We’re highlighting some of our most popular Node Ahead topics to date. This week’s topic: bitcoin infiltrating the S&P. If you want to read the full piece, you can check out our blog or sign up to receive The Node Ahead straight to your inbox. This edition of Node Notes is an excerpt from Node Ahead 63.
Will every American own bitcoin even if they don’t know it?
It’s possible that over the next several years, nearly every American with a 401k or money in the stock market will have some exposure to Bitcoin in their portfolio.
I don’t expect that every American is going to open a Coinbase account and start buying bitcoin. But there are two recent developments that could lead to more than 100 million Americans having bitcoin exposure in their portfolios without intentionally adding it and perhaps, without ever knowing it’s there at all. The first has to do with bitcoin ETFs being added to model portfolios by the biggest financial players. The second is MicroStrategy entering the S&P 500.
Let’s start with the first reason. Most people aren’t financial experts, nor should they be. Rather than research individual stocks, study macro trends, build diversified portfolios, and rebalance periodically, a large number of people would prefer to outsource that work to financial experts (rightfully so). It’s much more convenient to invest in a pre-made portfolio that automatically takes care of all that for you than to do it yourself. As a result, these model portfolios are extremely popular and prevalent throughout the financial system.
Recently, the financial institutions responsible for creating these model portfolios started adding the bitcoin ETFs. Fidelity, one of the largest 401k managers in the world, now has multiple blueprint portfolios that include a 1-3% allocation to crypto. Anyone who allocates to Fidelity’s pre-made “All-In-One” portfolios now has exposure to bitcoin whether they are aware of it or not. Keep in mind that if that allocation is through a 401k, that means a portion of someone’s paycheck every two weeks or every month is being invested into a model that includes a bitcoin allocation. That’s a constant stream of demand to buy bitcoin that has never existed before.
Source: https://www.fidelity.ca/en/investments/solutions-portfolios/all-in-one/
And it’s not just Fidelity. BlackRock filed regulatory paperwork to get clearance to allocate a portion of its $36 billion Strategic Income Opportunities Fund to a bitcoin ETF. It also plans to add bitcoin to its $17 billion Global Allocation Fund. In a recent SEC filing, Morgan Stanley stated its desire to integrate the bitcoin ETFs into 13 investment vehicles. These include their Advantage Portfolio, Asia Opportunity Portfolio, Counterpoint Global Portfolio, and International Opportunity Portfolio.
I bet many readers of this newsletter already own some of these very same funds in their 401ks or personal portfolios. Surprise, you now have a bitcoin allocation (albeit likely small) in your portfolio even if you haven’t bought BTC on Coinbase or invested directly in the bitcoin ETF.
The second development has to do with MicroStrategy. In 2020, the founder and CEO Michael Saylor began buying bitcoin as an alternative to holding cash on the company’s balance sheet. Since then, the company has continued aggressively buying bitcoin using profits from the business, taking out debt, and issuing new stock. MicroStrategy currently holds 193,000 BTC making it the largest corporate holder of bitcoin.
MicroStrategy, which is a publicly listed company, is currently sitting on over $6.6 billion of profits from its bitcoin purchases. The strategy has paid off handsomely as the company’s stock price has exploded since 2020 and the company’s market cap is now over $24 billion. MicroStrategy has a larger market cap than more than 170 companies currently listed on the S&P 500.
Source: Yahoo Finance
To qualify to be included in the S&P 500, a company must meet several criteria, most notably be above a certain market cap threshold and have positive earnings over the past four quarters. Even if the criteria are met, the S&P’s 11-member executive committee must also approve a company’s inclusion. Today, MicroStrategy meets all the requisite criteria so it’s just up to the committee to decide if MSTR will be added to the index or not.
Why is getting added to the S&P 500 index a big deal? Because the three largest ETFs in existence are simply tracking the S&P 500. Those three funds are State Street’s SPDR S&P 500 ETF Trust (SPY), BlackRock’s iShares Core S&P 500 (IVV) and Vanguard’s S&P 500 ETF (VOO), each of which has over $400 billion in assets. These funds are in nearly every American’s stock and 401k portfolio. If MicroStrategy gets added to the S&P 500, bitcoin will automatically be added to nearly every portfolio including 401ks, pension funds, and just about every retail portfolio.
Even more interesting is what Michael Saylor may do if his company is added. The moment MSTR is added to the index, there will be automatic buying of the stock by those ETFs we just mentioned because they will need to add MicroStrategy’s stock to their holdings. In theory, that could drive the price up further. Every time MicroStrategy’s stock price has risen, Saylor sells more shares and uses those proceeds to buy more bitcoin. Bitcoin’s price goes up, stock goes up, and Saylor issues more stock to buy more bitcoin. He has created a feedback loop that keeps driving the price and market cap of the company up. The higher the market cap of MicroStrategy, the larger the weighting the company will hold in the index meaning anyone who owns a S&P 500 based fund, increases their bitcoin exposure without them doing a thing.
Source: https://twitter.com/TheBTCTherapist/status/1758187259541504367?ref_src=twsrc%5Etfw
Between MicroStrategy’s eventual inclusion in the S&P 500 and the bitcoin ETFs being added to an increasing number of model portfolios, bitcoin will be a part of nearly every American’s portfolio in the not-too-distant future, even if they do not realize it.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.