By Marco Manoppo
Compiled by: TechFlow
After eight consecutive weeks of price gains, the crypto market has experienced its first correction. But even so, I am more bullish on Bitcoin (BTC) than ever, despite the current market being in the Price Discovery Zone, that is, the stage where prices have not yet stabilized and are constantly exploring new highs or new 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 field. Simply put, passive funds are a type of investment product that aims to track and replicate the performance of a specific market index or sector, rather than trying to outperform them. They follow established rules and methods and serve different target markets and risk preferences.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are among the most famous passive funds. I’m sure your personal finance guru friends or uncles who like to give advice must have suggested that you invest in these funds instead of buying those worthless “air coins (FARTCOIN)” - but you have proved them wrong with your actual actions! Anyway, let’s get back to the topic.
Many investment enthusiasts may remember Warren Buffet’s bet with a hedge fund manager that the S&P 500 would outperform most actively managed managers—a bet that Buffet ultimately won. Since 2009, passive funds have rapidly risen to become the preferred approach for most investors.
Of course, those college friends who were addicted to risky options trading on WallStreetBets (WSB) were not part of “most people.”
While the reasons for the rise of passive investing are complex, we can boil them down to a few key factors:
Cost efficiency: Passive funds, such as index funds and ETFs, typically have expense ratios that are much lower than those of actively managed funds. This is because they do not require a lot of “active work” from the fund manager. Once the rules and methodology are set, the rest of the process is done primarily by algorithms, with only some human intervention during quarterly rebalancing. Lower costs generally mean higher net returns for investors, which makes passive investing particularly attractive to cost-conscious individuals.
Easy access and distribution: Passive funds are more accessible. Investors do not need to struggle to find trustworthy active funds. The entire financial industry has established a complete distribution system to deliver these products to ordinary investors. Due to regulatory support, passive funds are more easily integrated into mainstream investment channels such as 401k retirement funds and pensions, while active funds are more restricted in promotion and distribution.
Consistent performance: Crowd wisdom generally leads to more consistent results. Most actively managed funds have underperformed their benchmarks over the past 15 years. While passive investing may not deliver a 10x return like buying Tesla or Shopify early, most people don’t bet 50% of their net worth on a single risky stock. For most investors, consistent returns are more attractive than risky products.
Still not convinced? Here are some interesting statistics:
Over the past decade, U.S. passive fund assets under management (AUM) have quadrupled from $3.2 trillion at the end of 2013 to $15 trillion at the end of 2023.
As of December 2023, total assets under management of passive funds in the United States exceeded those of active funds for the first time, reaching an all-time high.
As of October 2024, US stock index funds hold $13.13 trillion in assets worldwide, of which $10.98 trillion is concentrated in the US market. Actively managed stock funds hold $9.78 trillion in global assets, with $7.26 trillion in US market assets.
Index funds now account for 57% of U.S. stock fund assets, a significant increase from 36% in 2016.
U.S. stock index funds attracted $415.4 billion in inflows through the first ten months of 2024, while actively managed stock funds saw outflows of $341.5 billion during the same period.
This is why the traditional finance (TradFi) sector, especially crypto fund managers with TradFi backgrounds, are paying so much attention to Bitcoin ETFs. They know that this marks the beginning of a larger wave that will truly incorporate Bitcoin (BTC) into the retirement portfolios of ordinary people.
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 indexes, the current adoption has been slow and focused on single-asset crypto products. This is because single-asset products are easier to launch, so institutions are scrambling to be the first to launch a Bitcoin ETF. Today, we have seen some ETFs based on ETH collateral, and more products based on other tokens are in development.
However, the truly revolutionary product is a BTC hybrid portfolio. For example, a portfolio contains 95% S&P500 and 5% BTC, or 50% gold and 50% BTC. Such products are more easily accepted by financial advisors and easier to integrate into the existing investment product supply chain, thereby expanding its distribution channels.
However, it will take time to launch and promote these products. As new products, they cannot immediately gain stable capital inflows like existing popular passive funds.
MSTR promotes TradFi (3,3)
Next, let’s talk about MSTR: As MSTR is included in the Nasdaq 100 Index, passive funds (such as QQQ) will passively buy MSTR, and MSTR will use these funds to buy more Bitcoin. In the future, there may be new BTC-stock-gold hybrid passive products that replace MSTR’s role, but in the next 3-5 years, since MSTR is a mature US public company, it is easier to be included in the index of top passive funds. And newly launched passive products will take longer to achieve the same market position. Therefore, MSTR is more suitable to play the role of "Bitcoin Vault Company" in the short term.
As long as MSTR continues to use funds to purchase Bitcoin, the market's purchasing power for BTC will continue to increase.
"There is no second choice."
If this sounds too idealistic, it's because MSTR still faces some obstacles before it can fully achieve this role. For example, MSTR's chances of being included in the S&P 500 index are low, as the S&P 500 requires companies to have positive earnings in the most recent quarter and cumulatively in the past four quarters. However, new accounting rules starting in January 2025 will allow MSTR to include changes in the value of its Bitcoin holdings in net income, which could make it eligible for inclusion in the S&P 500.
This is, in essence, TradFi (3,3).
In short - the entire traditional finance (TradFi) passive investing ecosystem will inadvertently buy more Bitcoin (BTC) as MicroStrategy (MSTR) is included in the passive investing supply chain. This is similar to investors unknowingly holding NVIDIA through passive funds, thus creating a similar (3,3) synergistic growth mechanism for the Bitcoin price.
