After MicroStrategy joins the Nasdaq 100, Bitcoin’s buying flywheel begins

Author: Marco Manoppo

Compiled by: Azuma, Odaily Planet Daily

Editor's note: Primitive Ventures investor Marco Manoppo has been quite productive recently. After his article describing how he missed out on Virtuals went viral last week, Manoppo published a new article today.

In the article, Manoppo outlined the potential impact of passive investment funds on Bitcoin buying conditions as Bitcoin gradually moves closer to traditional finance, especially after MicroStrategy (stock code: MSTR) was officially included in the Nasdaq 100 Index. Against this background, Manoppo said that although the cryptocurrency market has seen some recent pullbacks and is currently in a price discovery zone, he is more bullish on Bitcoin than ever before.

The following is the full text of Manoppo, compiled by Odaily Planet Daily.

After eight straight weeks of gains, the cryptocurrency market is finally seeing some pullback. Even though we are now in price discovery territory, 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.

The growth of passive funds

To understand what the TradFi (3, 3) system is, it is necessary to evaluate the growth of passive funds in investments. Simply put, a passive fund is an investment product that aims to track and replicate the performance of a specific market index or segment, rather than trying to beat it. They follow a set of rules and methodologies that cater to their target market and desired risk profile.

SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are well-known passive funds. Most investing enthusiasts probably remember that Buffett once made a bet with a hedge fund manager that the S&P 500 Index would outperform most active fund managers—and Buffett has been proven correct. Passive funds have been on a strong run since 2009, becoming the preferred investment method for most people.

It would take a long article to delve into all the intricacies that drive passive funds, but we can boil it down to a few simple factors:

more cost effective

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 a lot of "active work" from fund managers. Once the rules and methods are established, the algorithm starts to take over, with some human intervention only being imposed during quarterly rebalancing. Lower costs generally mean better net returns on investments, making passive funds more attractive to investors who are more cost-conscious.

Lower barriers to entry and wider distribution

In short, you have greater access to passive funds. Compared to active funds, investors don't have to go through the trouble of selecting fund managers, and there's a well-established industry around how to distribute financial products to your grandparents. Passive funds also tend to be easier to integrate into financial supply chains for regulatory reasons. Most active funds are often restricted in distribution materials, while passive funds have already been truly integrated into 401k plans, pension systems, etc.

More stable performance

The wisdom of crowds often leads to better results. Over the past 15 years, most active managers have failed to beat their benchmarks. While you may never get a 10x return when investing in passive funds compared to buying Tesla or Shopify in the early days, conversely, most people are not willing to bet 50% of their net worth on one. on stocks. High risk, high reward isn't always so attractive.

Here are some more interesting statistics:

• In the United States, the assets of passive funds have increased fourfold in the past decade, from US$3.2 trillion at the end of 2013 to US$15 trillion at the end of 2023.
• As of December 2023, passive funds have officially surpassed active funds in total assets under management (AUM) in the United States for the first time in history.
• As of October 2024, U.S. stock index funds hold $13.13 trillion in global assets, including $10.98 trillion in U.S. assets; while actively managed stock funds hold $9.78 trillion in global assets, including $7.26 trillion in U.S. assets.
• Index funds now account for 57% of U.S. stock fund assets, up from 36% in 2016.
• In the first ten months of 2024, U.S. stock index funds saw a total inflow of $415.4 billion, while actively managed funds experienced outflows of $341.5 billion during the same period.

This is why crypto fund managers across the traditional finance space or with experience in traditional finance are enamored with the Bitcoin ETF narrative. Because they know that this is the starting point of opening a larger floodgate that will truly introduce Bitcoin into the retirement portfolios of ordinary people.

Cryptocurrency investment products

But what’s the relationship between Bitcoin ETFs and passive funds?

Although the three major index providers (S&P, FTSE, and MSCI) have been working tirelessly to develop cryptocurrency indices, adoption has been quite slow and currently only offers single-asset crypto investment products. Of course, this is because these products are easier to launch, so every institution is rushing to be the first to launch a Bitcoin ETF. Today, we are seeing major institutions working hard to promote ETH pledged ETFs and more altcoin-based investment products.

However, the real killer product is an investment product mixed with Bitcoin. Imagine a portfolio consisting of 95% S&P 500 and 5% Bitcoin, or 50% gold and 50% Bitcoin. Fund managers will be happy to promote these types of products -they will also be easier to integrate into financial supply chains, increasing their distribution channels.

However, the launch and promotion of these products will still take time. Also given that they will be launched as a new product, they are not expected to automatically benefit from the existing monthly purchasing power of already popular passive products.

MSTR makes TradFi possible (3, 3)

Now it's MicroStrategy's (MSTR) turn.

With MSTR being included in the Nasdaq 100 Index, passive funds like QQQ (Invesco QQQ Trust, an ETF issued by Invesco that tracks the Nasdaq 100 Index) will be forced to automatically purchase MSTR, which in turn You will be able to use these funds to purchase more Bitcoins. In the future, there may be new "Bitcoin-Equity-Gold" hybrid passive investment products to replace MSTR's role, but in the foreseeable 3-5 years, MSTR will be easier to play this role as a "Bitcoin financial company" , because they are an established U.S. public company, they qualify for inclusion in top passive fund indices more quickly than newly launched passive investment products.

Therefore, as long as MSTR keeps using these funds to buy more Bitcoin, Bitcoin buying will continue to grow.

If this sounds too good to be true... that's because there are a few minor issues that need to be addressed in order for MSTR to perform this role more effectively. For example, since the Standard & Poor's 500 Index (S&P 500) requires companies to have positive earnings in the most recent quarter as well as the cumulative earnings for the past four quarters, the possibility of the current MSTR being included in the S&P 500 is slim. However, new accounting rules that will be implemented starting in January 2025 will allow MSTR to declare changes in the value of its BTC holdings as net income, potentially making MSTR eligible for inclusion in the S&P 500.

This is essentially TradFi’s (3, 3) system.

5 minutes of quick calculations and assumptions

I spent 5 minutes simply doing the following calculations. If there are any calculation errors or suggestions on related assumptions, please correct me.

Note: Taking MSTR accounting for 0.42% of the Nasdaq 100 Index as an example, QQQ will have a net inflow of US$9.11 billion in 2024, corresponding to MSTR 's monthly net inflow of US$38.26 million and annual inflow of US$459 million.

In short - the entire passive investment ecosystem of traditional finance will unconsciously buy more Bitcoin due to the inclusion of MicroStrategy (MSTR) in major indexes, just like they did not realize that they own NVIDIA (NVIDIA) Like stocks, this creates an effect similar to (3, 3) for Bitcoin’s price.