TL;DR
- In the long run, the launch of a Bit ETF is not necessarily a positive development. The trading volume of Hong Kong's Bit ETFs is significantly lower compared to the US Bit ETFs, and it is undeniable that US capital is gradually taking over the crypto market. Bit ETFs divide the market into two parts: the "white" part, which under the centralized financial regulatory framework, only retains the speculative trading attribute as a financial product; the "black" part, which has more native blockchain vitality and trading opportunities, but faces regulatory pressure due to "illegality";
- MicroStrategy, through its capital structure design, has achieved efficient arbitrage between stocks, bonds and Bit, closely linking the fluctuations of its stock and Bit prices, thereby achieving relatively low-risk returns in the long run. However, MicroStrategy is essentially issuing unlimited debt to increase leverage, which requires a long-term Bit bull market to sustain its own value, so the odds of Soros shorting MicroStrategy are higher than directly shorting Bit, but MicroStrategy is confident that the future price trend of Bit will be a slow and steady rise without large fluctuations;
- Trump's crypto-friendly policy will not only not lose the status of the US dollar as the global reserve currency, but will also strengthen the US dollar pricing power in the crypto market. Trump is firmly grasping the hegemonic position of the US dollar with one hand, and firmly grasping Bit, the strongest weapon against the lack of trust in national fiat currencies, with the other hand, consolidating in both directions and hedging risks.
I. US Capital Gradually Taking Over the Crypto Market
1.1 Hong Kong and US ETF Data
According to Glassnode data as of December 3, 2024, the holdings of the US Bit spot ETF are only 13,000 away from surpassing Satoshi Nakamoto, with holdings of 1,083,000 and 1,096,000 respectively. The total net asset value of the US Bit spot ETF reached $103.91B Bit, accounting for 5.49% of the total Bit market capitalization. Meanwhile, according to a report by Aastocks on December 3, the Hong Kong Stock Exchange data showed that the total trading volume of the three Bit spot ETFs in Hong Kong was about HK$1.2 billion in November.
Data Source: Glassnode
US capital is deeply involved in and influencing the global crypto market, even dominating the development of the crypto industry. ETFs have transformed Bit from an alternative asset to a mainstream asset, but have also weakened Bit's decentralized characteristics. The influx of traditional capital brought by ETFs has also given Wall Street firm control over Bit's pricing power.
1.2 The "Black and White Division" of Bit ETFs
Defining Bit as a commodity means that it needs to follow the same rules as stocks, bonds and other commodity-like products in terms of tax laws. However, the impact of the launch of Bit ETFs is not entirely equivalent to the launch of other commodity ETFs such as gold ETFs, silver ETFs, and crude oil ETFs. The Bit ETFs that have been approved or approved so far are different from the market's recognition of Bit itself:
- The path of commodity ETFization is like the person holding the physical asset or commodity (the trustee) needs to be custodied in the middle custodian (like the copper warehouse and the gold bank vault), and authorized institutions are required to complete the transfer and recording, etc. The right hand will have the unit holders who buy and sell the issued units (such as fund units) with funds.
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 Bit ETFs approved by the US SEC currently use cash settlement for the unit subscription and redemption links, which is also the point that Cathie Wood has been arguing about and hoping to be able to complete through physical delivery, but this is impossible to achieve in practice.
Because the cash custodians in the US are all institutions within the traditional centralized finance framework to conduct cash subscription and redemption transactions, which also means that the front part of the Bit ETF is completely centralized.
- At the back end of the Bit ETF, the centralized regulatory framework is difficult to confirm. The reason is that if you do not recognize Bit, you need to become a commodity under the existing centralized finance framework, and will never recognize the decentralized attributes of Bit such as being irreplaceable and untraceable. So Bit can only undergo various financial product derivatives such as futures, options, and ETFs if it fully meets the regulatory conditions.
So the emergence of Bit ETFs means that the part of Bit ETFs that opposes fiat currencies has completely failed, and the decentralization of the Bit ETF part is meaningless, as the front end needs to rely on the legality of custodians like Coinbase, and the entire trading transaction chain needs to be legal, public and traceable.
