Author: @ManoppoMarco Compiled by: Blockchain in vernacular

After eight weeks of continuous gains, the crypto market finally showed some correction. However, my bullish sentiment about Bitcoin is stronger than ever, even though we are currently in the price exploration zone. The reason is simple: as an asset class, Bitcoin is gradually entering the (3,3) system of traditional finance (TradFi).

1. The growth of passive funds

To understand TradFi, you first need to 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 market segment, rather than try to surpass them. These funds follow specific rules and methods to provide services for their target markets and risk appetite.

SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are examples of well-known passive funds. Your financial expert friend or uncle's elder probably suggested that you buy these funds instead of some kind of “air coin,” but you proved their advice wrong with your actions! But I'm taking it a long way.

Most investment fans may remember that Buffett made a bet with a hedge fund manager that betting the S&P 500 would perform better than most actively managed funds, and the fact did prove Buffett right. Since 2009, passive funds have rapidly risen and become the preferred investment method for the vast majority of people.

But please don't think of college students who are addicted to WSB options as “the vast majority.”

It would take an entire article to dive into all the details driving the development of passive investing, but we can boil it down to a few simple factors:

1) Cost efficiency

Passive funds, such as index funds and ETFs, generally have much lower fee rates than actively managed funds because they don't require a lot of “active action” from fund managers. Once the rules and methods are set, the next work is mainly done by an algorithm, requiring only a small amount of manual intervention during quarterly adjustments. Lower costs generally mean higher net returns, which makes passive investing particularly attractive to cost-conscious investors.

2) Accessibility and distribution channels

Simply put, passive funds are easier to obtain. You don't need to struggle to sift through which active funds are worth investing in. There is an entire industry dedicated to delivering financial products to your grandparents, and passive funds are more deeply integrated into these distribution chains due to regulation. For example, most active funds are limited in terms of promotional materials, and passive investment products have actually been integrated into many channels such as 401 (k) and pension systems.

3) Stable performance

“The wisdom of the masses” often brings better results. Most actively managed funds have fallen short of the benchmark over the past 15 years, which further highlights the advantages of passive funds. Although you probably won't get a 10x return like you did when you bought Tesla or Shopify in the early days, most people wouldn't bet 50% of their net worth on a single stock. High risk isn't always a sexy choice.

4) Still not convinced? Here's some interesting data

In the US, the assets of passive funds have quadrupled 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 surpassed active funds for the first time in history in total assets under management (AUM).

According to October 2024 data, US equity index funds hold $13.13 trillion in global assets and $10.98 trillion in US assets, while actively managed equity funds are $9.78 trillion and $7.26 trillion, respectively.

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

In the first ten months of 2024, US equity index funds had an inflow of $415.4 billion, while actively managed equity funds had an outflow of $341.5 billion over the same period.

Because of this, the entire traditional finance sector and crypto fund managers with traditional financial backgrounds are paying close attention to the progress of Bitcoin ETFs (pun intended, actually “investing” in them). They are well aware that this will be the starting point for a larger torrent that will actually bring Bitcoin into the retirement portfolios of ordinary people.

2. Crypto investment products

What is the relationship between Bitcoin ETFs and passive funds? Although the three major index providers (S&P, FTSE, and MSCI) have been working hard to develop cryptocurrency indices, their adoption has been relatively slow and is currently only starting with single-asset cryptographic products. Obviously, this is because these products are easier to launch, which is why everyone is scrambling to be the first to launch a Bitcoin ETF. Today, we're starting to see development efforts for Ethereum-staked ETFs and more altcoin-based products.

The real killer product, however, is the BTC hybrid product. Imagine an investment portfolio with 95% S&P 500, 5% BTC, or 50% gold and 50% BTC. Financial advisors will feel more comfortable recommending such products, and they will also be integrated into the supply chain of investment products to expand their distribution channels.

Still, it will take time to launch and promote these products. Since they are launched as new products, they cannot automatically enjoy the benefits of monthly capital inflows like existing popular passive products.

MSTR promotes traditional finance

Next up is MSTR: As MSTR is included in the NASDAQ 100 index, passive funds (such as QQQ) will be forced to automatically buy MSTR, and MSTR will use these funds to buy more Bitcoin. In the future, a new BTC-equity-gold hybrid passive product may take over the role of MSTR, but within the foreseeable 3-5 years, since MSTR is a mature US listed company, it is more likely than a newly launched passive product to quickly qualify for inclusion in the index of top passive funds, thus playing the role of a “Bitcoin treasury company.”

As a result, as long as MSTR continues to use capital to buy more BTC, the demand for Bitcoin purchases will continue to increase.

There's no better choice

If this sounds too good to be true, it's because there are a few minor hurdles that need to be addressed in order for MSTR to play this role more effectively. For example, since the S&P 500 requires that the company's cumulative earnings for the most recent quarter and the past four quarters be positive, MSTR is less likely to be included in the S&P 500. However, the new accounting rules, which will be implemented beginning in January 2025, will allow MSTR to include changes in the value of its BTC holdings in net income, which could make it eligible for inclusion in the S&P 500 index.

Essentially, this is the core of traditional finance.

5 minutes of math and assumptions I really only spent 5 minutes doing this calculation. If there are any mistakes or suggestions for the assumptions, please leave a comment below!

Simply put, as MicroStrategy is incorporated into the traditional finance supply chain, the entire traditional financial passive investment ecosystem will inadvertently buy more bitcoins, just as if they were unwittingly holding Nvidia shares, which has an effect similar to traditional finance.