Original title: How I Missed My First 100X as a VC. Original author: Marco Manoppo.

Original translation: Azuma, Odaily Planet Daily

Editor's note: Marco Manoppo, an investor at Primitive Ventures, has been quite prolific recently. After his article last week on how he missed the opportunity for 100x returns on Virtuals (see 'VC Narrative: How I Missed the 100x Opportunity on Virtuals'), Manoppo has released a new article today.

In the article, Manoppo outlines the potential impact of passive investment funds on Bitcoin buying pressure, especially after MicroStrategy (stock code: MSTR) officially entered the NASDAQ 100 index, under the trend of Bitcoin gradually approaching traditional finance. Manoppo indicates that despite recent pullbacks in the cryptocurrency market, we are currently in a price discovery range, and he is more optimistic about Bitcoin than ever.

The following is the full text from Manoppo, translated by Odaily Planet Daily.

After eight consecutive weeks of rising prices, the cryptocurrency market has finally seen some pullback. Although we are currently 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.

Growth of Passive Funds

To understand what the TradFi (3, 3) system is, one must assess the growth of passive funds in investing. Simply put, passive funds are investment products aimed at tracking and replicating the performance of a specific market index or segment, rather than attempting to outperform it. They follow a set of rules and methodologies to cater to their target market and desired risk allocation.

SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are famous passive funds. Most investment enthusiasts may remember that Buffett once bet with a hedge fund manager that the S&P 500 index would outperform most active fund managers — 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:

More Cost-Effective

Compared to actively managed funds, passive funds (like index funds and ETFs) usually have much lower expense ratios. This is because they do not require fund managers to engage in extensive 'active work.' Once the rules and methodologies are set, algorithms take over, with only minimal manual intervention during quarterly rebalancing. Lower costs typically mean better net returns on investments, making passive funds more attractive to cost-conscious investors.

Lower Barriers to Entry, Broader Distribution

In short, you have easier access to passive funds. Compared to active funds, investors do not need to worry about selecting fund managers, and there is already a well-established industry around how to distribute financial products to your grandparents. For regulatory reasons, passive funds also tend to integrate more easily into the financial supply chain. Most active funds are often limited 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 10x returns like early investors in Tesla or Shopify when investing in passive funds, conversely, most people are also reluctant to bet 50% of their net worth on a single stock. High risk and high return are not always that attractive.

Here are some more interesting statistics:

· In the U.S., over the past decade, the assets of passive funds have grown fourfold, increasing from $3.2 trillion at the end of 2013 to $15 trillion by the end of 2023.

· As of December 2023, for the first time in history, the total assets under management (AUM) of passive funds in the U.S. have officially surpassed those of active funds.

· As of October 2024, U.S. equity index funds hold $13.13 trillion in global assets, with $10.98 trillion in U.S. assets; while actively managed equity funds hold $9.78 trillion in global assets, with $7.26 trillion in U.S. assets.

· 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 an inflow of $415.4 billion, while active management funds experienced an outflow of $341.5 billion during the same period.

This is why the entire traditional financial sector or cryptocurrency fund managers with experience 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?

Despite the three major index providers (S&P, FTSE, MSCI) tirelessly developing cryptocurrency indices, the adoption rate has been rather slow, and currently only single-asset crypto investment products are offered. This is certainly because these products are easier to launch, which is why each institution is racing to be the first to launch a Bitcoin ETF. Nowadays, we are seeing major institutions working hard to promote ETH staking ETFs and more investment products based on altcoins.

However, the real killer product is an investment product that combines Bitcoin. Imagine a portfolio consisting of 95% S&P 500 index and 5% Bitcoin, or a portfolio made up of 50% gold and 50% Bitcoin. Fund managers would be eager to promote this type of product — they are also easier to integrate into the financial supply chain, increasing their distribution channels.

However, the launch and promotion of these products still take time. Moreover, 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's (MSTR) turn to shine.

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 buy MSTR, which in turn will be able to use these funds to purchase 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,' will find it easier to play this role since they are an established publicly traded U.S. company, qualifying them to be included in top passive fund indices more quickly 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... it’s because there are still a few small issues to resolve to enable MSTR to play this role more effectively. For instance, since the S&P 500 index requires companies to have positive earnings for the most recent quarter and the cumulative past four quarters, the current likelihood of MSTR being included in the S&P 500 is quite low. 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 TradFi (3, 3) system.

5-Minute Quick Calculation and Assumptions

I did a quick calculation in 5 minutes. If there are any errors in the calculations or suggestions regarding the assumptions, please feel free to point them out.

Odaily note: Taking MSTR's 0.42% weighting in the NASDAQ 100 index as an example, QQQ's net inflow in 2024 is projected to be $9.11 billion, corresponding to a net inflow of $38.26 million per month for MSTR, totaling $459 million annually.

In short — the entire ecosystem of passive investing in traditional finance will unconsciously purchase more Bitcoin due to MicroStrategy (MSTR) being included in major indices, just as they were unaware of holding Nvidia (NVIDIA) stocks, creating a similar effect for Bitcoin prices (3, 3).

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