After eight consecutive weeks of gains, the crypto market has finally seen some pullbacks. However, my bullish sentiment on Bitcoin is stronger than ever, even as we are currently in a price exploration phase. The reason is simple: as an asset class, Bitcoin is gradually entering the (3,3) system of traditional finance (TradFi).
1. Growth of Passive Funds
To understand TradFi, one must first understand the development of passive funds in investing. Simply put, passive funds are investment products designed to track and replicate the performance of a specific market index or segment rather than trying to outperform them. These funds follow specific rules and methods to serve their target market and risk preferences.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are classic examples of well-known passive funds. That financial expert friend of yours or elder may have also suggested buying these funds instead of some 'air coin', but you have practically proven that their advice is wrong! However, I'm digressing.
Most investment enthusiasts may remember that Buffett once made a bet with a hedge fund management company, wagering that the S&P 500 index would outperform the vast majority of actively managed funds, and indeed, the facts proved Buffett right. Since 2009, passive funds have rapidly risen, becoming the preferred investment method for the vast majority of people.
But please don't take those college classmates obsessed with WSB options as 'the vast majority'.
A thorough exploration of all the details driving the development of passive investing would require an entire article, but we can summarize it into a few simple factors:
1) Cost Efficiency
Passive funds (such as index funds and ETFs) typically have expense ratios significantly lower than actively managed funds, as they do not require a fund management company to engage in extensive 'active operations'. Once the rules and methods are set, the subsequent work is mainly done by algorithms, with only slight manual intervention needed during quarterly adjustments. Lower costs usually mean higher net returns, making passive investing particularly attractive to cost-conscious investors.
2) Accessibility and Distribution Channels
In simple terms, passive funds are easier to access. You don't need to struggle to filter which active funds are worth investing in. There is an entire industry dedicated to delivering financial products to your grandparents, and passive funds have become more deeply integrated into these distribution chains due to regulatory influences. For example, most active funds are limited in their promotional materials, while passive investment products have truly integrated into numerous channels such as 401(k) and pension systems.
3) Stable Performance
'The wisdom of the crowd' often leads to better results. Over the past 15 years, most actively managed funds have underperformed their benchmarks, further highlighting the advantages of passive funds. While you might not achieve a 10x return like early investors in Tesla or Shopify, most people also won't bet 50% of their net assets on a single stock. High risk is not always a sexy choice.
4) Still unconvinced? Here are some interesting data points
In the United States, the assets of passive funds have quadrupled over the past decade, growing from $3.2 trillion at the end of 2013 to $15 trillion by the end of 2023.
As of December 2023, the total assets under management (AUM) of passive funds have historically surpassed those of active funds for the first time.
Data from October 2024 shows:
U.S. equity index funds hold $13.13 trillion in global assets and $10.98 trillion in U.S. assets, while actively managed equity funds hold $9.78 trillion and $7.26 trillion, respectively.
Index funds now account for 57% of U.S. equity fund assets, up from just 36% in 2016.
In the first ten months of 2024, U.S. equity index funds saw inflows of $415.4 billion, while actively managed equity funds experienced outflows of $341.5 billion during the same period.
Because of this, the entire traditional finance industry and those crypto fund management companies with traditional finance backgrounds are highly attentive to the progress of Bitcoin ETFs (pun intended, indeed 'investing' in them). They are well aware that this will be the starting point of a larger tide, bringing Bitcoin into the retirement portfolios of ordinary people.
2. Crypto Investment Products
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, their adoption has been relatively slow, currently starting only from single-asset crypto products. Clearly, this is because these products are easier to launch, which is also why everyone is eager to be the first to launch a Bitcoin ETF. Nowadays, we are starting to see the development of Ethereum staking ETFs and more products based on altcoins.
However, the real killer products are Bitcoin hybrid products. Imagine a portfolio that is 95% S&P 500 and 5% Bitcoin, or 50% gold and 50% Bitcoin. These products are what financial advisors would feel more comfortable recommending, and they would also be integrated into the supply chain of investment products, thus expanding their distribution channels.
Nonetheless, launching and promoting these products still takes time. As they are new products coming to market, they cannot automatically enjoy the monthly inflow advantages like existing popular passive products.
MSTR drives traditional finance
Next is MSTR: As MSTR is included in the Nasdaq 100 index, passive funds (such as QQQ) will be forced to automatically buy MSTR, while MSTR will use these funds to purchase more Bitcoin. In the future, there may be new Bitcoin-stock-gold hybrid passive products to replace MSTR's role, but for the foreseeable 3-5 years, as MSTR is a mature U.S. listed company, it is more likely to quickly meet the index inclusion criteria of top passive funds compared to newly launched passive products, thus playing the role of a 'Bitcoin treasury company'.
Therefore, as long as MSTR continues to use capital to purchase more Bitcoin, the demand for Bitcoin purchases will continue to increase.
No better choice
If this sounds too good to be true, it's because there are still some small hurdles to overcome for MSTR to play this role more effectively. For instance, due to S&P 500 requirements for a company's cumulative earnings to be positive for the most recent quarter and the previous four quarters, the likelihood of MSTR being included in the S&P 500 is low. However, the new accounting rules to be implemented starting January 2025 will allow MSTR to account for changes in the value of its Bitcoin holdings in its net income, which may make it eligible for inclusion in the S&P 500 index.
Essentially, this is the core of traditional finance.
5 minutes of rough calculation and assuming I really spent 5 minutes on this calculation, if there are any errors or suggestions on the assumptions, please leave a comment below!
In short, as MicroStrategy is incorporated into the traditional financial supply chain, the entire traditional finance passive investment ecosystem will inadvertently buy more Bitcoin, just as they unknowingly hold Nvidia stock, which has a similar effect on Bitcoin's price as traditional finance.
This article is republished with permission from: (Foresight News)
Original author: @ManoppoMarco
'Are your elders passively investing in Bitcoin? ETF + passive funds, how they silently push up BTC' was first published in 'Crypto City'
