Original text: (Put the Crypto in the Index Funds)
Translation: jk, Odaily Planet Daily
What strategy has Vanguard (the investment management company) adopted?
One fundamental situation today is that the U.S. stock market uses a $2 stock valuation to buy $1 worth of cryptocurrency. If a small public company holds $100 million worth of cryptocurrencies like Bitcoin, Ethereum, or Trump Coin, then its market value will rise to at least $200 million. This kind of transaction seems both confusing and magical. The pioneer of this approach is MicroStrategy (which has now simplified its name to 'Strategy', holding about $70 billion in Bitcoin with a market value of approximately $138 billion), and now various small companies are continuously imitating it and seem to be quite successful.
I often joke about this, but it really deserves a serious question: Why is the stock market willing to pay $2 for a cryptocurrency worth $1? This question can generally be divided into three explanations:
Bitcoin held by companies is worth more than the Bitcoin you hold yourself. This is because companies can use these crypto assets to do things you cannot, such as educating investors, lending, leveraging, staking, tokenization, in short, various 'operations'. From a business perspective, this premium is reasonable.
There is a large amount of institutional capital wanting to buy Bitcoin, but they can't buy it directly, nor can they hold it through more conventional (lower premium) means like futures or ETFs. So they are willing to pay a premium to invest indirectly through these 'crypto reserve companies'. This premium comes from a market structure imbalance: these companies provide a 'legitimate and compliant' investment form for institutional investors.
Retail investors are both lazy and confused, following the trend to buy stocks labeled with 'crypto reserve' without realizing they are buying a bunch of overvalued crypto assets. In simple terms, it's the 'meme stock effect'.
Every company making such operations will publicly state the first reason — 'We are not just hoarding coins; we will do many things', but I have always felt this lacks persuasion. The third explanation — 'Haha, retail investors' — sounds very reasonable, and I have written similar viewpoints myself ('For many small U.S. companies, the most direct appeal of the crypto reserve 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 cryptocurrency exposure, and Strategy is the only convenient channel for them to buy, hence 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 and instead pays double the price for Strategy? (As short-seller Jim Chanos questioned) Maybe they want to buy but can't: this part 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 were right, (2) but you couldn't buy. So buying Strategy might be your only practical choice.
Therefore, the high premium of Strategy stock may reflect an expectation: 'Institutional investors want Bitcoin in stock form, but market supply cannot keep up.'
Another related but slightly different viewpoint is: 'Index funds will passively buy Strategy, no matter how high the premium is.'
Capital is the second-largest shareholder, but according to (Bloomberg), 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 could cause 'serious disruption' to a portfolio.
Vanguard's executives have consistently upheld the logic of founder Jack Bogle, maintaining a critical stance towards crypto assets. Ironically, based on the 'cold logic' of passive investing through index funds, this giant managing $10 trillion in assets has now become the largest shareholder of Strategy - a software company that has turned itself into a 'Bitcoin shadow company'.
Vanguard owns more than 20 million shares of Strategy stock, accounting for nearly 8% of its Class A common stock, likely exceeding Capital Group in the fourth quarter of last year. According to Bloomberg's 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 yet! ('Vanguard's largest holding is its total market index fund VITSX, holding about 5.7 million shares worth about $2.6 billion.') However, Strategy is working hard to get listed. Just imagine how lively it would be if it really made it into the index.
And: is that a problem? Although I often joke about these matters, what do I know? Just yesterday, I mocked a newly launched 'crypto reserve company' whose asset reserves are HYPE tokens. I wrote: 'This name is too straightforward.' However, I also often mock some ordinary public companies, and their stock prices sometimes still rise. This article is not investment advice; most of my money is in index funds. I have learned a lesson: the financial phenomena I want to mock have nothing to do with whether they will rise. I have no predictive ability, so I try to be a price taker — buy the market portfolio and accept market returns. Many investors should do the same, or are already doing so.
In 2005, the 'market portfolio' was mostly stocks and bonds; by 2025, it will undoubtedly also include cryptocurrencies. There are many ways to access crypto assets now (you can buy Bitcoin directly, buy Bitcoin ETFs, etc.), and there will certainly be people telling me about their startup projects that can conveniently provide you with 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 buy the entire U.S. stock market index directly. Because the current stock market has been continually absorbing more and more 'crypto reserve companies'. You may not want crypto assets 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 (nor what the fund manager wants), but buying what the market wants.
You don't believe you (or fund managers) can pick the right things, so you choose to believe in the market. And now, what the market wants is cryptocurrency.
(The above content is excerpted and reprinted with permission from our partner PANews, original link | Source: Odaily Planet Daily)
"Vanguard complains about Bitcoin, but holds the most? The truth about 'Bitcoin shadow stocks' exposed" was originally published on (Block客).
