Author: @ManoppoMarco Compiled by: White Paper Blockchain

After eight consecutive weeks of growth, the crypto market finally experienced some pullback. However, the bullish sentiment towards Bitcoin is stronger than ever, even though we are currently in a price exploration zone. The reason is simple: as an asset class, Bitcoin is gradually entering the (3,3) system of traditional finance (TradFi).

1. Growth of Passive Funds

To understand TradFi, one must first understand the development of passive funds in investing. Simply put, passive funds are investment products designed to track and replicate the performance of a specific market index or segment, rather than trying to outperform them. These funds follow specific rules and methods, providing services based on their target market and risk preferences.

SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are well-known examples of passive funds. Your financial advisor friend or elder may have suggested that you buy these funds instead of some "air coins," but your actions have proven their advice wrong! However, I digress.

Most investment enthusiasts may remember that Buffett once bet a hedge fund manager that the S&P 500 Index would perform better than the vast majority of actively managed funds, and indeed, Buffett was right. Since 2009, passive funds have rapidly risen to become the preferred investment method for most people.

But please don’t take those college students addicted to WSB Options as "the vast majority of people."

A thorough exploration of all the details driving the development of passive investing would require a whole article, but we can summarize it into a few simple factors:

1) Cost efficiency

The expense ratios of passive funds (such as index funds and ETFs) are often much lower than those of actively managed funds because they do not require fund managers to engage in extensive "active operations". Once the rules and methods are established, the subsequent work is primarily handled by algorithms, requiring only minimal manual intervention during quarterly adjustments. Lower costs usually mean higher net returns, making passive investing particularly attractive to cost-conscious investors.

2) Accessibility and Distribution Channel

Simply put, passive funds are easier to access. There is no need to struggle to filter out which active funds are worth investing in. There is an entire industry dedicated to delivering financial products to your grandparents, and passive funds have more deeply integrated into these distribution networks due to regulatory influences. For instance, most active funds are restricted in their promotional materials, while passive investment products have genuinely infiltrated numerous channels such as 401(k) and pension systems.

3) Stable Performance

"The wisdom of the crowd" often yields better results. Over the past 15 years, most actively managed funds have underperformed benchmarks, highlighting the advantages of passive funds. While you may not achieve tenfold returns like early investors in Tesla or Shopify, most people wouldn’t stake 50% of their net worth on a single stock either. High risk is not always the appealing choice.

4) Still not convinced? Here are some interesting data

In the USA, the assets of passive funds have quadrupled over the past decade, increasing 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 has, for the first time in history, surpassed that of active funds.

Data from October 2024 shows that US stock index funds hold 13.13 trillion USD in global assets and 10.98 trillion USD in US assets, while actively managed stock funds have 9.78 trillion USD and 7.26 trillion USD, respectively.

Index funds now account for 57% of US stock fund assets, compared to only 36% in 2016.

In the first ten months of 2024, US stock index funds saw an inflow of 415.4 billion USD, while actively managed stock funds experienced an outflow of 341.5 billion USD during the same period.

For this reason, the entire traditional finance sector, as well as crypto fund managers with traditional finance backgrounds, are highly focused on the progress of Bitcoin ETF (a play on words, indeed 'investing' in it). They understand that this will be the starting point of a larger tide, truly bringing Bitcoin into ordinary people's retirement portfolios.

2. Crypto Investment Products

What is the relationship between Bitcoin ETF and passive funds? While the three major index providers (S&P, FTSE, MSCI) have been working to develop cryptocurrency indices, their adoption has been relatively slow, currently only starting with single asset crypto products. This is clearly because these products are easier to launch, which is why there is a rush to be the first to launch a Bitcoin ETF. Today, we are starting to see development efforts for Ethereum staking ETFs and more products based on altcoins.

However, the real killer product is BTC diversified bond products. Imagine a portfolio with 95% in S&P 500 and 5% in BTC, or 50% in Gold and 50% in BTC. These types of products would be more comfortably recommended by financial advisors and would also be integrated into the supply chain of investment products, thus expanding their distribution channels.

Nonetheless, launching and promoting these products will still take time. Since they are new products being introduced, they cannot automatically enjoy the monthly inflow advantages like existing popular passive products.

MSTR drives traditional finance.

Next is MSTR: With MSTR included in the NASDAQ 100 Index, passive funds (like QQQ) will be forced to automatically Buy MSTR, which will then use those funds to purchase more Bitcoin. In the future, there may be new BTC- Stocks - Gold diversified bond passive products replacing the role of MSTR, but for the foreseeable 3-5 years, since MSTR is a mature publicly listed company in the USA, it is more likely to quickly qualify for index inclusion of top passive funds compared to newly launched passive products, thereby playing the role of 'Bitcoin Treasury Company.'

Therefore, as long as MSTR continues to utilize capital to buy more BTC, the demand for purchasing Bitcoin will continue to increase.

There are no better options.

If this sounds too good to be true, it is because there are still some minor hurdles to resolve to let MSTR play this role more effectively. For example, MSTR's chances of being included in the S&P 500 are lower due to the requirement for companies to show positive cumulative earnings for the most recent quarter and the previous four quarters. However, the new accounting rules to be implemented starting January 2025 will allow MSTR to recognize the changes in the value of its BTC holdings in net income, which could qualify it for inclusion in the S&P 500 Index.

Essentially, this is the core of traditional finance.

5 minutes of rough calculation and assumptions. If I really spent only 5 minutes doing this calculation, please leave a comment below if there are any errors or suggestions regarding the assumptions!

In summary, as MicroStrategy becomes part of the traditional financial supply chain, the entire passive investment ecosystem of traditional finance will inadvertently buy more Bitcoin, just as they unknowingly Hold NVIDIA Stocks, which will have a similar effect on the price of Bitcoin as that of traditional finance.