Concerns Emerge Over Potential Exclusion of Strategy from Major Indexes, $9 Billion Loss Forecasted

Summary:
Strategy (formerly MicroStrategy), known as the largest publicly traded Bitcoin treasury firm, faces the potential of being excluded from the MSCI index. Analysts predict that this could result in major financial repercussions amounting to a loss of up to $9 billion in demand for shares. This article delves into the implications of this proposed exclusion not only for Strategy but also for the wider cryptocurrency sector.

Key Takeaways

Exclusion Risks: Strategy might be removed from the MSCI index, leading to potential losses of $9 billion.
Consultation Process: MSCI is consulting the public, with fears that other indexes may follow suit.
Financial Impact: Analysts estimate significant capital outflows if exclusion occurs.
Industry Response: Strategy executives contend that such measures unfairly bias against companies functioning in the cryptocurrency space.

Strategy

Potential Consequences for the Cryptocurrency Industry

In recent months, Strategy, which is recognized as the largest publicly traded Bitcoin treasury entity, has come under scrutiny for a possible exclusion from the Morgan Stanley Capital International (MSCI) index. This potential decision poses substantial financial threats not only to the firm but could also reverberate throughout the cryptocurrency landscape, with analysts estimating that the loss in demand for its shares could hit $9 billion.

The MSCI suggested in October that any company with more than 50% of its total assets in digital assets should be removed from its global benchmarks. Their rationale is that such companies operate similarly to investment funds, which are traditionally excluded from the index. However, many companies, including Strategy, argue that they are legitimate businesses focused on innovation, and MSCI’s proposal seems to discriminate against the cryptocurrency industry.

Currently, MSCI is engaged in a public consultation process. Analysts warn that should it move forward with excluding Digital Asset Treasury (DAT) companies like Strategy, other index providers may follow suit. "The conversation already extends beyond just MSCI… to the eligibility of DATs in equity indexes in general,” remarked Kaasha Saini, who leads index strategy at Jefferies. She anticipates alignment with MSCI's decisions by most equity indexes.

Impact of Potential Outflows

Asset managers hold up to 30% of the free float in large-cap companies. If these firms are excluded from major indexes, substantial capital outflows are anticipated. This situation is particularly delicate for the DAT sector, which often finances token purchases through stock sales.

In a public letter, Strategy's CEO, Phong Le, and co-founder, Michael Saylor, addressed the implications of a potential exclusion by MSCI, estimating a liquidation of up to $2.8 billion worth of the firm's stock that may significantly impact the cryptocurrency sector. They cautioned that removing DATs could alienate them from the estimated $15 trillion passive investment market, severely affecting their competitive position.

Expected Outflows for Strategy

In November, TD Cowen analysts indicated that around $2.5 billion of Strategy’s market valuation is closely tied to MSCI, with another $5.5 billion linked to other indexes. JPMorgan’s analysis suggested that should MSCI choose to exclude Strategy, the company might face outflows amounting to $2.8 billion. This figure could escalate to as much as $8.8 billion, should it also be excluded from indexes like the Nasdaq 100, CRSP US Total Market Index, and various Russell indexes owned by LSEG.

MSCI's initial list identifies 38 companies at risk of exclusion, with a combined issuer market capitalization of $46.7 billion as of September 30. This includes the French firm Capital B, which is also engaged in Bitcoin investments. Alexandre Laizet, Capital B's Bitcoin strategy director, noted that while passive fund holdings in their shares are limited, access to passive flows will be critical for future growth.

Matt Cole, CEO of US-based Bitcoin buyer Strive—an entity not currently at risk of exclusion—observed that the MSCI proposals have mostly been integrated into market valuations. He added, “In the long term, this could elevate the cost of capital for all Bitcoin treasury firms.”

Strategy The chart displays MSTR’s valuation declining, reflecting the wider downturn in the crypto market. Source: MSTR on TradingView.com

As of the time of writing, the company's stock, which trades under the ticker symbol MSTR on the Nasdaq, was priced at $165, reflecting a nearly 4% increase just before the end of the trading week.

Featured image from DALL-E, chart from TradingView.com