Forward the 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

TL;DR

• In the long run, Bitcoin through ETFs is not necessarily beneficial. The trading volume of Bitcoin ETFs in Hong Kong is vastly lower than in the United States. Undoubtedly, U.S. capital is gradually taking control of the crypto market. Bitcoin ETFs will split the market into two parts: the “white” section, which operates under centralized financial regulations and is limited to speculative trading, and the “black” section, which retains the native blockchain activity and trading opportunities but faces regulatory pressure due to being “illegal.”
• MicroStrategy, through its capital structure design, achieves efficient arbitrage between stocks, bonds, and Bitcoin. It tightly correlates the fluctuations of its stock and Bitcoin prices to obtain lower-risk returns over the long term. However, MicroStrategy is leveraging unlimited debt issuance to inflate its own value, which requires a prolonged Bitcoin bull market to maintain. Therefore, Citron Research’s shorting of MicroStrategy has higher odds of success compared to directly shorting Bitcoin, though MicroStrategy bets on Bitcoin’s price moving towards slow, steady growth without large fluctuations.
• Trump’s crypto-friendly policies will not only preserve the dollar’s position as the global reserve currency but will also strengthen the dollar’s dominance in crypto pricing. With one hand holding the dollar’s hegemony and the other grasping Bitcoin, the most powerful weapon against the loss of trust in fiat currencies, Trump is simultaneously fortifying both, hedging the risks.

I. U.S. Capital Gradually Encompasses the Crypto Market

1.1 Hong Kong vs. U.S. ETF Data

According to Glassnode data on December 3, 2024, the holdings of U.S. Bitcoin spot ETFs are only 13,000 BTC away from surpassing Satoshi Nakamoto’s holdings. The respective holdings are 1,083,000 BTC and 1,096,000 BTC, with the total net asset value of U.S. Bitcoin spot ETFs reaching $103.91B, 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 the three Bitcoin spot ETFs in Hong Kong was approximately HKD 1.2 billion in November.

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 they have also weakened Bitcoin’s decentralized nature. The influx of traditional capital driven by ETFs has allowed Wall Street to firmly control Bitcoin’s pricing power.

1.2 Bitcoin ETF: The Black and White Divide

Classifying Bitcoin as a commodity means it must follow the same tax regulations as stocks, bonds, and other commodities. However, the impact of Bitcoin ETFs is not entirely the same as other commodity ETFs like gold, silver, and oil. Currently approved or proposed Bitcoin ETFs differ in their recognition of Bitcoin:

1.The commodity ETF path involves holding physical assets (e.g., copper warehouse or gold bank vault) with authorized institutions handling transfers and records, and investors purchasing shares (such as fund shares) to buy or redeem based on funds.

But in the case of Bitcoin ETFs, the process for purchasing and redeeming shares is done through cash settlements, which is a point of contention for people like Cathie Wood, who hopes for physical settlement. However, this is practically impossible, as U.S. custodians are centralized financial institutions handling cash transactions. This makes the early stage of Bitcoin ETF completely centralized.

1. At the end of the Bitcoin ETF process, it’s difficult to verify under a centralized regulatory framework. For Bitcoin to be recognized as a commodity under this framework, it would have to abandon its decentralized properties, such as being a substitute for fiat currency and being non-traceable. Therefore, Bitcoin can only be part of financial products like futures, options, and ETFs if it meets regulatory standards.

The emergence of Bitcoin ETFs signifies the complete failure of Bitcoin ETFs in countering fiat currencies. The decentralization aspect of Bitcoin ETFs has become meaningless. On the front end, it entirely relies on the legitimacy and custodianship of platforms like Coinbase, ensuring that the entire buy-sell transaction chain is legal, transparent, and traceable.

The Split Between Bitcoin’s “Black” and “White” Parts Due to ETFs:

• The White Section: Under a centralized regulatory framework, the market’s price volatility is reduced through the widespread creation of financialized products, and as legitimate participants become more numerous, the speculative volatility of Bitcoin commodities will gradually decrease. After Bitcoin becomes an ETF, the white section in the market’s supply-demand relationship loses its key demand factor (Bitcoin’s decentralization and anonymity) and is left with only its speculative trading financial attributes. At the same time, under the legalized regulatory framework, this also means the need to pay more taxes, which eliminates Bitcoin’s original function of asset transfer and tax evasion. In essence, the endorsement has shifted from a decentralized chain to a centralized government.
• The Black Section: The main reason for the crypto market’s extreme volatility lies in its opacity and anonymity, which make it vulnerable to manipulation. At the same time, the black section of the market remains more open, retaining the native value vitality of blockchain, with more trading opportunities. However, with the emergence of the white section, those unwilling to transition to the white section will forever be excluded from the centralized regulatory framework and lose their pricing power, much like paying fines to the SEC.

