Original title: How I Missed My First 100X as a VC
Original author: Marco Manoppo,
Original translation by: Azuma, Odaily Planet Daily
Editor's note: Marco Manoppo from Primitive Ventures has been quite prolific recently. After the article detailing how he missed the Virtuals opportunity went viral last week (see VC's narrative: How I Missed the 100-fold Return Opportunity in Virtuals), Manoppo has released a new article today.
In the article, Manoppo outlines the trend of Bitcoin gradually approaching traditional finance, especially after MicroStrategy (stock code: MSTR) was officially included in the Nasdaq 100 index, and the potential impact of passive investment funds on Bitcoin buying pressure. Against this backdrop, Manoppo states that despite recent pullbacks in the cryptocurrency market, we are currently in a price discovery range, but he is more optimistic about Bitcoin than ever.
The following is the full text of Manoppo, translated 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 area, 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 investing. Simply put, passive funds are investment products aimed at tracking and replicating the performance of specific market indices or segments rather than trying to outperform them. They follow a set of rules and methodologies to cater to their target market and required risk allocation.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are famous passive funds. Most investors may recall that Buffett once bet with a hedge fund manager that the S&P 500 index would outperform most active fund managers—Buffett has been proven right. Since 2009, passive funds have performed strongly, becoming the preferred investment method for most people.
To delve into all the intricate factors driving the development of passive funds would require a lengthy article, but we can summarize it into a few simple factors:
More cost-effective
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 a lot of 'active work'. Once the rules and methodologies are established, algorithms take over, with only some human intervention during quarterly rebalancing. Lower costs typically mean better investment net returns, making passive funds more attractive to cost-conscious investors.
Lower barriers to entry, broader distribution
In short, it's easier for you to access passive funds. Compared to active funds, investors do not have to painstakingly sift through fund managers; an established industry already exists for distributing financial products to your grandparents. For regulatory reasons, passive funds are often easier to integrate into the financial supply chain. Most active funds tend to face limitations in distribution materials, while passive funds have already genuinely integrated into 401k plans, pension systems, and so on.
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 a 10-fold return like early investments in Tesla or Shopify, most people also do not want to bet 50% of their net worth on a single stock. High risk and high reward are not always so appealing.
Here are some more interesting statistics:
In the United States, passive fund assets have quadrupled over the past decade, growing from $3.2 trillion at the end of 2013 to $15 trillion at the end of 2023.
As of December 2023, passive funds in the U.S. officially surpassed active funds in total assets under management (AUM) for the first time in history.
As of October 2024, U.S. stock index funds hold global assets of $13.13 trillion, with U.S. assets accounting for $10.98 trillion; meanwhile, active management stock funds hold global assets of $9.78 trillion, with U.S. assets accounting for $7.26 trillion.
As of now, index funds account for 57% of U.S. stock fund assets, up from 36% in 2016.
In the first ten months of 2024, U.S. stock index funds saw an inflow of $415.4 billion, while active management funds saw an outflow of $341.5 billion.
This is why the entire traditional finance space or cryptocurrency fund managers with experience in traditional finance are so keen on the narrative of Bitcoin ETFs. Because they know this is the starting point for opening a larger gateway 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 (S&P, 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, so every institution is rushing to be the first to launch a Bitcoin ETF. Today, we are seeing major institutions working hard to promote ETH staking ETFs and more altcoin-based investment products.
However, the real killer product is an investment product that mixes Bitcoin. Imagine a portfolio composed of 95% S&P 500 index and 5% Bitcoin, or a portfolio consisting of 50% gold and 50% Bitcoin. Fund managers would be eager to promote this type of product—it's also easier to integrate into the financial supply chain, increasing its distribution channels.
However, the launch and promotion of these products still take time. Also, since they will be launched as new products, they are not expected to automatically benefit from the monthly purchasing power already established by popular passive products.
MSTR makes TradFi (3, 3) possible
Now it's MicroStrategy (MSTR)'s turn to take the stage.
As MSTR is 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 allow MSTR to use these 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 they are a mature publicly traded company, qualifying them 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 buy more Bitcoin, the buying pressure for Bitcoin will continue to grow.
If this sounds too good to be true... it's because some minor issues still need to be resolved for MSTR to play this role more effectively. For example, since the S&P 500 index requires companies to have positive cumulative earnings in the most recent quarter and the past four quarters, the current likelihood of MSTR being included in the S&P 500 is low. However, new accounting rules to be implemented starting January 2025 will allow MSTR to report the value changes of its BTC holdings as net income, potentially qualifying MSTR for inclusion in the S&P 500.
This is essentially the TradFi (3, 3) system.
5-minute quick calculations and assumptions
I took 5 minutes to do the following simple calculations, and if there are any errors in the calculations or suggestions regarding the assumptions, please feel free to point them out.
Taking MSTR's 0.42% share in the Nasdaq 100 index as an example, QQQ had a net inflow of $9.11 billion in 2024, corresponding to a monthly net inflow of $38.26 million into MSTR, with an annual inflow of $459 million.
In short— the entire passive investment ecosystem of traditional finance will inadvertently purchase more Bitcoin because MicroStrategy (MSTR) is included in major indices, just like they were unaware of holding NVIDIA stock, creating a similar effect for Bitcoin prices.
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