MicroStrategy joins the Nasdaq 100, triggering a buying frenzy for Bitcoin

Author: Marco Manoppo

Compiled by: Azuma, Odaily Planet Daily

Editor’s Note: Marco Manoppo, an investor at Primitive Ventures, has been quite prolific recently. After his article on how he missed out on Virtuals went viral last week, Manoppo has published a new piece today.

In the article, Manoppo outlines the potential impact of passive investment funds on Bitcoin buying conditions, especially after MicroStrategy (stock code: MSTR) officially joined the Nasdaq 100 Index, amidst the trend of Bitcoin gradually aligning with traditional finance. Against this backdrop, Manoppo states that despite some recent pullbacks in the cryptocurrency market, which is currently in a price discovery range, he is more bullish on Bitcoin than ever before.

Below is the full text by Manoppo, compiled by Odaily Planet Daily.

After eight consecutive weeks of gains, the cryptocurrency market has finally seen some pullbacks. 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 needs to assess the growth of passive funds in investments. Simply put, passive funds are investment products aimed at tracking and replicating the performance of specific market indices or segments, rather than attempting to outperform them. They follow a set of rules and methodologies to cater to their target market and desired risk allocation.

SPY (SPDR SP 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are well-known passive funds. Most investment enthusiasts may remember that Buffett once bet a hedge fund manager that the SP 500 index would outperform most active fund managers—Buffett has proven to be correct. Since 2009, passive funds have performed strongly, becoming the preferred investment method for most people.

To delve into all the intricate factors driving the growth of passive funds would require a lengthy article, but we can summarize it into a few simple factors:

Better Cost Efficiency

Compared to actively managed funds, passive funds (such as index funds and ETFs) typically 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 established, algorithms take over, with only minimal human intervention during quarterly rebalancing. Lower costs usually mean better net investment returns, making passive funds more attractive to cost-conscious investors.

Lower Access Barriers and Broader Distribution

In short, passive funds are easier to access. Unlike active funds, investors do not need to painstakingly sift through fund managers, as there is already a well-established industry around distributing financial products to your grandparents. For regulatory reasons, passive funds also tend to integrate more easily into the financial supply chain. Most active funds often face restrictions on distribution materials, while passive funds have already been fully 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 investing in passive funds may never yield 10x returns like early investments in Tesla or Shopify, conversely, most people are also unwilling to bet 50% of their net worth on a single stock. High risk and high reward are not always that appealing.

Here are some more interesting statistics:

• In the U.S., 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 in the U.S. officially surpassed that of active funds for the first time in history.
• As of October 2024, U.S. equity index funds hold global assets of $13.13 trillion, with U.S. assets at $10.98 trillion; while actively managed equity funds hold global assets of $9.78 trillion, with U.S. assets at $7.26 trillion.
• 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 inflows of $415.4 billion, while actively managed funds experienced outflows of $341.5 billion.

This is why the entire traditional finance sector or cryptocurrency fund managers experienced in traditional finance are so enthusiastic about the Bitcoin ETF narrative. 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?

Although the three major index providers (SP, FTSE, MSCI) have been tirelessly developing cryptocurrency indices, the adoption has been relatively slow, and currently, they only offer single-asset crypto investment products. This is, of course, because these products are easier to launch, leading each institution to rush to be the first to launch a Bitcoin ETF. Today, we are seeing major institutions working hard to advance ETH staking ETFs and more investment products based on altcoins.

However, the real killer product would be an investment product that mixes Bitcoin. Imagine a portfolio composed of 95% SP 500 index and 5% Bitcoin, or a portfolio made up of 50% gold and 50% Bitcoin. Fund managers would be eager to market such products—they would also be easier to integrate into the financial supply chain, increasing their distribution channels.

However, the launch and promotion of these products will still take time. Given that they will be introduced as new products, 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 (MSTR)’s turn to take the stage.

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 purchase MSTR, which in turn will be able to use those funds to buy more Bitcoin. In the future, there may be new "Bitcoin-equity-gold" hybrid passive investment products that could replace MSTR's role, but for the foreseeable 3-5 years, MSTR, as a "Bitcoin treasury company," will find it easier to play this role because it is a mature publicly traded company in the U.S., qualifying it to be included in top passive fund indices faster than newly launched passive investment products.

Therefore, as long as MSTR continues to use these funds to purchase 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 some minor issues to resolve for MSTR to effectively play this role. For instance, the SP 500 index requires companies to have positive earnings in the most recent quarter and cumulative earnings over the past four quarters, so the current likelihood of MSTR being included in the SP 500 is low. However, new accounting rules set to take effect in January 2025 will allow MSTR to report the value changes of its BTC holdings as net income, potentially qualifying MSTR for inclusion in the SP 500.

This is essentially the TradFi (3, 3) system.

5-Minute Quick Calculation and Assumptions

I took 5 minutes to do a simple calculation, and if there are any errors in the calculations or suggestions regarding the assumptions, please feel free to point them out.

Note: Calculated based on MSTR's 0.42% weight in the Nasdaq 100 Index, with QQQ seeing a net inflow of $9.11 billion in 2024, corresponding to a net inflow of $38.26 million per month for MSTR, or $459 million annually.

In short— the entire passive investment ecosystem of traditional finance will unconsciously purchase more Bitcoin due to MicroStrategy (MSTR) being included in various indices, just as they are unaware of holding NVIDIA (NVIDIA) stock, creating a similar (3, 3) effect for Bitcoin's price.