Michael Saylor’s investment strategy could face significant setbacks as MSCI considers removing companies with substantial digital asset holdings from its global benchmarks. This potential exclusion may result in up to $9 billion in demand loss for Saylor’s firm, MicroStrategy, significantly impacting both its shares and the broader cryptocurrency sector.
In October, MSCI proposed this exclusion based on the criteria that companies holding 50% or more of their total assets in digital assets resemble investment funds, which the index does not include. Many companies, however, contend that they are operational entities developing innovative products and argue that MSCI’s actions unfairly target the cryptocurrency industry.
MicroStrategy’s shares skyrocketed by 3,000% after the company began accumulating Bitcoin in 2020. However, the stock has seen substantial declines, down approximately 43% this year due to a dip in cryptocurrency values. The situation has spurred interest from numerous companies looking to bolster their balance sheets with crypto assets, but there’s growing concern about the sustainability of such ventures.
MSCI is currently conducting a public consultation, with a decision set to be announced by January 15. Analysts predict that if MSCI proceeds with the exclusion of digital asset treasury (DAT) companies, other index providers might follow suit. Kaasha Saini, head of index strategy at Jefferies, indicated that the debate surrounding DATs extends beyond MSCI, hinting at broader implications for various equity indexes.
A substantial outflow of investments could follow such exclusions, particularly considering passive asset managers are estimated to control around 30% of a large-cap company’s free float. Many companies in the DAT sector, including MicroStrategy, have financed their crypto acquisitions through stock sales, making potential index exclusions particularly damaging.
Saylor has downplayed concerns over the potential MSCI exclusion but has also acknowledged in a public letter to the index provider that the ramifications could lead to an estimated $2.8 billion in stock liquidations, which would stifle industry growth. The proposed exclusion threatens to cut DATs off from the $15 trillion passive-investment market, severely undermining their competitive standing.
Analysts from TD Cowen speculated that the portion of MicroStrategy’s market value linked to MSCI is about $2.5 billion, with an additional $5.5 billion tied to other indexes. JPMorgan estimated that if MSCI excludes the company, MicroStrategy could face up to $2.8 billion in outflows, potentially rising to $8.8 billion if removed from other significant indexes like the Nasdaq 100 and various Russell-owned indexes.
As of recent reports, MicroStrategy held a market value of roughly $45 billion. While the CRSP index declined to comment, a spokesperson for LSEG noted that they continuously monitor feedback and adhere to governance processes for methodology consultations. The Nasdaq kept MicroStrategy within its index during recent reshuffles.
As of September, over 200 DAT companies collectively held around $150 billion, a significant increase from the previous year. Despite some companies trading below their net asset values as crypto prices plummeted, the preliminary MSCI list identified 38 companies at risk of exclusion, which combined account for an issuer market cap of $46.7 billion.
The potential changes in index eligibility could reshape the landscape for Bitcoin treasury companies, affecting their capital access and fostering uncertainty within the broader sector.