The "black and white" of Bit will be completely divided due to ETFs:
The current "white" part: Under the centralized regulatory framework, through the extensive financial product derivatives, reduce the price volatility of the market, and as the legal participants become more and more extensive, the speculative volatility of Bit commodities will gradually decrease. After Bit is introduced through ETFs, the "white" part has lost its important demand side (the decentralization and anonymity of Bit) in the market supply and demand relationship, leaving only the single financial attribute of speculative trading. At the same time, under the legalized regulatory framework, it also means that more taxes need to be paid, so the original function of Bit to transfer assets and evade taxes no longer exists. That is, the endorsement has shifted from the decentralized chain to the centralized government.
The former "black" part: The main reason for the crypto market's volatility is its opaque and anonymous characteristics, which make it easy to be manipulated. At the same time, the "black" market is more open and has more native blockchain value vitality, with more trading opportunities. But with the emergence of the "white" part, those who are unwilling to turn white will be permanently excluded from the centralized regulatory framework and lose their pricing power, just like paying fines to the SEC.
II. Trump's All-Star Crypto Cabinet Picks
2.1 Cabinet Picks
In the 2024 US presidential election, compared to the restrictive policies of the SEC, Federal Reserve and FDIC under the Biden administration, the new Trump administration is likely to take a more open attitude towards crypto. According to data from Chaos Labs, the cabinet nominations of the new Trump administration are as follows:
Source: @chaos_labs
Howard Lutnick (Transition Team Leader and Commerce Secretary Nominee):
Lutnick, as the CEO of Cantor Fitzgerald, publicly supports cryptocurrencies. His company is actively exploring the blockchain and digital asset space, including strategic investments in Tether.
Scott Bessent (Treasury Secretary Nominee):
Bessent, a veteran hedge fund manager, supports cryptocurrencies, believing they represent freedom and will exist in the long run. He is more crypto-friendly than the previous Treasury Secretary candidate Paulson.
Tulsi Gabbard (Director of National Intelligence Nominee):
Gabbard, with privacy and decentralization as her core principles, supports Bit and has invested in ETH and LTC since 2017.
Robert F. Kennedy Jr. (Health and Human Services Secretary Nominee):
Kennedy publicly supports Bit, seeing it as a tool to combat fiat currency devaluation, and may become an ally of the crypto industry.
Pam Bondi (Attorney General Nominee):
Bondi has not yet made a clear statement on cryptocurrencies, and her policy direction is 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 and support for technological innovation, and may provide technical infrastructure support for the crypto industry.
Hester Peirce & Mark Uyeda (Potential SEC Chairman Candidates):
Peirce is a staunch supporter of cryptocurrencies and advocates for clear regulation. Uyeda is critical of the SEC's tough stance on cryptocurrencies and calls for clear regulatory rules.
2.2 Encryption-friendly policies are financial tools to hedge against the lack of trust in the US dollar as a global reserve currency
Will the White House's promotion of Bit in the future shake people's trust in the US dollar as the global reserve currency, thereby weakening the US dollar's status? American scholar Vitaliy Katsenelson pointed out that as the market's sentiment towards the US dollar has already been disrupted, the White House's promotion of Bit may shake people's trust in the US dollar as the global reserve currency, thereby weakening the US dollar's status. As for the current fiscal challenges, "what will truly enable the US to continue to be great is not Bit, but controlling debt and deficits."
Perhaps Trump's move may become a risk hedge for the US government's future loss of dominance of the US dollar. In the context of economic globalization, all countries hope to achieve the internationalization of their national currencies in terms of circulation, reserves, and settlement. But in this issue, there is a trilemma of monetary sovereignty, free flow of capital, and fixed exchange rates.
The important value of Bit is: in the context of economic globalization, it provides a completely new solution to the contradictions between national systems and economic sanctions.
On December 1, 2024, Trump stated on the social media platform X that the era of the BRICS countries trying to break away from the US dollar has ended. He demanded that these countries pledge not to create a new BRICS currency or support any other currency that could replace the US dollar, otherwise they will face a 100% tariff and lose the opportunity to enter the US market.
Nowadays, Trump seems to be grasping the US dollar's hegemonic position with his left hand and refusing to compromise, while grasping Bit, the strongest weapon against the lack of trust in national currencies, with his right hand, consolidating both the US dollar's international settlement power and the pricing power of the encryption market.
III. The Tug-of-War Between Micro Strategy and Citron Capital
On November 21, during the US stock trading session, the well-known short-selling institution Citron Research released a message on the social media platform X, stating that it planned to short "Bit-heavy stocks" MicroStrategy (MSTR), causing MSTR's stock price to plummet, with a pullback of more than 21% from the intraday high at one point.
