Marco’s Market Musing - #1

After eight weeks of consecutive green candles, the crypto market finally saw some retracement. But, I’m more bullish on BTC than ever, even though we’re literally in a price discovery zone. The premise is simple, Bitcoin as an asset class is now properly entering the TradFi (3,3) system.

Growth of Passive Funds

To understand TradFi (3,3), one needs to assess the growth of passive funds in investing. Simply put, passive funds are investment products that aim to track and replicate the performance of a specific market index or segment rather than try to outperform it. They follow a set of rules and methodologies, catering to their target market and desired risk profiles.

The SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are examples of famous passive funds. I’m sure your personal finance guru friend or boomer uncles have told you to buy these instead of FARTCOIN — but you’ve proven them wrong! Anyway, I digress.

Most investing nerds out there remember that Warren Buffet once made a bet with a hedge fund manager that the S&P500 would outperform most active managers out there — and Buffet was proven right. Since 2009, passive funds have been on a tear, becoming the preferred way of investing for the large majority of people.

And oh, please, your college friends who are degen-ing WSB options aren’t “the large majority”.

Diving into all the intricacies that helped passive investing grow will take a whole essay, but we can break it down to a few simple factors:

• Cost efficiency. Passive funds, such as index funds and ETFs, generally have much lower expense ratios compared to actively managed funds. This is because they do not require extensive “active work” by the fund managers. Once the rules and methodologies are set, it’s up to the algorithm to take over, with some human intervention every quarterly rebalance. Alas, lower costs usually translate into better net returns for investors, making passive investing particularly attractive for cost-conscious individuals.
• Accessibility and distribution. TLDR it’s easier to access them. You don’t have to go out of your way to find which active funds to invest in. There’s a whole industry built around distributing financial products into the hands of your grandparents. Passive funds are more integrated into these supply chains because of regulations. For example, most active funds are limited in their promotional material. Whereas passive investment products are truly integrated with the 401k, pension systems, and many more.
• Consistent performance. Wisdom of the crowd usually leads to better results. It doesn’t help that most active managers have also been underperforming their benchmark in the past 15 years. Yes, you might never get your 10x like buying Tesla or Shopify in the early days, but again, most people won’t bet 50% of their net worth into one stock. High-risk isn’t always a sexy product.

Not convinced yet? Here are a few more interesting statistics:

• In the United States, assets in passive funds have grown fourfold over the past decade, from $3.2 trillion at the end of 2013 to $15 trillion at the end of 2023.
• As of December 2023, passive funds officially overtook active funds in total AUM in the US for the first time in history.
• As of October 2024, US equity index funds held $13.13 trillion in global assets and $10.98 trillion in US-centric assets, compared to $9.78 trillion and $7.26 trillion for actively managed equity funds.
• Index funds now account for 57% of equity fund assets in the U.S., up from 36% in 2016
• US equity index funds saw inflows of $415.4 billion in the first ten months of 2024, while actively managed equity funds experienced outflows of $341.5 billion during the same period.

This is why the entire TradFi space or crypto fund managers who had some experience in the TradFi world were so invested (pun intended) in the Bitcoin ETF stories. Because they knew that it was the starting point of a much larger floodgate that would truly insert BTC into your common man’s retirement portfolio.

Crypto Investment Products

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

While the big 3 index providers (S&P, FTSE, MSCI) have been relentlessly working on crypto indices, adoptions are fairly slow and have only started with single-asset crypto products. This is, of course, because those products are easier to launch, hence why everybody was racing to become the first Bitcoin ETF out the door. Nowadays, we’re seeing efforts to create ETH-staking ETFs and many more altcoin-based products.

However, the true killer is a BTC blended product. Imagine a portfolio of 95% S&P500 and 5% BTC, or 50% gold and 50% BTC. These are the types of products that financial advisors will be comfortable selling — they will also be integrated into the supply chain of investment products, increasing their distribution channels.

However, it will still take time to ship and promote these products. Given that they’ll launch as a new product and won’t automatically benefit from the monthly buying power that popular passive products are already enjoying.

MSTR Enables The TradFi (3,3)

Enters MSTR: With MSTR’s inclusion in the NASDAQ-100, passive funds such as QQQ will be forced to automatically buy MSTR, which in turn will use that capital to purchase more Bitcoin. In the future, there might be new BTC-equity-gold blended passive products that will overtake MSTR’s role, but in the foreseeable 3-5 years, it’s much easier for MSTR to play this role as a “Bitcoin Treasury Company” given that they’re an established public company in the US, and will be eligible for index inclusion amongst the top passive funds much quicker than a newly launched passive products.

As a result, there’ll be a perpetually increasing buying power on BTC, so long as MSTR continuously uses that capital to purchase more BTC.

THERE IS NO SECOND BEST

If this sounds too good to be true, it’s because there are small blockers that need to be solved for MSTR to more effectively play this role. For example, MSTR inclusion in the S&P500 is quite unlikely given the fact that the S&P500 requires companies to have positive earnings in the most recent quarter and cumulatively over the past four quarters. However, new accounting rules starting in January 2025 would allow MSTR to claim the changes in the value of its BTC holdings as net income, potentially making it eligible for S&P500 inclusion.

This, in essence, is the TradFi (3,3)

5-Minute Napkin Math & Assumption

I’m literally doing this in 5 minutes so if there are any mistakes or suggestions to the assumption please comment below!

TLDR — the entire TradFi passive investing ecosystem will unknowingly buy more BTC because of MicroStrategy’s inclusion in the supply chain, just like how they all own NVIDIA without realizing it, creating a (3,3)-like effect for the price of BTC.

Disclaimer:

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