MSCI’s Potential Exclusion of Bitcoin-Holding Companies
Michael Saylor’s Strategy may soon be removed from MSCI and other significant stock indexes, a move analysts predict could diminish demand for its shares by as much as $9 billion and affect the broader cryptocurrency sector. In response to client inquiries, MSCI proposed in October to exclude companies holding digital assets that account for 50% or more of their total assets from its global benchmarks. According to MSCI, these companies resemble investment funds, which are not included in its indexes. However, many of these firms contend that they are operational entities creating innovative products, arguing that MSCI’s proposal is an unfair bias against the cryptocurrency industry. Shares of Strategy, which originated as a software company named MicroStrategy, surged by 3,000% after it began investing in bitcoin in 2020; however, they have since declined significantly, with a 43% drop this year amid the downturn in cryptocurrency values. Numerous other companies have been encouraged to acquire and retain crypto tokens on their balance sheets, hoping for an increase in value, although doubts about the sustainability of such practices are growing.
Possible Industry Impact of Exclusion
MSCI is currently conducting a public consultation and is expected to announce its decision by January 15. Analysts warn that if MSCI excludes digital asset treasury (DAT) companies, other index providers may follow suit. “The discussion is already moving beyond MSCI to the overall eligibility of DATs in equity indexes,” noted Kaasha Saini, head of index strategy at Jefferies, adding that she anticipates most equity indexes will align with MSCI’s approach.
Concerns Over Market Consequences
Passive asset managers are thought to control approximately 30% of a large-cap company’s free float, which means that exclusion could lead to substantial capital outflows. This poses a particular challenge for the DAT sector since many firms finance their token purchases through stock sales. A representative from Strategy, which has increasingly relied on debt for its token acquisitions, did not provide a comment when approached. This month, Saylor downplayed concerns regarding the potential MSCI exclusion, asserting it would have minimal impact. However, in a subsequent open letter to MSCI, he and Strategy CEO Phong Le estimated that excluding DATs could lead to $2.8 billion in stock liquidation and significantly dampen the industry. They emphasized that this exclusion would effectively bar DATs from the approximately $15 trillion passive investment market, which would “drastically weaken their competitive standing.”
Market Valuations and the Stakes for Strategy
Analysts at TD Cowen estimated in November that $2.5 billion of Strategy’s market capitalization is derived from MSCI, with an additional $5.5 billion linked to other indexes. JPMorgan projected that if MSCI were to remove Strategy, it could face $2.8 billion in outflows, potentially escalating to $8.8 billion if excluded from other indexes such as the Nasdaq 100, CRSP US Total Market Index, and various Russell indexes operated by LSEG. As of Thursday, Strategy’s market value stood at around $45 billion. CRSP opted not to comment, while a spokesperson for LSEG indicated that it consistently reviews client input and that any methodological changes would adhere to its governance procedures. Nasdaq also refrained from commenting but retained Strategy in its Nasdaq 100 index during the recent annual reshuffle.
The Growing Trend of Treasury Companies
As of September, there were at least 200 DATs with a combined market capitalization of about $150 billion, representing a more than threefold increase from the previous year, according to the law firm DLA Piper. However, as cryptocurrency prices have fallen, some companies are now trading below the net asset value of their tokens. Besides Strategy, MSCI’s preliminary risk exclusion list includes 38 companies with a total market cap of $46.7 billion as of September 30, such as the French firm Capital B, which is actively acquiring bitcoin. Alexandre Laizet, Capital B’s director of bitcoin strategy, mentioned that while the proportion of shares held by passive funds is currently “not that significant,” access to passive investment flows is “quite important” for the company’s future growth. Matt Cole, CEO of U.S. bitcoin-investor Strive, which is not on the exclusion list, remarked that the market has largely accounted for the proposals. “In the long run, I think this raises the cost of capital for all bitcoin treasury firms,” Cole added.
