TradFi (3,3) Model: Bitcoin's Integration into Traditional Finance is a Value Game
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TradFi (3,3) Model: Bitcoin's Integration into Traditional Finance is a Value Game
Bitcoin, as an asset class, is formally integrating into the traditional finance (TradFi) system.
Navigating Web3 tides with focused insightsAuthor: Marco Manoppo
Translation: TechFlow
After eight consecutive weeks of price increases, the crypto market has seen its first correction. Yet despite this, my bullish sentiment on Bitcoin (BTC) is stronger than ever—precisely because we are now in a Price Discovery Zone, where prices have yet to stabilize and continue exploring new highs or lows. The reason is simple: Bitcoin, as an asset class, is officially integrating into Traditional Finance (TradFi, 3,3).
The Rise of Passive Funds
To understand TradFi (3,3), we must first grasp the rapid growth of passive funds in the investment world. In short, passive funds are investment products designed to track and replicate the performance of a specific market index or sector, rather than trying to outperform it. They follow predefined rules and methodologies, serving different target markets and risk profiles.
SPY (SPDR S&P 500 ETF Trust) and VTI (Vanguard Total Stock Market ETF) are among the most well-known passive funds. I’m sure your financially savvy friend or that advice-giving uncle has recommended you invest in these instead of worthless "shitcoins"—though you’ve already proven them wrong with your actions! Anyway, back to the point.
Many investing enthusiasts may recall Warren Buffett’s famous bet against a hedge fund manager, where he argued that the S&P 500 would outperform most actively managed funds—and ultimately won. Since 2009, passive funds have surged in popularity, becoming the preferred choice for most investors.
Of course, those college friends glued to high-risk options trading on WallStreetBets (WSB) don’t exactly fall into the “most investors” category.
While the rise of passive investing stems from complex factors, we can summarize the key drivers as follows:
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Cost Efficiency: Passive funds (such as index funds and ETFs) typically have significantly lower expense ratios than actively managed funds. This is because they don't require fund managers to conduct extensive "active management." Once rules are set, operations are largely algorithm-driven, with only minor manual adjustments during quarterly rebalancing. Lower costs generally translate into higher net returns for investors, making passive investing especially appealing to cost-conscious individuals.
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Accessibility and Distribution: Passive funds are far easier to access. Investors no longer need to search for trustworthy active fund managers. The financial industry has built robust distribution systems that deliver these products directly to retail investors. Supported by regulations, passive funds integrate more easily into mainstream channels like 401(k) retirement plans and pension funds, while active funds face greater limitations in promotion and distribution.
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Consistent Performance: Collective market wisdom often yields more stable outcomes. Over the past 15 years, the majority of actively managed funds have underperformed their benchmark indices. While passive investing may not deliver 10x returns like early bets on Tesla or Shopify, most people also wouldn’t risk 50% of their net worth on a single high-volatility stock. For most investors, consistent returns are more attractive than high-risk speculation.
Still not convinced? Here are some compelling data points:
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Over the past decade, U.S. passive funds' assets under management (AUM) grew from $3.2 trillion at the end of 2013 to $15 trillion by the end of 2023, a fourfold increase.
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As of December 2023, U.S. passive funds’ total AUM surpassed active funds for the first time, setting a new record.
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As of October 2024, U.S.-listed equity index funds held $13.13 trillion in global assets, with $10.98 trillion concentrated in the U.S. market. In comparison, actively managed equity funds held $9.78 trillion globally, with $7.26 trillion in the U.S.
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Index funds now account for 57% of all U.S. equity fund assets—up sharply from 36% in 2016.
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In the first ten months of 2024, U.S. equity index funds attracted $415.4 billion in inflows, while actively managed equity funds experienced $341.5 billion in outflows during the same period.
This is why players in traditional finance (TradFi), especially crypto fund managers with TradFi backgrounds, are so focused on Bitcoin ETFs. They recognize this as the starting point of a much larger wave—one that will truly bring Bitcoin (BTC) into everyday retirement portfolios.
Crypto Investment Products
So what’s the connection between Bitcoin ETFs and passive funds?
Although the three major index providers (S&P, FTSE, MSCI) have been working on developing cryptocurrency indices, adoption remains slow, with current focus primarily on single-asset crypto products. Single-asset products are simpler to launch, so institutions are racing to be the first to release a Bitcoin ETF. Today, we’re already seeing ETH staking-based ETFs, with more token-specific products in development.
However, the truly revolutionary products will be hybrid BTC investment portfolios. For example, a portfolio consisting of 95% S&P 500 and 5% BTC, or 50% gold and 50% BTC. Such products are more acceptable to financial advisors and can more easily integrate into existing investment product supply chains, thereby expanding their distribution reach.
Still, launching and scaling these products will take time. As new offerings, they cannot immediately attract steady capital inflows like established passive funds do today.
MSTR Driving TradFi (3,3)
Now let’s talk about MSTR: With MicroStrategy (MSTR) added to the Nasdaq 100 Index, passive funds like QQQ will automatically buy MSTR shares. MSTR, in turn, uses this capital to purchase more Bitcoin. In the future, new BTC-stock-gold hybrid passive products might eventually replace MSTR’s role—but over the next 3–5 years, due to MSTR being a mature U.S. public company, it is far easier to include in top-tier passive fund indices. Newly launched passive products will require much longer to achieve similar market standing. Therefore, MSTR is better positioned to serve as a short-term "Bitcoin treasury company."
As long as MSTR continues allocating capital to buy Bitcoin, the market’s purchasing power for BTC will keep growing.
"No second option."
If this sounds too idealistic, it’s because MSTR still faces certain hurdles before fully fulfilling this role. For instance, MSTR is unlikely to be included in the S&P 500 Index anytime soon, as S&P requires companies to report positive earnings in the most recent quarter and over the past four quarters combined. However, new accounting rules effective January 2025 will allow MSTR to reflect changes in the value of its Bitcoin holdings directly in net income, potentially qualifying it for S&P 500 inclusion.
In essence, this *is* TradFi (3,3).
In short—because MicroStrategy (MSTR) is now embedded in the passive investment supply chain, the entire traditional finance (TradFi) passive investment ecosystem will inadvertently buy more Bitcoin (BTC). This mirrors how investors unknowingly hold NVIDIA shares through passive funds, creating a similar (3,3) synergistic growth mechanism for Bitcoin’s price.
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@ManoppoMarco
