The Death of Decentralization: American Capital Completes the Transfer of Power in the Crypto Utopia

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 beneficial. Hong Kong's Bitcoin ETF trading volume is much lower than that of the United States. There is no doubt that American capital is gradually taking control of the crypto market. Bitcoin ETFs will divide the market into two parts: "white disks" that operate under centralized financial supervision and are limited to speculative trading, and "black disks" that retain native blockchain activities and trading opportunities but face regulatory pressure due to "illegality."

• MicroStrategy has designed its capital structure to achieve efficient arbitrage between stocks, bonds, and Bitcoin. It closely tracks the fluctuations of stock and Bitcoin prices to obtain long-term low-risk returns. However, MicroStrategy uses unlimited debt issuance to inflate its own value, which requires a long-term bull market in Bitcoin to maintain. Therefore, Citron Research has a higher success rate in shorting MicroStrategy than shorting Bitcoin directly, even though MicroStrategy is betting that the price of Bitcoin will grow slowly and steadily without large fluctuations.

• Trump's cryptocurrency-friendly policies will not only maintain the status of the US dollar as the global reserve currency, but also strengthen the US dollar's dominance in cryptocurrency pricing. With one hand holding the hegemony of the US dollar and the other holding Bitcoin, the most powerful weapon against the loss of trust in fiat currencies, Trump has strengthened both at the same time and hedged the risks.

1. US capital gradually enters the cryptocurrency 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 BTC away from surpassing Satoshi Nakamoto's holdings, which are 1.083 million BTC and 1.096 million BTC respectively. The total net asset value of US Bitcoin spot ETFs reached US$103.91 billion, accounting for 5.49% of the total market value of Bitcoin. At the same time, according to Aastocks' report on December 3, the total trading volume of Hong Kong's three Bitcoin spot ETFs in November was about HK$1.2 billion.

Source: Glassnode

American capital is deeply involved in and influences the global encryption market, and even dominates its development. Bitcoin ETF has turned Bitcoin from an alternative asset into a mainstream asset, but it has also weakened the decentralized nature of Bitcoin. ETFs have driven the influx of traditional capital, allowing Wall Street to firmly control the pricing power of Bitcoin.

1.2 Bitcoin ETF: Black and White

Classifying Bitcoin as a commodity means that it must follow the same tax regulations as stocks, bonds and other commodities. However, the impact of a Bitcoin ETF is not exactly the same as other commodity ETFs such as gold, silver, and oil. The currently approved or proposed Bitcoin ETFs have different recognitions of Bitcoin:

1. The commodity ETF path involves holding physical assets (e.g., copper warehouses or gold bank vaults), with authorized institutions handling transfers and records, and investors purchasing shares (e.g., fund shares) to buy or redeem on a fund basis.

But in the case of Bitcoin ETFs, the process of buying and redeeming shares is carried out through cash settlement, which is a point of contention for those like Cathie Wood who want physical settlement. However, this is actually impossible because the custodians in the United States 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. In order for Bitcoin to be recognized as a commodity under a centralized regulatory framework, it must give up its decentralized characteristics, such as being a substitute for legal currency and being untraceable. Therefore, Bitcoin can only become part of financial products such as futures, options, and ETFs if it meets regulatory standards.

The emergence of Bitcoin ETF marks the complete failure of Bitcoin ETF against legal currency. The decentralization of Bitcoin ETF has become meaningless. The front end completely relies on the legitimacy and custody of platforms such as Coinbase to ensure that the entire buying and selling transaction chain is legal, transparent and traceable.

The "black" part and the "white" part of Bitcoin are split due to ETF:

• White part:Under the centralized regulatory framework, the market price volatility is reduced by the extensive creation of financial products, and with the increase of legal participants, the speculative volatility of Bitcoin commodities will gradually decrease. After Bitcoin became an ETF, the white part of the market supply and demand relationship lost the key demand factor (the decentralization and anonymity of Bitcoin), leaving only the speculative trading financial attributes. At the same time, under the legalized regulatory framework, this also means that more taxes need to be paid, which eliminates the original asset transfer and tax avoidance functions of Bitcoin. In essence, the endorsement is transferred from the decentralized chain to the centralized government.

