commit not to create a new BRICS currency or support any other currency that could replace the dollar, or they would face 100% tariffs and lose access to the US market.

Now, Trump seems to be firmly holding onto the dollar's dominant position with one hand while grasping Bitcoin, the strongest weapon against the loss of trust in national fiat currencies, thus consolidating the international settlement power of the dollar and the pricing power of the crypto market.

III. The Tug-of-War Between MicroStrategy and Citron Capital

On November 21, during US stock trading hours, the well-known short-selling firm Citron Research announced on social media platform X that it plans to short "Bitcoin-heavy stock" MicroStrategy (MSTR), causing MicroStrategy's stock price to plummet, retreating over 21% from its intraday high.

The next day, MicroStrategy's Executive Chairman Michael Saylor responded in an interview with CNBC, stating that the company not only profits from Bitcoin's volatility trading but also leverages its investment in Bitcoin through an ATM mechanism. Therefore, as long as Bitcoin prices continue to rise, the company can maintain profitability.

Source: @CitronResearch

Overall, the premium of MicroStrategy (MSTR) stock and its strategy to achieve profits through the ATM (At The Market) mechanism, along with leveraged operations in Bitcoin investment and the views of short-selling institutions, can be summarized as follows:

1. Source of Stock Premium:

Most of MSTR's premium comes from the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment to Bitcoin, and the stock price has shown an unreasonable premium compared to Bitcoin, thus deciding to short MSTR. However, Michael Saylor refuted this view, arguing that the shorts overlook MSTR's important profit model.

1. MicroStrategy's Leveraged Operations:

Leverage and Bitcoin investment: Saylor pointed out that MSTR leverages its investment 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 volume to achieve large-scale stock sales, obtaining arbitrage opportunities from stock premiums.

1. Advantages of the ATM Mechanism:

The ATM model allows MSTR to flexibly raise funds and transfer debt volatility, risk, and performance to common stock. Through this operation, the company can achieve returns far exceeding borrowing costs and Bitcoin price increases. For example, Saylor noted that by financing Bitcoin investments at a 6% interest rate, if Bitcoin rises by 30%, the actual return for the company would be about 80%.

1. Specific Profit Cases:

By issuing $3 billion in convertible bonds, the company expects earnings per share to reach $125 within ten years. If Bitcoin prices continue to rise, Saylor predicts that the company's long-term profits will be substantial. For instance, 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 profits expected to reach $33.6 billion.

1. 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 predicts that Bitcoin will rise by 29% annually in the future, while MSTR's stock price will rise by 60% annually.

1. MSTR's Market Performance:

So far this year, MSTR's stock price has risen 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 the fastest-growing and most profitable companies in the US.

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 rises by 30%, we actually receive an 80% Bitcoin price difference (a function of the combined stock premium, conversion premium, and Bitcoin premium)."

"The company issued $3 billion in convertible bonds, and based on an 80% Bitcoin price difference, this $3 billion investment could bring $125 in earnings per share over ten years."

This means that as long as Bitcoin prices continue to rise, the company can continue to be profitable:

"Two weeks ago, we did $4.6 billion in ATM and traded at a 70% price difference, which means we earned $3 billion in Bitcoin within five days. About $12.5 per share. If calculated over ten years, profits will reach $33.6 billion, approximately $150 per share."

In summary, MicroStrategy's operational model achieves efficient arbitrage among stocks, bonds, and Bitcoin through capital structural design, closely linking its stock with Bitcoin price fluctuations to ensure low-risk profits over the long term. However, the essence of MicroStrategy is issuing unlimited debt to raise its value, which requires a long-term Bitcoin bull market to maintain its value. Undoubtedly, Citron's shorting of MicroStrategy has a higher payout than shorting Bitcoin directly, so MicroStrategy is also confident that the future price trend of Bitcoin will be a slow rise without significant fluctuations.

IV. Conclusion

Source: Tradesanta

The US is continuously strengthening its control over the crypto industry, and market opportunities are increasingly shifting towards centralization. The decentralized crypto utopia is gradually compromising towards centralization and "handing over" power. As the saying goes, every medicine has its poison; the influx of funds from ETFs is merely a pain-relieving capsule that cannot cure the disease.

In the long run, Bitcoin through ETFs is not beneficial. There is a significant gap in trading volume between Hong Kong Bitcoin ETFs and US Bitcoin ETFs. Based on the flow of capital, US capital is gradually taking over the crypto market. Currently, even though China is an absolute leader in the mining sector, it remains at 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.

Reference:
Fu Peng: Talking about the SEC and Bitcoin ETF - Clear Division of Centralization