Original text (Put the Crypto in the Index Funds)
Original author: Matt Levine
Compiled by: jk, Odaily Planet Daily
What strategy has Vanguard taken?
One basic situation today is that the U.S. stock market is valuing $2 stocks to buy $1 worth of cryptocurrency. If a small listed company holds $100 million worth of cryptocurrencies like Bitcoin, Ethereum, or TrumpCoin, its market value will at least rise to $200 million. This kind of trading seems both confusing and magical. The pioneer of this play is MicroStrategy (which has simply simplified its name to "Strategy" and holds about $70 billion in Bitcoin with a market cap of around $138 billion), and now various small companies are continuously imitating it, looking quite successful.
I often joke about this, but it's indeed worth seriously asking: Why is the stock market willing to pay $2 for a cryptocurrency worth $1? This question can generally be broken down into three explanations:
The Bitcoin held by companies is worth more than what you hold yourself. Because companies can use these crypto assets to do things you can't do, such as educating investors, lending, leveraging, staking, tokenizing, and all sorts of 'operations'. From a business perspective, this premium makes sense.
There is a large amount of institutional capital wanting to buy Bitcoin, but they can't; they can't hold it directly, nor can they hold it through futures, ETFs, or other more conventional (lower premium) means. So they are willing to pay a premium to invest indirectly through these 'crypto vault-type companies.' This premium comes from a market structure imbalance: these companies provide institutional investors with a 'legitimate and compliant' investment form.
Retail investors are both lazy and confused, following the trend to buy these stocks labeled as 'crypto vaults,' completely unaware that they are buying a bunch of overvalued crypto assets. In simple terms, it’s the 'meme stock effect.'
Every company doing this kind of operation will mouth the first reason—"We are not just hoarding coins; we will do a lot of things," but I've always felt that this is not very convincing. The third explanation—"Haha, retail investors"—sounds quite reasonable, and I have written similar views myself ("For many small U.S. stock companies, the most direct appeal of the crypto vault strategy is: no one pays attention to our small company, but if we announce that we bought a bunch of cryptocurrencies, retail investors will get excited and rush in to buy our stock at a high price.")
But the really interesting point is the second one. If this logic holds: "Large asset management institutions want exposure to cryptocurrency, and Strategy is the only channel they can conveniently buy into, so they are willing to pay a 100% premium for its stock," then... this sounds super strange, but maybe it's true? I checked the shareholder list of Strategy on Bloomberg, and the second largest shareholder is Capital Group—a traditional fund management company focused on active investing, holding 6.99%. Is this a good investment? Over the past 12 months, Strategy's stock price has risen about 175%, while the S&P 500 has only risen 13%. So... yes?
So why doesn’t Capital buy Bitcoin directly, but instead pays double the price to buy Strategy? (As short-seller Jim Chanos questioned) Maybe they want to buy it, but can't: This portion of Capital's holdings comes from its Growth Fund of America, which 'primarily invests in common stocks,' and 'can invest in other types of equity securities,' but clearly does not include Bitcoin or Bitcoin ETFs. If you are a long-term fund manager who only invests in stocks and want to buy Bitcoin, then over the past year, (1) you are right, (2) but you can't buy it. So, buying Strategy may be the only practical choice you have.
Therefore, the high premium on Strategy stock may reflect an expectation: 'Institutional investors want to buy “stock-form Bitcoin,” but the market supply cannot keep up.' Another related but slightly different view is: 'Index funds will passively buy Strategy, no matter how high the premium is.' Capital is the second largest shareholder, but according to Bloomberg's Vildana Hajric, the largest shareholder is actually Vanguard:
"Bitcoin is not suitable for long-term investors. Digital assets are more speculative than investment. They are an 'immature asset class' with no clear history and no 'intrinsic economic value,' which may cause 'serious disruption' to portfolios."
Executives at Vanguard have consistently upheld the logic of founder Jack Bogle and have a critical attitude towards crypto assets. But ironically, according to the 'cold logic' of passive investing in index funds, this $10 trillion asset giant has now become the largest shareholder of Strategy—a software company that has turned itself into a 'shadow Bitcoin company.'
Vanguard owns over 20 million shares of Strategy stock, accounting for nearly 8% of its Class A common stock, and likely surpassed Capital Group in the fourth quarter of last year. According to Bloomberg data, these holdings are distributed across dozens of funds under Vanguard, covering various index products such as small-cap, mid-cap, momentum, value, and growth.
And Strategy hasn't even entered the S&P 500 index! ("Vanguard's largest holding is its total market index fund VITSX, which holds about 5.7 million shares worth around $2.6 billion.") However, Strategy is working hard to get selected. Just imagine how lively it would be if it actually made it into the index.
And: is there anything wrong with that? Although I often joke about these things, what do I understand? Just yesterday, I mocked a newly launched 'crypto vault company,' whose asset reserve is HYPE tokens. I wrote: "This name is too straightforward." However, I also often mock some ordinary listed companies, and their stock prices still go up sometimes. This article is not investment advice; most of my money is also in index funds. I've learned one lesson: the financial phenomena I want to mock have no relation to whether they will rise or not. I have no predictive ability, so I try to choose to be a price taker—buy the market portfolio and accept market returns. Many investors should do this, or are already doing it.
In 2005, the 'market portfolio' was mostly stocks and bonds; by 2025, it will undoubtedly also include cryptocurrencies. There are now many ways to access crypto assets (you can buy Bitcoin directly, buy Bitcoin ETFs, etc.), and there will surely be people emailing me about their startup projects that can help you conveniently gain exposure to crypto indices (for example, give them $100, and they will allocate a basket of crypto assets for you using a market-cap-weighted method).
But the simplest and laziest way is to directly buy the entire U.S. stock market index. Because the current stock market has been continuously absorbing more and more 'crypto vault companies.' You may not want cryptocurrency to appear in your stock index fund—Vanguard doesn't want that either—but the essence of index funds is: it's not about buying what you want, but buying what the market wants. (And not what the fund managers want either.)
You don't trust yourself (or the fund managers) to pick the right things, so you choose to trust the market. And now, what the market wants is cryptocurrency.
