Analysts Warn Strategy Could Be Dropped From Multiple Indexes, Potential $9 Billion Loss Predicted

Overview

Recent developments regarding Strategy, previously known as MicroStrategy, have raised significant concerns within the cryptocurrency sector. The company, recognized as the largest publicly traded Bitcoin treasury firm, may face exclusion from the MSCI index, which could lead to substantial financial implications, including predictions of up to $9 billion in losses.

Situation Analysis

Over the past few months, Strategy has been at the forefront of a critical issue as the MSCI has proposed excluding companies that hold digital assets comprising 50% or more of their total assets from its global benchmarks. This proposal stems from the MSCI’s classification of such companies as resembling investment funds, which are traditionally excluded from their indexes. In response, many firms, including Strategy, have argued that they are operational entities focused on developing innovative products, contending that the MSCI’s stance is biased against the cryptocurrency industry.

Currently, MSCI is conducting a public consultation regarding this proposal. Analysts indicate that if MSCI decides to exclude Digital Asset Treasury (DAT) companies, it could set a precedent that prompts other index providers to implement similar exclusions. Kaasha Saini, head of index strategy at Jefferies, highlighted the broader implications of this conversation, suggesting that the eligibility of DATs in equity indexes could be impacted across the board.

The potential exclusion poses a significant risk for Strategy and similar companies, particularly because asset managers typically hold a considerable percentage of a large-cap company’s free float. As a result, the removal of these companies from major indexes could lead to significant outflows of capital. The precarious nature of the DAT sector is further exacerbated by their reliance on selling stock to finance token purchases.

In a public letter, Strategy’s CEO Phong Le and co-founder Michael Saylor addressed the ramifications of a potential MSCI exclusion. They projected that such a move could lead to the liquidation of approximately $2.8 billion of the company’s stock, which could also create a chilling effect across the entire industry. They emphasized that excluding DATs from indexes could effectively shut them out from the passive investment market, which is valued at around $15 trillion, severely undermining their competitive positioning.

Analysts have forecasted major outflows for Strategy. Estimates from TD Cowen suggest that approximately $2.5 billion of Strategy’s market value is tied to MSCI, with an additional $5.5 billion associated with other indexes. According to JPMorgan’s analysis, if MSCI excludes Strategy, the company could face $2.8 billion in outflows, which could escalate to $8.8 billion if it were also excluded from other significant indexes, including the Nasdaq 100 and various Russell indexes.

Additionally, the MSCI’s preliminary list has identified 38 companies at risk of exclusion, with a total market cap of $46.7 billion as of a recent date, which includes firms like Capital B that are also investing in Bitcoin.

From author

The current situation surrounding Strategy and the MSCI proposal highlights the complex interplay between traditional financial institutions and the evolving cryptocurrency landscape. With the potential for substantial financial repercussions, the dialogue surrounding the classification of digital asset firms is likely to influence market perceptions and behaviors significantly.

Impact on the crypto market

• The potential exclusion of Strategy from the MSCI index could trigger significant capital outflows from the firm and others in the DAT sector.
• A shift in index eligibility criteria may lead to a reevaluation of digital asset companies by investors and asset managers.
• The exclusion could create a chilling effect on market confidence in cryptocurrency treasury firms.
• The estimated $9 billion loss in demand could affect overall market sentiment towards Bitcoin and other cryptocurrencies.
• Broader implications for the cryptocurrency sector could emerge if other index providers follow MSCI’s lead on exclusion.
• The situation may raise the cost of capital for Bitcoin treasury companies, impacting their operational strategies and future investments.