The next day, MicroStrategy's Executive Chairman Michael Saylor responded in an interview with CNBC, saying that the company not only profits from the volatility of Bit through trading, but also leverages the ATM mechanism to invest in Bit. Therefore, as long as the price of Bit continues to rise, the company will be able to maintain profitability.
1. The source of the stock premium:
MSTR's premium is mostly derived from the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment to Bit, and its stock price has an unreasonable premium compared to Bit, so it decided to short MSTR. However, Michael Saylor refuted this view, arguing that the shorts ignored MSTR's important profit model.
2. MicroStrategy's leverage operation:
Leverage and Bit investment: Saylor pointed out that MSTR invests in Bit through issuing bonds and financing with leverage, relying on the volatility of Bit to generate profits. The company uses the ATM mechanism to raise funds flexibly, avoiding the discount in traditional financing, and at the same time utilizes the high trading volume to realize the arbitrage opportunity of the stock premium.
3. Advantages of the ATM mechanism:
The ATM model allows MSTR to raise funds flexibly and transfer the volatility, risk, and performance of debt to common stock. Through this operation, the company can obtain a return far higher than the borrowing cost and the rise in the price of Bit. For example, Saylor pointed out that by financing at an interest rate of 6% to invest in Bit, if Bit rises by 30%, the company's actual return is about 80%.
4. Specific profit case:
By issuing $3 billion in convertible bonds, the company expects to achieve earnings per share of $125 within 10 years. If the price of Bit continues to rise, Saylor predicts that the company's long-term earnings will be very considerable. For example, two weeks ago, MSTR raised $4.6 billion through the ATM mechanism, trading at a 70% premium, and made $3 billion in Bit profits in five days, equivalent to $12.5 per share, and the long-term earnings are expected to reach $33.6 billion.
5. Risks of Bit price decline:
Saylor believes that buying MSTR's stock means that investors have already accepted the risk of a decline in the price of Bit. To achieve high returns, one must bear the corresponding risks. He expects Bit to appreciate by 29% per year in the future, and MSTR's stock price to appreciate by 60% per year.
6. MSTR's market performance:
So far this year, MSTR's stock price has risen 516%, far exceeding the 132% increase in Bit and even surpassing the 195% increase of AI leader Nvidia. Saylor believes that MSTR has become one of the fastest-growing and most profitable companies in the US.
Regarding Citron's short-selling, MSTR's CEO stated that Citron does not understand where MSTR's premium over Bit comes from and explained:
"If we invest Bit with financing at an interest rate of 6%, when the price of Bit rises by 30%, we actually get an 80% Bit spread (a function of stock premium, conversion premium, and Bit premium)."
"The company issued $3 billion in convertible bonds, and based on an 80% Bit spread, this $3 billion investment can bring $125 in earnings per share within 10 years."
This means that as long as the price of Bit continues to rise, the company can continue to be profitable:
"Two weeks ago, we did a $4.6 billion ATM and traded at a 70% spread, which means we made $3 billion in Bit profits in five days. About $12.5 per share. If calculated over 10 years, the earnings will reach $33.6 billion, about $150 per share."
In summary, MicroStrategy's operating model is to achieve efficient arbitrage between stocks, bonds, and currencies through the design of its capital structure, and to tightly bind its stock price to the rise and fall of Bit to ensure low-risk profits for the company in the long run. However, the essence of MicroStrategy is to issue unlimited debt and use unlimited leverage to inflate its own value, which requires a long-term Bit bull market to sustain its value. Undoubtedly, Citron's short-selling of MicroStrategy has a much higher payoff ratio than shorting Bit, so MicroStrategy is also confident that the future price trend of Bit will be a slow and steady rise without major fluctuations.
IV. Conclusion
The US is constantly strengthening its control over the encryption industry, and the market opportunities are also constantly shifting towards centralization. The decentralized crypto utopia world is gradually compromising and "handing over" its rights to centralization. ETF inflows are just a pain reliever that cannot cure the disease.
In the long run, Bit's entry into ETFs is not a positive factor. The trading volume of the Hong Kong Bit ETF is significantly lower than that of the US Bit ETF, and from the perspective of the flow of capital, US capital is gradually enveloping the encryption market. Although China is currently the absolute leader in mining, it is still at a disadvantage in the capital market and policy orientation. Perhaps the long-term impact of Bit ETFs will accelerate the normalization of encryption asset trading, which is both a beginning and an end.
