MSCI Index May Exclude Crypto Treasuries, Analyst Cautions

Digital asset treasury (DAT) companies might experience significant challenges if the MSCI stock market index decides to exclude them starting in January. This warning comes from an analyst speaking to Cointelegraph, who indicated that this outcome is probable.

Key Takeaways

Analysts suggest that the MSCI Index may exclude digital asset treasury companies in January.
Feedback indicates DATs exhibit traits similar to investment funds, which could lead to their exclusion.
If excluded, index-tracking funds may need to sell, putting pressure on affected companies.
At least 38 crypto businesses, including major firms like MicroStrategy, are potentially impacted.
Clarity in corporate classification on treasuries is seen as beneficial for the cryptocurrency sector.

The MSCI Index began consulting with the investment community in October regarding the possible exclusion of Bitcoin. Feedback indicated that digital asset treasury companies may demonstrate characteristics akin to investment funds, which are currently not permitted for index inclusion.

Charlie Sherry, Head of Finance at the Australian cryptocurrency exchange BTC Markets, shared with Cointelegraph his belief that the likelihood of MSCI excluding DATs is "solidly in favour of it." According to him, an index only opens consultations on proposed changes when it is already leaning toward a decision.

The consultation process will continue until December 31, with results to be publicly shared on January 15 of the coming year. Following this, any changes would be implemented in February. The MSCI is also considering whether to take into account additional parameters, such as a company's self-identification as a DAT or whether it has primarily raised capital for crypto accumulation.

Should the MSCI proceed with the exclusion of DATs, Sherry warns that funds tracking the index would be required to sell off their holdings, leading to significant downward pressure on the affected companies. A preliminary list includes 38 crypto firms that may be impacted, including notable names such as Michael Saylor’s MicroStrategy, Sharplink Gaming, and crypto mining firms like Riot Platforms and Marathon Digital Holdings.

MSCI lists at least 38 crypto companies that could be affected by its decision. Source: MSCI

Sherry highlighted that when a substantial portion of a company's value derives from a balance-sheet asset rather than its underlying business, MSCI tends to view that as irrelevant to traditional equity benchmarks. This is seen as a risk-management strategy aimed at maintaining the alignment of indexes with predictable business fundamentals.

A report from JPMorgan analysts indicates that MicroStrategy might lose $2.8 billion if MSCI goes ahead with the exclusion. Roughly $9 billion of its estimated $56 billion in market value is currently associated with passive funds tracked by various indexes, according to Bloomberg.

Source: Matthew Sigel

MSCI index likely to kick out crypto treasuries, exec warns

The MSCI Index has been consulting with the investment community since October about potentially excluding Bitcoin and companies that fit the DAT profile. Analysts believe that this exclusion could create considerable pressure on these companies, affecting their market performance. The consultation period will conclude on December 31, with a final decision expected to be announced on January 15.

Potential Implications for Other Indexes

Sherry remarked that it is "hard to predict at this stage" whether the MSCI's decision could influence other index providers. "Index providers frequently observe each other's actions, but they do not always react simultaneously," he explained. Historical moves, such as S&P’s treatment of MicroStrategy, show there is a precedent for adopting stricter guidelines. However, each index provider has its own methodology and client base to contend with.

Related: Strategy Increases Bitcoin Purchases with 8,178 BTC Acquisition

Despite these potential challenges, MicroStrategy is still on track for potential inclusion in the S&P 500, according to predictions from crypto market intelligence firm 10X Research. They had forecasted a 70% chance that it would make it onto the index by the end of the year.

Advantages of Clearer Rules for Crypto

Sherry concluded by stating that establishing clearer rules regarding corporate classification is ultimately beneficial for the cryptocurrency space. "When companies clearly understand how their treasury decisions will be evaluated, it alleviates uncertainty for both issuers and investors," he noted.

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