In recent months, Strategy (formerly MicroStrategy), the largest publicly traded Bitcoin (BTC) treasury company, has become embroiled in a significant matter that may result in its removal from the Morgan Stanley Capital International (MSCI) index.
This potential change presents substantial financial risks for the company and could also have wider ramifications for the cryptocurrency industry, with analysts predicting potential losses of up to $9 billion in demand for its shares.
Industry-Wide Ramifications
In October, MSCI suggested that firms holding digital assets that comprise 50% or more of their total assets should be excluded from its global benchmarks, claiming these firms function similarly to investment funds, which are not included in its indexes.
Nonetheless, numerous companies, including Strategy, contend that they are operational entities developing innovative products and argue that MSCI’s proposal is unfairly prejudiced against the cryptocurrency sector.
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MSCI is presently engaging in a public consultation, and experts caution that should it decide to eliminate Digital Asset Treasury (DAT) companies, this could encourage other index providers to follow suit.
“The dialogue already transcends just MSCI… concerning the eligibility of DATs in equity indexes as a whole,” stated Kaasha Saini, head of index strategy at Jefferies, who expects that most equity indexes will align with MSCI’s decisions.
Asset managers reportedly hold up to 30% of a large-cap company’s free float, potentially leading to considerable outflows if these firms are dropped from major indexes. This scenario is particularly delicate for the DAT sector, which frequently finances its token acquisitions by selling stock.
The CEO, Phong Le, and co-founder Michael Saylor addressed the potential MSCI exclusion in an open letter. They estimated that such a decision could lead to the liquidation of $2.8 billion worth of the company’s stock and could “chill” the overall industry.
In their letter, they noted that excluding DATs might shut them out from the estimated $15 trillion passive investment market, severely impairing their competitive position.
Significant Outflows Anticipated For Strategy
Analysts at TD Cowen estimated in November that approximately $2.5 billion of Strategy’s market value is tied to MSCI, with an additional $5.5 billion depending on other indexes.
JPMorgan’s analysis indicated that if MSCI were to exclude Strategy, the company might experience $2.8 billion in outflows, a figure that could escalate to $8.8 billion if it faced exclusion from alternative indexes, such as the Nasdaq 100, the CRSP US Total Market Index, and various Russell indexes owned by LSEG.
Aside from Strategy, MSCI’s initial list highlights 38 companies at risk of exclusion, with a combined total issuer market cap of $46.7 billion as of September 30, including the French company Capital B, which is also investing in Bitcoin.
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Alexandre Laizet, Director of Bitcoin Strategy at Capital B, commented that while the current holdings of passive funds in their shares are limited, access to passive inflows is vital for future adoption.
Matt Cole, CEO of the US-based Bitcoin buyer Strive—which isn’t at risk of exclusion—observed that the proposals have predominantly been accounted for in market valuations. He added, “In the long run, I believe it raises the cost of capital for all Bitcoin treasury companies.”
As of the latest update, the firm’s stock, trading on the Nasdaq under the ticker symbol MSTR, was priced at $165, representing gains of nearly 4% before the trading week concluded.
Featured image sourced from DALL-E, chart from TradingView.com