• Black:The main reason for the high volatility of the cryptocurrency market is its opacity and anonymity, which makes it extremely vulnerable to manipulation. At the same time, the black market still maintains a high degree of openness, retains the value vitality of blockchain native, and has more trading opportunities. But with the emergence of the white market, those who are unwilling to transition to the white market will be forever excluded from the centralized regulatory framework and lose pricing power, just like paying a fine to the SEC.

2. Trump's Crypto-Friendly Cabinet Nominees

2.1 Cabinet Nominees

Trump's victory in the 2024 US presidential election indicates that the new US government may take a more aggressive stance on cryptocurrencies compared to the restrictive policies of regulatory agencies such as the SEC, the Federal Reserve, and the FDIC during the Biden administration. According to Chaos Labs, here are the key cabinet nominees for Trump's new administration:

Source: @chaos_labs

• Howard Lutnick (Nominee for Commerce Secretary and Head of Transition Team):Cantor Fitzgerald CEO Howard Lutnick is an outspoken supporter of cryptocurrency. His company is actively exploring the blockchain and digital asset space, including a strategic investment in Tether.

• Scott Bessent (Treasury Secretary nominee): Bessent is a veteran hedge fund manager who supports cryptocurrencies, believing that cryptocurrencies represent freedom and will be around for a long time. He is more supportive of cryptocurrencies than former Treasury Secretary nominee Paulson.

• Tulsi Gabbard (Director of National Intelligence nominee): Gabbard advocates for privacy and decentralization, supports Bitcoin, and invested in Ethereum and Litecoin in 2017.

• Robert F. Kennedy Jr. (U.S. Secretary of Health and Human Services nominee): Kennedy is a public advocate of Bitcoin, sees Bitcoin as a tool to combat the debasement of fiat currencies, and is a potential ally of the cryptocurrency industry.

• Pam Bondi (Attorney General nominee): Bondi has not yet made a clear statement on cryptocurrency, and her policy stance remains unclear.

• Michael Waltz (National Security Advisor Nominee): Waltz is a staunch supporter of cryptocurrency and emphasizes the role of encryption in enhancing economic competitiveness and technological independence.

• Brendan Carr (FCC Chairman Candidate): Carr is known for opposing censorship and supporting technological innovation and may provide infrastructure support for the encryption industry.

• Hester Peirce and Mark Uyeda (Potential Candidates for US SEC Chairman): Peirce is a staunch supporter of cryptocurrency and she advocates for clearer regulations. Uyeda criticized the US SEC's tough stance on cryptocurrency and called for clear regulatory rules.

2.2 Cryptocurrency-friendly policies can prevent the decline of the US dollar's global reserve status

Will the White House's promotion of Bitcoin shake people's confidence in the US dollar as a global reserve currency, thereby weakening the US dollar's status? American scholar Vitaliy Katsenelson believes that given that market sentiment around the dollar has been disturbed, the White House's promotion of Bitcoin may indeed undermine people's confidence in the dollar's status as a global reserve currency, thereby weakening the dollar's influence. Regarding the current fiscal challenges, Katsenelson believes that "what really keeps the United States strong is not Bitcoin, but controlling debt and deficits." Perhaps Trump's move can be a means to hedge the risk of the United States losing its dominance in the dollar. In the context of economic globalization, all countries strive to achieve international circulation, reserves and settlement of their own currencies, but the dilemma on this issue lies in the impossible triangle of monetary sovereignty, free capital flows and fixed exchange rates. The important value of Bitcoin lies in 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 the social media platform X that the era of BRICS countries trying to decouple from the US dollar is over, requiring these countries to promise not to create a new BRICS currency and not to support any other currency that may replace the US dollar, otherwise they will face 100% tariffs and lose access to the US market.

Trump now seems to hold the hegemony of the US dollar in one hand and Bitcoin in the other - the most powerful tool to fight the decline in trust in national legal currencies. By doing so, he simultaneously consolidated the global settlement power of the US dollar and the pricing power of the cryptocurrency market.

3. The tug-of-war between MicroStrategy and Citron Research

During the U.S. stock market on November 21, Citron Research, a well-known short-selling institution, announced on the social media platform X that it planned to short MicroStrategy (MSTR), a "Bitcoin heavy stock". This news caused MicroStrategy's stock price to fall sharply, falling more than 21% from its intraday high.

