Shares of business intelligence firm MicroStrategy (MSTR) came under pressure Friday following a warning that its substantial Bitcoin holdings could lead to its removal from major global stock indices. The potential exclusion could trigger billions of dollars in forced selling from investment funds that track these benchmarks.
Index provider MSCI is currently reviewing its eligibility rules for companies that hold a significant portion of their assets in digital currencies. The outcome of this consultation could have profound implications for MicroStrategy, which has made acquiring Bitcoin a core part of its corporate strategy.
Key Takeaways
- MicroStrategy is at risk of being removed from major MSCI equity indices due to its large Bitcoin holdings.
- MSCI is considering new rules for companies holding 50% or more of their assets in digital currencies.
- Analysts at JPMorgan estimate that an exclusion could force between $2.8 billion and $8.8 billion in outflows from tracker funds.
- The move could create negative sentiment and make it more difficult for the company to raise capital in the future.
MSCI Considers Rule Change on Digital Assets
The central issue stems from a consultation initiated by MSCI, a leading provider of global stock market indices used as benchmarks by thousands of exchange-traded funds (ETFs) and mutual funds. The firm is seeking feedback on whether companies with very large digital asset holdings should remain part of its standard global investable market indexes.
The proposed threshold under consideration is 50% or more of a company's total assets being held in cryptocurrencies. MicroStrategy, which has famously converted most of its cash reserves into Bitcoin, would almost certainly fall into this category.
Currently, MicroStrategy is a component of several influential benchmarks, including the MSCI USA and MSCI World indexes, as well as the Nasdaq 100. Inclusion in these indices ensures consistent demand for its stock from passive investment funds that are mandated to mirror the index's composition.
Billions in Potential Outflows
If MSCI and other index providers decide to implement the new rule, the consequences for MicroStrategy's stock could be significant. Passive funds tracking these benchmarks would be obligated to sell their shares of MSTR to remain compliant.
Forced Selling Pressure
According to analysis from JPMorgan, the potential outflows from passive funds could range from $2.8 billion to as high as $8.8 billion. This wave of forced selling would place considerable downward pressure on the company's share price.
This is not a matter of choice for these funds. Their investment mandate is to replicate an index, not to make active decisions on individual stocks. If a stock is removed from the index, the fund must sell it, regardless of the company's performance or outlook.
"While active fund managers are not required to adjust their holdings, exclusion from key indices could create negative sentiment, making it harder for the company to raise capital through equity or debt," analysts noted.
A Corporate Strategy Under Scrutiny
Under the leadership of its executive chairman, Michael Saylor, MicroStrategy has pioneered a corporate strategy of using Bitcoin as its primary treasury reserve asset. The company began accumulating the digital currency in 2020 and has continued to purchase more, often using debt and equity offerings to fund its acquisitions.
This strategy has effectively turned MSTR stock into a proxy for Bitcoin investment for many institutional and retail investors. While it has led to massive gains for the stock during crypto bull markets, it also exposes the company to significant volatility and now, potential structural risks related to its market inclusion.
What Are Stock Indices?
Stock indices, like the MSCI World or the S&P 500, are curated lists of stocks that represent a particular market or sector. Investment funds, especially passive ETFs, use these indices as a guide. Being included provides a company with stability and a constant source of demand from these large funds.
Broader Implications for the Market
The decision by MSCI could set a precedent for how index providers treat companies with unconventional balance sheets. As more firms explore holding digital assets, the rules governing index inclusion will become increasingly important.
For MicroStrategy, a potential delisting from these benchmarks represents a significant headwind. Beyond the immediate impact of forced selling, it could limit the company's access to capital markets. Raising funds through future stock or debt offerings might become more challenging if a large portion of the investment universe is structurally barred from owning its shares.
Investors are now closely watching the outcome of MSCI's consultation. The decision will not only shape the future of MicroStrategy's stock but may also influence how other public companies approach holding digital assets on their balance sheets.
