Here’s why Bitcoin will kill index funds
The modern index fund being the bread and butter of investors, creates an inefficient and uncreative market that Bitcoin solves.
In an episode of Bitcoin Spaces Live, produced by Bitcoin Magazine on November 3, 2021, Michael Saylor claimed that bitcoin would “demonetize” index funds.
“The war is bitcoin against gold and bitcoin against index funds… the war is against weak assets, and bitcoin is going to demonetize $ 100,000 billion afterwards.”
What does it mean to demonetize an asset? This means removing him from his status as money. Not good for the owners of these assets. In this article, I’ll focus on the potential of bitcoin to eat the lunch of index funds.
How do you “demonetize” index funds if, after all, they are… funds? The answer is that index funds are used as broad money. The larger ones, like those that follow the Standard & Poor’s 500 index, are de facto a store of value for retirement savings. Therefore, there is a monetary premium placed on these products that goes beyond the simple investment for the holders of them. This is one of the reasons Saylor calls index funds “weak assets” whose value will be transferred into bitcoin.
Index funds have their advantages, but I think their dominance is not sustainable over the long term. Bitcoin is here as the ideal alternative.
The advantages of index funds
In over a decade as a financial advisor, clients have turned to me to point them in the right direction on how to use their savings and investments. When I started out, I remember hearing an old Wall Street adage, “No one gets fired for buying IBM.” Today, it could very well be that “no one is fired for recommending an S&P 500 index fund.” Index funds and index ETFs (I use these terms interchangeably) have become the preferred solution for wealth managers and retirement investors today. It is a sacred cow.
An index fund, according to Investopedia, is “A type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the constituents of a financial market index, such as the Standard & Poor’s 500 index.” There are good reasons why the growth of these products has exploded. Reducing expenses, winning by not losing, is important. More importantly, the genius of John Bogle (founder of the Vanguard group of investment firms) was in preaching the discipline of buying and holding … at HODL, if you will.
The index fund has given us an easy way to participate in the appreciation of stock market indices without having to pay high expenses. They were a necessary innovation at a time when savvy savers were forced into investments they knew nothing about because of fiat inflation.
The problems of index funds
The crux of the matter is that index funds are what I call ‘nihilistic’ investments because they invest where nothing matters.
To understand why, let’s look at the example of checkout lines in a grocery store. You may notice that it usually happens that every checkout line at the grocery store is roughly the same length. Why is it?
The reason is that each buyer looks at the lines and then goes to the one that appears to be the shortest. The collective result of these decisions are more or less even ordered lines. It is the order that is not created by anyone.
But imagine if everyone said to each other, “The markets are efficient, the lines are always equal, so I will naively stand in the first. “ Now the order ceases to exist. The lines were more or less equal because everyone was making an active decision, they were not nihilistic!
We can now begin to understand the fundamental problem with index funds. If everyone is indexed, it’s not a market at all. John Bogle, the inventor of the index fund, even said it towards the end of his life:
“If everyone indexed, the only word you could use is chaos, disaster … Markets would fail.” – John Bogle, May 2017
Index fund apologists might respond that there will always be greedy investors trying to find an edge in the market. These investors will always provide “price discovery,” they might say. This may be true to some extent, but there is always a price distortion when a large part of the market is made up of “stupid money”.
This is exactly what we are seeing today. Because index investing, once seen as the way to get around Wall Street, is now the rule.
Let’s take a look at the monolith of BlackRock, Vanguard Group, Fidelity Investments, Capital Group and State Street, the top five providers of index funds and ETFs. These companies collectively manage over $ 27 trillion in global assets, which represents over 60% of all assets held in US equity funds.
BlackRock in particular may have even more influence than even the US Federal Reserve. It’s cronyism in all its glory. A revealing report from American Civil Liberties Project found that:
- BlackRock has a 5% or greater ownership interest in over 97.5% of the companies in the S&P 500.
- They have a former Fed vice president on the payroll.
- In June 2021, BlackRock’s two largest bond ETFs hit their largest ever size after the Fed announced it would buy corporate bond ETFs.
- Then the Fed hired BlackRock to run these corporate bond buying programs that, (you guessed it), would buy BlackRock’s own ETFs!
- CEO Larry Fink is a very important adviser to President Joe Biden.
We can therefore assume that the growth of indexation is not only the result of choice, but by the at least partial influence of governmental power. This trend was only amplified by the Ministry of Labor 2016 Fiduciary Rule, where my own community of financial advisers has dramatically shifted from a preference for actively managed investments to passive index funds and ETFs. This two-headed monster of government regulation and a powerful corporate lobby is pushing more and more investors towards passive indexation.
The influence of these friendly companies, however, may wane when investors finally wake up with a better alternative.
Why Bitcoin is superior to index funds and ETFs
The good news is that bitcoin, the money you owe Choose if you want to use it, it is a superior solution with no constraints. Since bitcoin is money, it exists for the sole purpose of saving. As Saifedean Ammous said, “Under a strong currency, all the demand for savings would simply go to holding cash. “ In other words, there would be no need to save by using investment products when there is money that retains its value and appreciates even while you hold it.
Of course, stock index funds will most likely experience lower volatility than bitcoin in the future, but their potential for upside returns is much lower as well. By Vanguard’s own admission, projected returns over the next ten years are only about 2-4% annualized for U.S. stocks:
On the other hand, bitcoin is an asset class that is still in its infancy, yet “he delivered an average annual return of 891% (2011-2020). As a pure money premium, it exists for the very reason that most people own index funds anyway. That is, to store their hard-earned savings, to transfer them to future themselves and leave something of value to their generations.
Bitcoin requires creativity from investors
For me, it took a little creative imagination to switch to bitcoin. It made me speculate, a swear word to financial advisers, about what the future might look like (as others have done). here, here, and even here. There are no backtests available for this kind of effort. Likewise, it can be an early hang-up for Bogleheads. But once they make the switch, I think the inertia will pull this community of believers into bitcoin as well. After all, there is no better marketing than “The number is increasing. ”
Investment, in its essence, will always exist, but saving bitcoin will replace indihilist nihilistic investment.
Thanks to Trent Dudenhoeffer and Don Stuart for reviewing and providing comments on this article.
This article should not be construed as a specific investment recommendation or advice. Always consult your investment professional before making any major investment decisions.
This is a guest post from Andy Flattery. The opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.