Author: YBB Capital Researcher Ac-Core
TL;DR
In the long run, the launch of a Bit coin ETF is not a positive development. The trading volume of the Hong Kong Bit coin ETF is significantly lower than that of the US Bit coin ETF, and it is undoubtedly that US capital is gradually taking over the crypto market. The Bit coin ETF will divide the market into black and white parts. The white part, under the framework of centralized financial regulation, only retains the single financial attribute of speculative trading, while the black part has more native blockchain vitality and trading opportunities, but faces regulatory pressure due to "illegality";
Through capital structure design, Microstrategy has achieved efficient arbitrage between stocks, bonds and Bit coin, closely linking the fluctuations of its stocks and Bit coin prices, thereby achieving relatively low-risk returns in the long run. But Microstrategy is issuing unlimited debt to increase leverage, which requires a long-term Bit coin bull market to sustain its own value, so the odds of Soros shorting Microstrategy are higher than directly shorting Bit coin, but Microstrategy is confident that the future price trend of Bit coin 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 of the crypto market. Trump is firmly grasping the hegemonic position of the US dollar with his left hand, and firmly grasping Bit coin, the strongest weapon against the lack of trust in national fiat currencies, with his right hand, consolidating in both directions and hedging risks.
I. US Capital Gradually Encroaching on the Crypto Market
1.1 Hong Kong and US ETF Data
According to Glassnode data on December 3, 2024, the holdings of the US Bit coin spot ETF are only 13,000 coins away from surpassing Satoshi Nakamoto, with holdings of 1,083,000 and 1,096,000 coins respectively, and the total net asset value of the US Bit coin spot ETF reaching $103.91B Bitcoin, accounting for 5.49% of the total Bit coin market capitalization. Meanwhile, according to the December 3 Aastocks report, Hong Kong stock exchange data shows that the total trading volume of the three Bit coin 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 coin from an alternative asset to a mainstream asset, but have also weakened Bit coin's decentralized characteristics. ETFs have brought a large influx of traditional capital, but have also given Wall Street firm control over Bit coin's pricing power.
1.2 The "Black and White Division" of Bit coin ETFs
Defining Bit coin as a commodity means that it needs to follow the rules applicable to other commodity-like assets such as stocks and bonds for tax purposes. But the impact of the launch of Bit coin ETFs is not entirely equivalent to the launch of other commodity ETFs such as gold ETFs, silver ETFs, and crude oil ETFs. The Bit coin ETFs that have been approved or authorized are different from the market's recognition of Bit coin 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 needed to complete the transfer and recording, and the right hand will have the unit holders to 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. But the Bit coin ETFs approved by the US SEC currently have a cash settlement method for the unit subscription and redemption process, 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 operating within the traditional centralized finance framework to conduct cash subscription and redemption transactions, which also means that the front part of the Bit coin ETF is completely centralized.
At the back end of the Bit coin ETF, the centralized regulatory framework is difficult to confirm. The reason is that if you do not recognize Bit coin, you need to become a commodity under the existing centralized finance framework, and will never recognize the decentralized attributes of Bit coin such as being irreplaceable and untraceable. So Bit coin 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 coin ETFs means that the part of Bit coin ETFs that opposes fiat currency has completely failed, and the decentralization of the part of Bit coin ETFs 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.
Bit coin's black and white will be completely divided due to ETFs:
The current white part: Under the centralized regulatory framework, through the extensive financial product derivatives, the price volatility of the market is reduced, and as the legal participants become more and more extensive, the speculative volatility of Bit coin commodities will gradually decrease. After Bit coin is through ETFs, the white part in the market supply and demand relationship has lost its important demand (the decentralization and anonymity of Bit coin), 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 coin 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 part of the market will also be more open, with more native blockchain value vitality, and there will be more trading opportunities. But due to 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, Trump's victory, compared to the restrictive policies of the SEC, Federal Reserve and FDIC regulatory agencies during the Biden administration, the US government may take a more open attitude towards crypto. According to Chaos Labs data, 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 CEO of Cantor Fitzgerald, publicly supports cryptocurrencies. His company is actively exploring the blockchain and digital asset space, including strategic investment 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 term. He is more crypto-friendly than former Treasury Secretary candidate Paulson.
Tulsi Gabbard (Director of National Intelligence Nominee):
Gabbard, with privacy and decentralization as her core principles, supports Bit coin and has invested in Ethereum and Litecoin since 2017.
Robert F. Kennedy Jr. (Health and Human Services Secretary Nominee):
Kennedy publicly supports Bit coin, 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, advocating for regulatory clarity. Uyeda is critical of the SEC's tough stance on cryptocurrencies, calling for clear regulatory rules.
