Author: Marco Manoppo
Compiled by: TechFlow
After eight consecutive weeks of price increases, the cryptocurrency market has seen its first correction. However, despite this, my bullish sentiment on Bitcoin (BTC) is stronger than ever, even though the current market is in the Price Discovery Zone, where prices are unstable and constantly exploring new highs or lows. The reason is simple: Bitcoin as an asset class is officially being integrated into the traditional financial (TradFi, 3,3) system.
The Rise of Passive Funds
To understand TradFi (3,3), we need to first understand the rapid growth of passive funds in the investment landscape. In simple terms, passive funds are investment products that aim to track and replicate the performance of a specific market index or sector, rather than trying to outperform them. They follow established rules and methodologies, serving different target markets and risk preferences.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are among the most well-known passive funds. I'm sure your personal finance expert friends or the uncles who like to give advice have recommended you invest in these funds, rather than those "worthless shitcoins" (FARTCOIN) - but you've already proven them wrong with your actions! Anyway, back to the topic.
Many investment enthusiasts may remember that Warren Buffett once bet against a hedge fund manager, believing that the S&P 500 index would outperform most actively managed funds - and Buffett ultimately won the bet. Since 2009, passive funds have risen rapidly, becoming the preferred choice for most investors.
Of course, those college friends who are obsessed with high-risk options trading on WallStreetBets (WSB) are not part of the "majority."
While the rise of passive investing is due to a complex set of reasons, we can summarize the key factors as follows:
Cost Efficiency: Passive funds (such as index funds and ETFs) typically have much lower expense ratios than actively managed funds. This is because they do not require fund managers to engage in extensive "active trading." Once the rules and methodologies are set, the subsequent operations are mainly carried out by algorithms, with only some manual intervention during quarterly adjustments. Lower costs usually mean investors can achieve higher net returns, making passive investing particularly attractive to cost-conscious individuals.
Accessibility and Distribution: Passive funds are more easily accessible. Investors no longer need to put in the effort to find trustworthy active funds, as the financial industry has built a well-established distribution system to deliver these products to ordinary investors. Supported by regulations, passive funds are more easily integrated into mainstream investment channels such as 401k retirement plans and pension funds, while active funds face more restrictions in promotion and distribution.
Consistent Performance: Collective wisdom often leads to more stable results. Over the past 15 years, most actively managed funds have underperformed their benchmark indices. While passive investing may not be able to achieve 10x returns like early investments in Tesla (Tesla) or Shopify, most people also won't bet 50% of their net worth on a high-risk stock. For most investors, stable returns are more appealing than high-risk products.
Still not convinced? Here are some interesting data points:
Over the past decade, the assets under management (AUM) of passive funds in the US have grown from $3.2 trillion at the end of 2013 to $15 trillion by the end of 2023, a four-fold increase.
As of December 2023, the total AUM of passive funds in the US surpassed that of active funds for the first time, reaching a historic high.
As of October 2024, US stock index funds held $13.13 trillion in assets globally, with $10.98 trillion concentrated in the US market. In comparison, actively managed stock funds had $9.78 trillion in global assets, with $7.26 trillion in the US market.
Index funds currently account for 57% of US stock fund assets, up significantly from 36% in 2016.
In the first ten months of 2024, US stock index funds attracted $415.4 billion in net inflows, while actively managed stock funds saw $341.5 billion in outflows during the same period.
This is why traditional finance (TradFi) players, especially those crypto fund managers with a TradFi background, are so focused on Bitcoin ETFs. They know that this marks the beginning of a larger wave that will truly integrate Bitcoin (BTC) into the retirement portfolios of the general public.
Crypto Investment Products
So, what is the relationship between Bitcoin ETFs and passive funds?
While the three major index providers (S&P, FTSE, MSCI) have been working on developing cryptocurrency indices, the adoption rate has been relatively slow, mainly focusing on single-asset crypto products. This is because single-asset products are easier to launch, so various institutions are competing to be the first to introduce a Bitcoin ETF. We have already seen some ETFs based on ETH staking, and more products based on other tokens are in development.
However, the truly revolutionary products are the BTC-blended portfolios. For example, a portfolio with 95% S&P500 and 5% BTC, or 50% gold and 50% BTC. These products are more easily accepted by financial advisors and can be more seamlessly integrated into the existing investment product supply chain, thereby expanding their distribution channels.
Nevertheless, the launch and promotion of these products will still take time. As new products, they cannot immediately attract stable inflows like the current popular passive funds.
MSTR Driving TradFi (3,3)
Now, let's talk about MSTR: With MSTR being included in the Nasdaq 100 index, passive funds (such as QQQ) will passively purchase MSTR, and MSTR will then use these funds to buy more Bitcoin. In the future, there may be new BTC-stock-gold blended passive products that replace MSTR's role, but in the next 3-5 years, as a mature US-listed company, MSTR is more likely to be included in top passive fund indices than newly launched passive products, which will take longer to reach the same market position. Therefore, MSTR is better suited to play the role of a "Bitcoin treasury company" in the short term.
As long as MSTR continues to use its funds to purchase Bitcoin, the market's buying power for BTC will continue to increase.
"There is no second choice."
If this sounds too idealistic, it's because MSTR still faces some hurdles before fully realizing this role. For example, the likelihood of MSTR being included in the S&P 500 index is relatively low, as the S&P 500 requires companies to have positive earnings in the most recent quarter and the past four quarters. However, new accounting rules starting in January 2025 will allow MSTR to include the value changes of its Bitcoin holdings in net income, which may make it eligible for inclusion in the S&P 500.
Fundamentally, this is TradFi (3,3).
In a nutshell - due to MicroStrategy (MSTR) being included in the passive investment supply chain, the entire traditional finance (TradFi) passive investment ecosystem will inadvertently purchase more BTC. This is similar to investors unknowingly holding NVIDIA through passive funds, thereby creating a similar (3,3) synergistic growth mechanism for the BTC price.
