Author: Marco Manoppo
Translated by: Azuma, Odaily Planet Daily
Editor’s note: Marco Manoppo, an investor at Primitive Ventures, has been quite prolific recently. After his article on missing out on Virtuals went viral last week, Manoppo has published a new article today.
In the article, Manoppo outlines the potential impact of automated investment funds on Bitcoin buying pressure, especially after MicroStrategy (stock code: MSTR) was officially included in the Nasdaq 100 index, in the context of Bitcoin gradually approaching traditional finance. Manoppo expresses that despite some recent pullbacks in the cryptocurrency market and being in a price discovery range, he is more bullish on Bitcoin than ever.
The following is the full text of Manoppo, translated by Odaily Planet Daily.
After eight consecutive weeks of gains, the cryptocurrency market has finally seen some correction. Although we are currently in a price discovery area, 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.
Growth of passive funds
To understand what the TradFi (3,3) system is, one needs to evaluate the growth of passive funds in investments. Simply put, passive funds are investment products aimed at tracking and replicating 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 profile.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are well-known passive funds. Most investment enthusiasts may remember that Buffett once bet against a hedge fund manager, believing that the performance of the S&P 500 index would outpace most active fund managers — and Buffett has been proven right. Since 2009, passive funds have performed strongly, becoming the preferred investment method for most people.
To delve into all the intricate factors driving the development of passive funds would require a lengthy article, but we can summarize it into a few simple factors:
Cost-effective
Compared to actively managed funds, passive funds (such as index funds and ETFs) typically have much lower fee ratios. This is because they do not require fund managers to engage in extensive 'active work'. Once the rules and methodologies are established, algorithms take over, with only minimal manual intervention during quarterly rebalancing. Lower costs usually mean better net investment returns, making passive funds more attractive to cost-conscious investors.
Lower entry barriers, broader distribution
In short, it is easier to access passive funds. Compared to active funds, investors do not need to painstakingly sift through fund managers, as there is already a well-developed industry around distributing financial products to your grandparents. For regulatory reasons, passive funds often fit more easily into the financial supply chain. Most active funds are often restricted in their 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 outcomes. Over the past 15 years, most active fund managers have failed to outperform their benchmarks. While you may never achieve a 10x return like early investors in Tesla or Shopify when investing in passive funds, most people are also reluctant to bet 50% of their net worth on a single stock. High risk and high reward are not always that attractive.
Here are some more interesting statistics:
In the U.S., the assets of passive funds have quadrupled over the past decade, growing from $3.2 trillion at the end of 2013 to $15 trillion at the end of 2023.
As of December 2023, the total assets under management (AUM) of passive funds in the U.S. has officially surpassed that of active funds for the first time in history.
As of October 2024, U.S. equity index funds hold global assets of $13.13 trillion, of which U.S. assets amount to $10.98 trillion; while actively managed equity funds hold global assets of $9.78 trillion, with U.S. assets at $7.26 trillion.
Index funds currently account for 57% of U.S. equity fund assets, up from 36% in 2016.
In the first ten months of 2024, U.S. equity index funds saw inflows of $415.4 billion, while actively managed funds experienced outflows of $341.5 billion.
This is why the entire traditional finance sector or cryptocurrency fund managers experienced in traditional finance are so enthusiastic about the narrative of Bitcoin ETFs. Because they know this is the starting point for opening a larger floodgate that will truly bring Bitcoin into the retirement portfolios of ordinary people.
Cryptocurrency investment products
But what is the relationship between Bitcoin ETFs and passive funds?
Although the three major index providers (S&P, FTSE, MSCI) have been tirelessly developing cryptocurrency indices, the pace of adoption has been slow, and currently only single-asset cryptocurrency investment products are offered. Of course, this is because these products are easier to launch, leading each institution to rush to be the first to launch a Bitcoin ETF. Today, we see major institutions striving to advance ETH staking ETFs and more investment products based on altcoins.
However, the real killer product is an investment product that mixes Bitcoin. Imagine a portfolio consisting of 95% S&P 500 index (S&P 500) and 5% Bitcoin, or a portfolio of 50% gold and 50% Bitcoin. Fund managers will be happy to promote such products — they are also more easily integrated into the financial supply chain, expanding their distribution channels.
However, the launch and promotion of these products still require time. At the same time, given that they will be introduced as a new product, they are not expected to automatically benefit from the existing monthly purchasing power of popular passive products.
MSTR makes TradFi (3,3) possible
Now it's MicroStrategy (MSTR)'s 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, which 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 replacing MSTR's role, but for the foreseeable 3-5 years, MSTR, as a 'Bitcoin treasury company', is more likely to play this role due to being a mature publicly traded company, qualifying for inclusion in top passive fund indices faster than newly launched passive investment products.
Therefore, as long as MSTR continues to use these funds to buy more Bitcoin, the buying pressure for Bitcoin will continue to grow.
If this sounds too good to be true... that's because there are still some small issues to resolve to make MSTR more effective in this role. For example, the possibility of MSTR being included in the S&P 500 is currently low because the S&P 500 requires companies to have positive earnings in the most recent quarter and over the past four quarters cumulatively. However, new accounting rules to be implemented starting January 2025 will allow MSTR to declare the value changes of its BTC holdings as net income, potentially qualifying MSTR for inclusion in the S&P 500.
This is essentially the (3,3) system of TradFi.
5-minute quick calculations and assumptions
I took 5 minutes to do the following simple calculations. If there are any errors in calculations or suggestions on relevant assumptions, please feel free to correct me.
Note: Taking MSTR's 0.42% weight in the Nasdaq 100 index as an example, the net inflow into QQQ in 2024 is $9.11 billion, corresponding to a monthly net inflow of $38.26 million for MSTR, with an annual inflow of $459 million.
In short — the entire passive investment ecosystem of traditional finance will, unknowingly, purchase more Bitcoin due to MicroStrategy (MSTR) being included in major indices, just as they are unaware of holding NVIDIA (NVIDIA) stocks, creating a similar (3,3) effect for Bitcoin's price.