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

Source: @CitronResearch

To summarize, MicroStrategy's stock premium, leveraged Bitcoin investment strategy through the ATM mechanism, and the views of short sellers can be summarized as follows:

1. Source of stock premium: A large part of MSTR's premium comes from the ATM mechanism. Citron Research believes that MSTR's stock has become an alternative investment in Bitcoin, and its stock price shows an unreasonable premium relative to Bitcoin, which is why they decided to short MSTR. However, Michael Saylor refuted this view, saying that short sellers ignored MSTR's important profit model.

2. MicroStrategy's leverage operation: Leverage and Bitcoin investment: Saylor pointed out that MSTR used debt financing to leverage its Bitcoin investment and relied on the volatility of Bitcoin to make profits. The company flexibly raised funds through the ATM mechanism to avoid the discounted issuance of traditional financing methods, while using high trading volume to execute large-scale stock sales and obtain arbitrage opportunities from stock premiums.

3. Advantages of the ATM mechanism: The ATM model allows MSTR to flexibly raise funds and transfer the volatility, risk and performance of debt to common stock. Through this operation, the company can obtain benefits far exceeding the cost of borrowing and the rise in Bitcoin prices. For example, Saylor pointed out that if Bitcoin rises 30% by financing investment in Bitcoin at an interest rate of 6%, the company will actually get an 80% return.

4. Specific profit example: By issuing $3 billion in convertible bonds, the company expects earnings per share to reach $125 in the next 10 years. If the price of Bitcoin continues to rise, Saylor expects the company to make substantial long-term profits. For example, two weeks ago, MSTR raised $4.6 billion through an ATM mechanism, trading at a 70% premium, and earned $3 billion worth of Bitcoin in five days, equivalent to about $12.5 per share. Long-term earnings are expected to reach $33.6 billion.

5. Risk of falling Bitcoin prices: Saylor believes that buying MSTR shares means that investors accept the risk of falling Bitcoin prices. To get high returns, you must take corresponding risks. He expects Bitcoin to rise 29% per year, while MSTR's stock price will rise 60% per year.

6. MSTR's market performance: MSTR's stock price has soared 516% this year, far exceeding Bitcoin's 132% increase over the same period, and even exceeding the 195% increase of AI leader Nvidia. Saylor believes that MSTR has become one of the fastest growing and most profitable companies in the United States.

In response to Citron’s short selling, MSTR CEO Michael Saylor said that Citron did not understand where MSTR’s premium over Bitcoin came from, and explained:

“If we fund our Bitcoin investment at a 6% interest rate and Bitcoin rises 30%, then we actually earn an 80% Bitcoin spread (a function of the equity premium, conversion premium, and Bitcoin premium).”

“MicroStrategy has issued $3 billion in convertible bonds. Based on the 80% Bitcoin spread, this $3 billion investment will generate $125 per share in 10 years.”

This means that as long as the price of Bitcoin continues to rise, MicroStrategy can remain profitable:

“Two weeks ago, we completed $4.6 billion in ATM transactions at a premium of 70%. This means that we made $3 billion worth of Bitcoin in five days, about $12.5 per share. If we predict that earnings will reach $336 in 10 years, Billions of dollars, or about $150 per share. ”

To summarize, MicroStrategy’s operating model is to efficiently build capital, arbitrage between stocks, bonds, and Bitcoin, and closely link 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 inflate its own value. This requires a long-term Bitcoin bull market to maintain its value. Despite this, Citron’s short position in MicroStrategy has a much higher return than shorting Bitcoin, and MicroStrategy still believes that the price of Bitcoin will continue to grow steadily and slowly without large fluctuations.

Fourth, Conclusion

Source: Tradesanta

The United States continues to strengthen its control over the cryptocurrency industry, market opportunities are gradually shifting to centralization, and the decentralized crypto utopia is slowly compromising, with power "transferred" to the central government. Any drug has side effects, and the funds pouring into ETFs are only temporary relief, just like painkillers cannot cure the underlying disease.

In the long run, the promotion of Bitcoin through ETFs is not necessarily a good thing, and the trading volume of Bitcoin ETFs in Hong Kong is significantly lower than that in the United States. Judging from the flow of funds, American capital is gradually taking control of the crypto market. At present, although China is leading in Bitcoin mining, it is still at a disadvantage in terms of capital markets and policy orientation. Perhaps in the future, the long-term impact of Bitcoin ETFs will accelerate the normalization of crypto asset transactions, but this is both the beginning and the end.