2.2 Crypto-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 Bitcoin 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 argues that as the market's sentiment towards the US dollar has already been disrupted, the White House's promotion of Bitcoin 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 Bitcoin, but controlling debt and deficits."
Perhaps Trump's move may become a risk hedge for the US government's future loss of the US dollar's dominant position. 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 among monetary sovereignty, free capital flow, and fixed exchange rates. The important value of Bitcoin is: in the context of economic globalization, it provides a completely new solution to the contradictions between national systems and economic sanctions.
Source: @realDonaldTrump
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 new BRICS currencies or support any other currencies that could replace the US dollar, otherwise they will face 100% tariffs 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 the strongest weapon against the lack of trust in national currencies, Bitcoin, with his right hand, consolidating both the US dollar's international settlement power and the pricing power of the crypto market.
III. The Tug-of-War Between MicroStrategy and Citron Capital
During the US stock trading session on November 21, the well-known short-selling institution Citron Research posted a message on the social media platform X, stating that it planned to short "Bitcoin-heavy stocks" MicroStrategy (MSTR), causing MSTR's stock price to plummet, at one point falling more than 21% from the intraday high.
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 Bitcoin through trading, but also leverages the ATM mechanism to invest in Bitcoin. Therefore, as long as the Bitcoin price continues to rise, the company can maintain profitability.
Source: @CitronResearch
In summary, the stock premium of MicroStrategy (MSTR) and its strategy of using the ATM (At The Market) mechanism to achieve profitability, its leveraged operations in Bitcoin investment, and the views of the short-selling institution on this are summarized as follows:
Source of stock premium:
MSTR's premium is largely due to the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment to Bitcoin, and the stock price has an unreasonable premium compared to Bitcoin, so it decided to short MSTR. However, Michael Saylor refuted this view, arguing that the short-sellers ignored MSTR's important profit model.
MicroStrategy's leveraged operations:
Leverage and Bitcoin investment: Saylor pointed out that MSTR invests in Bitcoin through issuing bonds and financing with leverage, relying on the volatility of Bitcoin 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 stock premium.
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 increase in Bitcoin price. For example, Saylor pointed 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%.
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 Bitcoin price 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 Bitcoin profits in five days, equivalent to $12.5 per share, and the long-term earnings are expected to reach $33.6 billion.
Risks of Bitcoin price decline:
Saylor believes that buying MSTR's stock means that investors have already accepted the risk of Bitcoin price decline. To achieve high returns, one must bear the corresponding risks. He expects Bitcoin to appreciate 29% per year in the future, and MSTR's stock price to appreciate 60% per year.
MSTR's market performance:
So far this year, MSTR's stock price has risen 516%, far exceeding Bitcoin's 132% increase 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 US.
Regarding Citron's short-selling, MSTR's CEO stated that Citron does not understand where MSTR's premium over Bitcoin comes from and explained:
"If we invest in Bitcoin with financing at an interest rate of 6%, when the Bitcoin price rises 30%, we actually get an 80% Bitcoin spread (a function of stock premium, conversion premium, and Bitcoin premium)."
"The company issued $3 billion in convertible bonds, and based on an 80% Bitcoin spread, this $3 billion investment can bring $125 per share in earnings within 10 years."
This means that as long as the Bitcoin price continues to rise, the company can continue to profit:
"Two weeks ago, we did a $4.6 billion ATM and traded at a 70% spread, which means we made $3 billion in Bitcoin profits in five days. That's 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 cryptocurrencies through the design of its capital structure, and to tightly bind its stock price to the rise and fall of Bitcoin prices to ensure low-risk profitability for the company in the long run. However, the essence of MicroStrategy is to issue debt infinitely and use infinite leverage to boost its own value, which requires a long-term Bitcoin bull market to sustain its value. Undoubtedly, Citron's short-selling of MicroStrategy has a much higher payoff than shorting Bitcoin, so MicroStrategy is also confident that the future price trend of Bitcoin will be a slow and steady rise without significant volatility.
IV. Conclusion
Source: Tradesanta
The US is constantly strengthening its control over the crypto industry, and the market opportunities are also constantly shifting towards centralization. The decentralized crypto utopia world is gradually compromising with centralization and "handing over" its rights. It is a double-edged sword, and the influx of funds into ETFs is just a pain reliever that cannot cure the disease.
In the long run, Bitcoin's access to ETFs is not a positive factor. The trading volume of Bitcoin ETFs in Hong Kong is significantly lower than that in the US, and from the perspective of capital flow, US capital is gradually enveloping the crypto 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 Bitcoin ETFs will accelerate the normalization of crypto asset trading, which is both a beginning and an end.
Reference content:
Feng Peng: Let's talk about SEC and Bitcoin ETF - Black and white centralization