II. Trump’s Crypto-Friendly Cabinet Nominees

2.1 Cabinet Nominees

The victory of Donald Trump in the 2024 U.S. presidential election, compared to the restrictive policies of regulatory agencies like the SEC, Federal Reserve, and FDIC under the Biden administration, suggests that the new U.S. government may adopt a more progressive stance towards cryptocurrencies. According to data from Chaos Labs, the following are the key cabinet nominations for Trump’s new administration:

Source: @chaos_labs

• Howard Lutnick (Nominee for Secretary of Commerce and Transition Team Leader): Lutnick, CEO of Cantor Fitzgerald, is an outspoken supporter of cryptocurrencies. His company is actively exploring the blockchain and digital asset space, including a strategic investment in Tether.
• Scott Bessent (Nominee for Secretary of the Treasury): Bessent, a veteran hedge fund manager, supports cryptocurrencies, believing they represent freedom and will persist long-term. He is more crypto-friendly than former Treasury Secretary nominee Paulson.
• Tulsi Gabbard (Nominee for Director of National Intelligence): Gabbard, who champions privacy and decentralization, supports Bitcoin and had invested in Ethereum and Litecoin in 2017.
• Robert F. Kennedy Jr. (Nominee for Secretary of Health and Human Services): Kennedy is a public advocate for Bitcoin, viewing it as a tool to combat the depreciation of fiat currencies, potentially becoming an ally of the crypto industry.
• Pam Bondi (Nominee for Attorney General): Bondi has not made explicit statements about cryptocurrency, and her policy stance remains unclear.
• Michael Waltz (Nominee for National Security Advisor): Waltz is a strong supporter of cryptocurrencies, emphasizing their role in enhancing economic competitiveness and technological independence.
• Brendan Carr (Nominee for FCC Chairman): Carr is known for his opposition to censorship and support for technological innovation, potentially providing infrastructure support for the crypto industry.
• Hester Peirce & Mark Uyeda (Potential Nominees for SEC Chairman): Peirce is a staunch crypto supporter who advocates for clearer regulations. Uyeda, critical of the SEC’s hardline stance on crypto, calls for well-defined regulatory rules.

2.2 Crypto-Friendly Policies as a Hedge Against the Erosion of Dollar’s Global Reserve Status

Will the promotion of Bitcoin by the White House shake people’s confidence in the U.S. dollar as the global reserve currency, potentially weakening its position? U.S. scholar Vitaliy Katsenelson suggests that, given market sentiments surrounding the dollar have already been disrupted, the White House’s promotion of Bitcoin could indeed undermine confidence in the dollar’s status as the global reserve currency, thus diminishing its influence. As for the current fiscal challenges, Katsenelson argues that “what will truly keep America great is not Bitcoin, but controlling debt and deficits.”

Perhaps Trump’s actions could become a hedge against the risk of the U.S. losing its dominant position in the dollar. In the context of economic globalization, all countries strive to achieve the international circulation, reserve, and settlement of their own national currencies. However, in this matter, the dilemma lies in the three-way paradox of monetary sovereignty, free capital flow, and fixed exchange rates. The important value of Bitcoin is that, in the context of economic globalization, it provides a new solution to national institutional contradictions and economic sanctions.

Source: @realDonaldTrump

On December 1, 2024, Trump posted on social media platform X, stating that the era of BRICS nations attempting to decouple from the dollar is over. He demanded that these nations commit to not creating a new BRICS currency and not support any other currency that could replace the dollar, or they would face a 100% tariff and lose access to U.S. markets.

Trump now appears to be holding the dollar’s hegemonic position with one hand while wielding Bitcoin, the most powerful tool to counter the erosion of trust in national fiat currencies, with the other. In doing so, he is simultaneously consolidating both the dollar’s global settlement power and the crypto market’s pricing power.

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

On November 21, during the U.S. stock trading session, the well-known short-selling firm Citron Research announced on social media platform X that it planned to short “Bitcoin-heavy stock” MicroStrategy (MSTR). This news caused a sharp decline in MicroStrategy’s stock price, which once pulled back by more than 21% from its intraday high.

The next day, Michael Saylor, Executive Chairman of MicroStrategy, responded to CNBC in an interview, stating that the company not only profits from Bitcoin’s volatility but also leverages the ATM (At The Market) mechanism to invest in Bitcoin. Therefore, as long as Bitcoin’s price continues to rise, the company will remain profitable.

