Original author: Marco Manoppo
Compiled | Odaily
Translator | Azuma (@azuma_eth)
Editor's note: Primitive Ventures investor Marco Manoppo has been quite prolific recently, and after his article last week describing how he missed the 100x return opportunity of Virtuals (see 《VC Memoir: How I Missed the 100x Return Opportunity of Virtuals》), Manoppo has released a new article today.
In the article, Manoppo outlines the potential impact of passive investment funds on Bitcoin buying pressure, especially after MicroStrategy (ticker: MSTR) officially joined the Nasdaq 100 index. Based on this background, Manoppo states that although the crypto market has seen some pullbacks recently, it is currently in a price discovery phase, but he is more bullish on Bitcoin than ever before.
The full text of Manoppo's article, compiled by Odaily.
After eight consecutive weeks of gains, the Altcoin market has finally seen some pullback. Although we are now in a price discovery zone, my bullish sentiment on BTC is stronger than ever. The reason is simple - BTC as an asset class is now entering the TradFi (3,3) system.
The Growth of Passive Funds
To understand the TradFi (3,3) system, we need to assess the growth of passive funds in investing. In simple terms, passive funds are investment products that aim to track and replicate the performance of a specific market index or segment, rather than trying to outperform it. They follow a set of rules and methodologies to cater to their target market and required risk allocation.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are well-known passive funds. Most investment enthusiasts may still remember that Warren Buffett once bet against a hedge fund manager, believing that the S&P 500 index would outperform most active fund managers - and Buffett has been proven right. Since 2009, passive funds have been performing strongly, becoming the investment of choice for most people.
While a lengthy article would be required to delve into all the complex factors driving the growth of passive funds, we can summarize it into a few simple factors:
Better Cost-Effectiveness
Compared to actively managed funds, passive funds (such as index funds and ETFs) typically have much lower expense ratios. This is because they do not require fund managers to do a lot of "active work". Once the rules and methodologies are set, the algorithm takes over, with only some human intervention during quarterly rebalancing. Lower costs usually mean better net investment returns, making passive funds more attractive to cost-conscious investors.
Lower Access Barriers and Wider Distribution
In short, you have easier access to passive funds. Compared to active funds, investors do not need to put in as much effort to screen fund managers, and the industry has already developed a well-oiled system for distributing financial products to your grandparents. For regulatory reasons, passive funds are also often more easily integrated into the financial supply chain. Most active funds face restrictions on distribution materials, while passive funds have already truly integrated into 401k plans, pension systems, and more.
More Stable Performance
The wisdom of the crowd often leads to better results. Over the past 15 years, the performance of most active fund managers has failed to outperform the benchmark. While you may never get a 10x return like an early investor in Tesla or Shopify by investing in passive funds, on the flip side, most people are also unwilling to put 50% of their net worth into a single stock. High risk, high return is not always as appealing.
There are also some more interesting statistics:
In the US, passive fund assets have grown 4-fold over the past decade, from $3.2 trillion at the end of 2013 to $15 trillion by the end of 2023.
As of December 2023, passive funds in the US have officially surpassed active funds in total assets under management (AUM) for the first time in history.
As of October 2024, US stock index funds held $13.13 trillion in global assets, of which $10.98 trillion were US assets; while actively managed stock funds held $9.78 trillion in global assets, of which $7.26 trillion were US assets.
Index funds currently account for 57% of US stock fund assets, up from 36% in 2016.
In the first 10 months of 2024, US stock index funds saw inflows of $415.4 billion, while actively managed funds saw outflows of $341.5 billion.
This is why the entire traditional finance realm or crypto fund managers with experience in traditional finance are so keen on BTC ETFs. Because they know this is the starting point to open a much bigger gate, which will truly bring BTC into the retirement portfolios of the general public.
Crypto Investment Products
But what is the relationship between BTC ETFs and passive funds?
While the three major index providers (S&P, FTSE, MSCI) have been tirelessly developing crypto indexes, the adoption has been quite slow, and they currently only offer single-asset crypto investment products. Of course, this is because these products are easier to launch, so every institution is rushing to be the first to launch a BTC ETF. Now, we are seeing various institutions working to push forward ETH staking ETFs and more Altcoin-based investment products.
However, the real killer product is a mixed investment product that includes BTC. Imagine a portfolio composed of 95% S&P 500 index and 5% BTC, or 50% gold and 50% BTC. Fund managers would be eager to market such products - they would also be more easily integrated into the financial supply chain, increasing their distribution channels.
However, the launch and promotion of these products will still take time. And given that they will be launched as new products, they are not expected to automatically benefit from the existing monthly buying power of popular passive products.
MSTR Makes TradFi (3,3) Possible
Now it's MicroStrategy's (MSTR) turn.
With MSTR being included in the Nasdaq 100 index, passive funds like QQQ (Invesco QQQ Trust, an ETF tracking the Nasdaq 100 index) will be forced to automatically purchase MSTR, and MSTR in turn will be able to use these funds to buy more BTC. In the future, there may be new "BTC-Equity-Gold" hybrid passive investment products that replace MSTR's role, but in the foreseeable 3-5 years, MSTR as a "BTC treasury company" will be easier to play this role, because they are a mature US-listed company and are eligible to be included in top passive fund indexes faster than new passive investment products.
Therefore, as long as MSTR continues to use these funds to purchase more BTC, the buying pressure on BTC will continue to grow.
If this sounds too good to be true... it's because some small issues need to be resolved to make MSTR more effective in this role. For example, due to the S&P 500 index requirement that companies have positive earnings in the most recent quarter and the past four quarters, the current possibility of MSTR being included in the S&P 500 is very small. However, the new accounting rules to be implemented from January 2025 will allow MSTR to report changes in the value of its BTC holdings as net income, which may potentially make MSTR eligible for inclusion in the S&P 500.
This is essentially the (3, 3) system of TradFi.
5-Minute Quick Calculation and Assumptions
I did the following simple calculations in 5 minutes, and welcome any corrections to the calculations or suggestions on the relevant assumptions.
Odaily Note: Taking MSTR's 0.42% weighting in the NASDAQ 100 index as an example, the net inflow to QQQ in 2024 is $9.11 billion, corresponding to a net inflow of $38.26 million per month and $459 million per year for MSTR.
In short - the entire passive investment ecosystem of traditional finance will unconsciously purchase more BTC due to the inclusion of MicroStrategy (MSTR) in major indices, just as they are unaware of holding NVIDIA (NVIDIA) stocks, creating a (3, 3) effect-like impact on the price of BTC.
