Bitcoin, as an asset class, is officially integrating into the traditional financial (TradFi, 3,3) system.

Author: Marco Manoppo

Translation: Deep Tide TechFlow

After eight consecutive weeks of price increases, the crypto market has seen its first pullback. Nevertheless, my bullish sentiment towards Bitcoin (BTC) is stronger than ever, even though the current market is in the price discovery zone, where prices are not yet stable and are continuously exploring new highs or lows. The reason is simple: Bitcoin, as an asset class, is officially integrating into the traditional financial (TradFi, 3,3) system.

The Rise of Passive Funds

To understand TradFi (3,3), we first need to grasp the rapid growth of passive funds in the investment space. Simply put, passive funds are investment products designed to track and replicate the performance of specific market indices or sectors, rather than attempting to outperform them. They follow established rules and methods, catering to different target markets and risk preferences.

SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are among the most well-known passive funds. Your personal finance-savvy friends or advice-giving uncles have likely suggested investing in these funds instead of buying worthless "air coins (FARTCOIN)"—but you have already proven them wrong with your actions! Anyway, back to the point.

Many investment enthusiasts may recall that Warren Buffett once bet a hedge fund manager that the S&P 500 index would outperform most actively managed fund managers—ultimately, Buffett won that bet. Since 2009, passive funds have rapidly risen to become the preferred method for most investors.

Of course, those college friends obsessed with high-risk options trading on WallStreetBets (WSB) do not belong to the "majority."

While the reasons for the rise of passive investing are quite complex, we can summarize them into a few key factors:

• Cost Efficiency: Passive funds (such as index funds and ETFs) typically have expense ratios far lower than actively managed funds. This is because they do not require fund managers to engage in extensive "active management." Once the rules and methods are set, subsequent operations are mainly handled by algorithms, with only some manual intervention during quarterly adjustments. Lower costs usually mean that investors can achieve higher net returns, making passive investing particularly attractive to cost-conscious individuals.

• Ease of Access and Distribution: Passive funds are more accessible. Investors do not need to struggle to find trustworthy active funds; the entire financial industry has established a robust distribution system to deliver these products to ordinary investors. Due to regulatory support, passive funds are more easily integrated into mainstream investment channels like 401k retirement plans and pensions, while active funds face more restrictions in promotion and distribution.

• Consistent Performance: Collective wisdom often leads to more stable results. Over the past 15 years, most actively managed funds have underperformed their benchmark indices. While passive investing may not achieve 10x returns like early investments in Tesla (Tesla) or Shopify, most people would not bet 50% of their net worth on a single high-risk stock. For most investors, stable returns are more appealing than high-risk products.

Still not convinced? Here are some interesting data points:

• Over the past decade, the assets under management (AUM) of U.S. passive funds have grown from $3.2 trillion at the end of 2013 to $15 trillion by the end of 2023, a fourfold increase.

• As of December 2023, the total AUM of U.S. passive funds has for the first timeexceeded that of active funds, setting a new historical record.

• As of October 2024, U.S. stock index funds hold $13.13 trillion in assets globally, with $10.98 trillion concentrated in the U.S. market. In contrast, the global assets of actively managed stock funds amount to $9.78 trillion, with U.S. market assets at $7.26 trillion.

• Index funds currently account for57% of U.S. stock fund assets, a significant increase from 36% in 2016.

• In the first ten months of 2024, U.S. stock index funds attracted $415.4 billion in inflows, while actively managed stock funds saw outflows of $341.5 billion during the same period.

This is why traditional finance (TradFi) professionals, especially those with a TradFi background in crypto fund management, are so focused on Bitcoin ETFs. They know this marks the beginning of a larger wave that will truly integrate Bitcoin (BTC) into the retirement portfolios of ordinary people.

Crypto Investment Products

So, 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, the current adoption rate is slow and mainly focused on single-asset crypto products. This is because single-asset products are easier to launch, leading institutions to compete to be the first to launch a Bitcoin ETF. Today, we have seen some ETFs based on ETH staking, as well as more products based on other tokens in development.

However, the truly revolutionary products are BTC mixed portfolios. For example, a portfolio containing 95% S&P 500 and 5% BTC, or 50% gold and 50% BTC. Such products are more likely to be accepted by financial advisors and can be more easily integrated into the existing investment product supply chain, thereby expanding their distribution channels.

However, the launch and promotion of these products will still take time. As new products, they cannot immediately achieve stable inflows like existing popular passive funds.

MSTR Drives TradFi (3,3)

Next, let's talk about MSTR: As MSTR is included in the Nasdaq 100 index, passive funds (like QQQ) will passively purchase MSTR, which in turn will use these funds to buy more Bitcoin. In the future, there may be new BTC-stock-gold mixed passive products that replace MSTR's role, but in the next 3-5 years, MSTR, being a mature publicly traded company in the U.S., is more likely to be included in top passive fund indices. New passive products will take longer to achieve the same market position. Therefore, MSTR is better suited to play the role of a "Bitcoin treasury company" in the short term.

As long as MSTR continues to allocate funds to purchase Bitcoin, the market's purchasing power for BTC will continue to increase.

"There is no second choice."

If this sounds overly idealistic, it is because MSTR still faces some obstacles before fully realizing this role. For instance, the likelihood of MSTR being included in the S&P 500 index is low, as the S&P 500 requires companies to have positive earnings in the most recent quarter and over the past four quarters. However, new accounting rules starting in January 2025 will allow MSTR to account for the value changes of its Bitcoin holdings in net income, which may make it eligible for inclusion in the S&P 500.

Essentially, this is TradFi (3,3).

In short—because MicroStrategy (MSTR) is integrated into the supply chain of passive investment, the entire traditional finance (TradFi) passive investment ecosystem will inadvertently purchase more Bitcoin (BTC). This is similar to how investors unknowingly hold NVIDIA through passive funds, thereby creating a growth mechanism for Bitcoin prices akin to the (3,3) synergy effect.

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