Source: @CitronResearch

In summary, MicroStrategy’s stock premium, its leveraged Bitcoin investment strategy via the ATM mechanism, and the short-seller perspective can be summarized as follows:

1. Source of Stock Premium: A significant portion of MSTR’s premium comes from the ATM mechanism. Citron Research believes MSTR’s stock has become a substitute investment for Bitcoin, and its stock price has shown an unreasonable premium relative to Bitcoin, which is why they decided to short MSTR. However, Michael Saylor rebuffed this view, stating that the short-sellers have overlooked MSTR’s important profit model.
2. MicroStrategy’s Leverage Operations: Leverage and Bitcoin Investment: Saylor pointed out that MSTR uses debt issuance and financing to leverage its Bitcoin investments, relying on Bitcoin’s volatility to profit. The company flexibly raises funds through the ATM mechanism to avoid the discounted issuance of traditional financing methods, while utilizing high trading volumes to execute large-scale stock sales and gain arbitrage opportunities from stock premiums.
3. Advantages of the ATM Mechanism: The ATM model allows MSTR to raise funds flexibly, transferring the volatility, risks, and performance of debt to common stock. Through this operation, the company can achieve returns far exceeding the borrowing cost and Bitcoin’s price rise. For example, Saylor noted that with 6% interest rate financing for Bitcoin investment, if Bitcoin increases by 30%, the company would actually earn an 80% return.
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 Bitcoin’s price continues to rise, Saylor predicts substantial long-term profits for the company. For instance, two weeks ago, MSTR raised $4.6 billion via the ATM mechanism, trading at a 70% premium, and earned $3 billion worth of Bitcoin in five days, which translates to about $12.5 per share. Long-term earnings are expected to reach $33.6 billion.
5. Risks of Bitcoin Price Decline: Saylor believes that purchasing MSTR shares means investors are accepting the risk of Bitcoin’s price decline. To achieve high returns, one must bear corresponding risks. He anticipates that Bitcoin will increase by 29% annually, and MSTR’s stock price will increase by 60% per year.
6. MSTR’s Market Performance: This year, MSTR’s stock price has surged 516%, far exceeding Bitcoin’s 132% increase during the same period, and even outperforming 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 shorting, MSTR CEO Michael Saylor remarked that Citron does not understand where the premium of MSTR relative to Bitcoin comes from and explained:

“If we finance Bitcoin investments at an interest rate of 6%, and Bitcoin increases by 30%, what we actually earn is an 80% Bitcoin spread (a function of stock premium, conversion premium, and Bitcoin premium).”

“The company issued $3 billion in convertible bonds, and at an 80% Bitcoin spread, this $3 billion investment will generate $125 in earnings per share over 10 years.”

This means that as long as Bitcoin’s price continues to rise, the company will remain profitable:

“Two weeks ago, we completed an ATM of $4.6 billion and traded at a 70% premium. This means we earned $3 billion worth of Bitcoin in five days, which is about $12.5 per share. If we project over 10 years, the earnings will reach $33.6 billion, or roughly $150 per share.”

In conclusion, MicroStrategy’s operational model involves structuring capital efficiently to arbitrage between stocks, bonds, and Bitcoin, linking its stock price closely to Bitcoin’s price fluctuations to ensure low-risk profits over the long term. However, MicroStrategy’s essence lies in its ability to issue unlimited debt and use infinite leverage to inflate its own value. This requires a long-term Bitcoin bull market to maintain its value. Nonetheless, Citron’s short position against MicroStrategy offers a much higher payout than shorting Bitcoin, and MicroStrategy remains confident that Bitcoin’s price will continue to experience steady, slow growth without large fluctuations.

IV. Conclusion

Source: Tradesanta

The U.S. continues to strengthen its control over the cryptocurrency industry, and market opportunities are gradually shifting towards centralization. The decentralized crypto utopia is slowly compromising and “handing over” power to central authorities. As with any medicine, there is a side effect — the funds flooding into ETFs are merely a temporary relief, like a painkiller that does not cure the underlying illness.

In the long run, Bitcoin’s promotion via ETFs is not necessarily a positive development. The trading volume of Bitcoin ETFs in Hong Kong is significantly lower compared to that in the U.S. Based on capital flow volumes, U.S. capital is gradually taking control of the crypto market. Currently, even though China leads in Bitcoin mining, it remains disadvantaged in terms of capital markets and policy direction. Perhaps in the future, the long-term impact of Bitcoin ETFs will accelerate the normalization of crypto asset trading, but this is both the beginning and the end.

About YBB

YBB is a web3 fund dedicating itself to identify Web3-defining projects with a vision to create a better online habitat for all internet residents. Founded by a group of blockchain believers who have been actively participated in this industry since 2013, YBB is always willing to help early-stage projects to evolve from 0 to 1.We value innovation, self-driven passion, and user-oriented products while recognizing the potential of cryptos and blockchain applications.

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