Author: Marco Manoppo
Compiled by: Azuma, Odaily
Editor's Note: Marco Manoppo, an investor at Primitive Ventures, has been quite productive recently. After his article last week about how he missed out on Virtuals went viral, Manoppo has released a new article today.
In the article, Manoppo outlines the trend of Bitcoin gradually moving closer to traditional finance, especially after MicroStrategy (ticker: MSTR) officially joined the Nasdaq 100 index, and the potential impact of passive investment funds on Bitcoin buying demand. Against this backdrop, Manoppo states that although the Altcoin market has seen some pullbacks recently, he is more bullish on Bitcoin than ever before.
The full text of Manoppo's article is as follows, compiled by Odaily.
After eight consecutive weeks of gains, the Altcoin market has finally seen some corrections. Although we are now in a price discovery zone, my bullish sentiment on Bitcoin is stronger than ever. The reason is simple - Bitcoin 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 and have become the investment method of choice for most people.
To delve into all the complex factors driving the development of passive funds would require a lengthy article, but 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 go through the hassle of screening 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 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 buying Tesla or Shopify early on 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 some more interesting statistics here:
- 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 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 Bitcoin ETFs. Because they know this is the starting point to open a much bigger gate, which will truly bring Bitcoin into the retirement portfolios of the general public.
Crypto Investment Products
But what is the relationship between Bitcoin ETFs and passive funds?
While the three major index providers (S&P, FTSE, MSCI) have been tirelessly developing Altcoin indices, the adoption has been painfully slow, and they have only provided single-asset Altcoin investment products so far. Of course, this is because these products are easier to launch, so every institution is rushing to be the first to launch a Bitcoin ETF. Now, we are seeing all the major institutions pushing for ETH staking ETFs and more investment products based on Altcoins.
However, the real killer product is a mixed investment product that includes Bitcoin. Imagine a portfolio composed of 95% S&P 500 index and 5% Bitcoin, or 50% gold and 50% Bitcoin. 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 to take the stage.
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 Bitcoin. In the future, there may be new "Bitcoin-Equity-Gold" hybrid passive investment products that replace MSTR's role, but in the foreseeable 3-5 years, MSTR as a "Bitcoin Treasury Company" will be easier to play this role, as they are a mature US-listed company and are eligible to be included in top passive fund indices faster than newly launched passive investment products.
So as long as MSTR continues to use these funds to purchase more Bitcoin, the Bitcoin buying demand will continue to grow.
If this sounds too good to be true... it's because there are still some small issues that need to be solved to make MSTR more effectively play this role. For example, the S&P 500 index currently requires companies to have positive earnings in the most recent quarter and the past four quarters, so MSTR's chances of being included in the S&P 500 are currently quite low. However, the new accounting rules to be implemented starting January 2025 will allow MSTR to report the value changes of its BTC holdings as net income, potentially making MSTR eligible for inclusion in the S&P 500.
This is essentially the TradFi (3,3) system.
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.
Note: Using MSTR's 0.42% weighting in the Nasdaq 100 index as an example, QQQ is expected to see net inflows of $9.11 billion in 2024, corresponding to net monthly inflows of $38.26 million for MSTR, or annual inflows of $459 million.
In short, the entire passive investment ecosystem of traditional finance will unconsciously purchase more Bitcoins as MicroStrategy (MSTR) is included in major indices, just as they are unaware of holding Nvidia (NVIDIA) stocks, creating a similar (3, 3) effect on the price of Bitcoin.
