Over the past few months, MicroStrategy (formerly known as Strategy), the largest publicly traded company holding Bitcoin as a treasury asset, has faced a critical issue that could lead to its removal from the MSCI index. This potential exclusion not only poses significant financial risks for the firm but could also impact the broader cryptocurrency sector, with analysts estimating it might reduce demand for its shares by up to $9 billion.
In October, MSCI proposed that companies holding digital assets making up 50% or more of their total assets should be removed from its global benchmarks, arguing these firms resemble investment funds, which are excluded from its indexes. However, many companies, including MicroStrategy, contend they are operational businesses developing innovative products and view MSCI’s proposal as biased against the crypto industry.
MSCI is currently gathering public feedback, and analysts warn that if it decides to exclude Digital Asset Treasury (DAT) companies, other index providers may follow. “The discussion already goes beyond just MSCI… to the eligibility of DATs in equity indexes overall,” said Kaasha Saini, head of index strategy at Jefferies, who expects most equity indexes to align with MSCI’s decisions.
Asset managers are estimated to hold up to 30% of a large-cap company’s freely traded shares, meaning significant outflows could occur if these companies are dropped from major indexes. This is especially concerning for the DAT sector, which often funds its token purchases by issuing stock.
MicroStrategy’s CEO, Phong Le, and co-founder Michael Saylor addressed the potential MSCI exclusion in a public letter. They estimated it could trigger $2.8 billion in stock liquidation and potentially “chill” the entire industry. They explained that excluding DATs could cut them off from the roughly $15 trillion passive investment market, severely harming their competitive position.
Analysts at TD Cowen estimated in November that about $2.5 billion of MicroStrategy’s market value is tied to MSCI, with an additional $5.5 billion dependent on other indexes. JPMorgan’s analysis suggested that if MSCI excludes MicroStrategy, the company could see $2.8 billion in outflows, potentially rising to $8.8 billion if it is also removed from other indexes like the Nasdaq 100, the CRSP US Total Market Index, and various Russell indexes.
Besides MicroStrategy, MSCI’s preliminary list identifies 38 other companies at risk of exclusion, with a combined market cap of $46.7 billion as of September 30. This includes French firm Capital B, which is also investing in Bitcoin. Alexandre Laizet, Capital B’s director of Bitcoin strategy, noted that while passive funds currently hold limited shares in their company, access to passive investment flows is vital for future growth.
Matt Cole, CEO of U.S.-based Bitcoin buyer Strive—which is not at risk of exclusion—said the proposals have largely been priced into market valuations. He added, “On a longer-term basis, I think it raises the cost of capital for all Bitcoin treasury companies.”
At the time of writing, MicroStrategy’s stock, traded on Nasdaq under the ticker MSTR, was at $165, up nearly 4% ahead of the week’s close.
Frequently Asked Questions
Of course Here is a list of FAQs based on the news headline Analysts warn that the strategy could be removed from several major indexes potentially leading to losses of up to 9 billion
Beginner Definition Questions
1 What does this headline even mean
This means financial experts are warning that a specific investment strategy might no longer be included in important market benchmarks If that happens many large investment funds that automatically track those benchmarks might be forced to sell which could cause the value of that strategy to drop significantly
2 What is an index in investing
An index is like a measuring stick for the stock market or a sector of it Examples are the SP 500 or the Nasdaq Composite They track the performance of a group of stocks to show how that segment of the market is doing
3 What is an investment strategy in this context
It likely refers to a specific theme or approach that is packaged into an ETF This could be something like a multifactor fund a specific ESG strategy or a thematic fund focused on a trend like artificial intelligence
4 Why would an index remove a strategy
Index providers have strict published rules A strategy might be removed if it no longer meets those rulesfor example if its performance drifts from its stated goal if it becomes too illiquid or if the methodology for selecting stocks is changed
Impact Mechanism Questions
5 How could removal from an index cause 9 billion in losses
Huge amounts of money are invested in passive funds that automatically mimic an index If the index removes a strategy all those passive funds are legally obligated to sell their holdings in it at the same time This massive forced selling can overwhelm buyers pushing the price down sharply and creating paper losses for anyone still holding it
6 Who would lose this money
Primarily the investors who own shares in the affected strategy This could be individual investors pension funds or other institutions The 9 billion represents the potential drop in the total market value of all the shares