Over the past few months, Strategy (formerly known as MicroStrategy), the largest publicly traded Bitcoin (BTC) treasury company, has found itself at the center of a burning issue that could lead to its expulsion from Morgan Stanley Capital International (MSCI) index.
This potential move not only poses significant financial risks for the company, but could also have wider implications for the cryptocurrency sector, with analysts estimating that it could result in a loss of up to $9 billion in demand for its stock.
The implications for the entire industry
In October, MSCI proposed removing companies that hold digital assets that make up 50% or more of their total assets from its global benchmarks, arguing that such companies resemble investment funds that are excluded from its indexes.
However, many companies, including Strategy, claim to be operating companies that create innovative products and claim that MSCI proposal is biased towards the cryptocurrency industry.
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MSCI is currently conducting a public consultation, and analysts warn that if it decides to exclude Digital Asset Treasury (DAT) companies, it could prompt other index providers to follow suit.
“The conversation is already extending beyond MSCI… to the suitability of DATs in equity indices in general,” he said Kaasha Saini, head of index strategy at Jefferies, who predicts that most stock indexes will align with MSCI’s decisions.
Asset managers are believed to hold as much as 30% of the free float of large-cap companies, leading to potentially significant outflows if those companies drop out of major indexes. This situation is particularly precarious for THAT sectorwhich often finances its token purchases by selling shares.
The company’s CEO, Phong Le, and co-founder Michael Saylor addressed the potential MSCI exclusion in a public letter. They estimated that such a move could lead to the liquidation of the company’s shares worth $2.8 billion and could “chill” the entire industry.
In theirs letterexplained that excluding DATs could cut them out of the roughly $15 trillion passive investment market, drastically undermining their competitive position.
The main outflows foreseen for the strategy
TD Cowen analysts estimated in November that about $2.5 billion of Strategy’s market value is linked to MSCI, with an additional $5.5 billion depending on other indexes.
Analysis by JPMorgan suggested that if MSCI excluded Strategy, the company could see outflows of $2.8 billion, a figure that could rise to $8.8 billion if it faced exclusion from other indexes, such as the Nasdaq 100, the CRSP US Total Market Index and the various Russell indexes owned by LSEG.
In addition to Strategy, MSCI’s preliminary list identifies 38 companies at risk of exclusion, with a combined issuer market capitalization of $46.7 billion as of Sept. 30, including French firm Capital B, which also invests in Bitcoin.
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Alexandre Laizet, director of Bitcoin strategy at Capital B, noted that although current holdings passive assets in their shares are limited, access to passive streams is crucial for future adoption.
Matt Cole, CEO of U.S. Bitcoin buyer Strive—which is not in danger of being shut down—notes that the proposals are heavily factored into market valuations. He added: “In the long term, I think that raises the cost of capital for all Bitcoin treasury companies.”
At the time of writing, shares of the company, which trades on the Nasdaq under the ticker symbol MSTR, were trading at $165, marking a nearly 4% gain before the close of trading this week.
Featured image from DALL-E, chart from TradingView.com
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