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 pressing issue that could lead to its exclusion from the Morgan Stanley Capital International (MSCI) index. 

This potential move not only poses significant financial risks for the firm but could also have broader implications for the cryptocurrency sector, with analysts estimating that it could result in losses up to $9 billion in demand for its shares.

Industry-Wide Consequences

The MSCI proposed in October that companies holding digital assets comprising 50% or more of their total assets should be removed from its global benchmarks, arguing that such companies resemble investment funds, which are excluded from its indexes. 

However, many firms, including Strategy, assert that they are operational companies creating innovative products and argue that MSCI’s proposal is biased against the cryptocurrency industry.

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 already extends beyond just MSCI… to the eligibility of DATs in equity indexes in general,” said Kaasha Saini, head of index strategy at Jefferies, who anticipates that most equity indexes will align with MSCI’s decisions.

Asset managers are believed to hold as much as 30% of a large-cap company’s free float, leading to potentially significant outflows if these companies are dropped from major indexes. This situation is particularly precarious for the DAT sector, which often finances its token purchases by selling stock.

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 $2.8 billion worth of the company’s stock being liquidated and may “chill” the entire industry. 

In their letter, they explained that excluding DATs could shut them out from the roughly $15 trillion passive investment market, drastically undermining their competitive standing.

Major Outflows Predicted For Strategy 

Analysts at TD Cowen estimated in November that around $2.5 billion of Strategy’s market value is linked to MSCI, with an additional $5.5 billion reliant on other indexes. 

JPMorgan’s analysis suggested that if MSCI were to exclude Strategy, the company could see $2.8 billion in outflows, 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 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 cap of $46.7 billion as of September 30, including French firm Capital B, which is also investing in Bitcoin. 

Alexandre Laizet, Capital B’s director of Bitcoin strategy, remarked that while the current holdings of passive funds in their shares are limited, having access to passive flows is crucial for future adoption.

Matt Cole, CEO of US-based Bitcoin buyer Strive—which is not at risk of exclusion—notes that the proposals have largely been factored into market valuations. He added, “On a longer-term basis, I think it raises the cost of capital for all Bitcoin treasury companies.”

At the time of writing, the firm’s stock, which trades on the Nasdaq under the ticker symbol MSTR, was trading at $165, marking gains of almost 4% ahead of the close of trading this week. 

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