JPMorgan Warns of Major Outflows for MSTR if Excluded by MSCI

Bitcoin Magazine

JPMorgan Warns of Major Outflows for MSTR if Excluded by MSCI

Michael Saylor’s Strategy—known as the original "bitcoin-on-NASDAQ" proxy—faces its most significant structural challenge since he transformed the firm into a leveraged Bitcoin holding entity five years ago.

In a recent research note, analysts from JPMorgan expressed concerns that the Strategy might face exclusion from major equity indices as MSCI nears a pivotal decision scheduled for January 15. This decision will determine whether companies with substantial digital asset holdings are eligible for traditional stock benchmarks.

MSCI is contemplating a rule that would disqualify firms whose digital asset holdings exceed 50% of their total assets—an area where Strategy is currently at the extreme end of the spectrum.

With a market capitalization hovering around $59 billion and nearly $9 billion tied up in passive index-tracking investments, analysts project that any exclusion could trigger substantial mechanical selling pressure.

Potential outflows could reach $2.8 billion if MSCI decides to drop Strategy from its indices, and could soar to as high as $8.8 billion if other index providers follow suit, as noted by the analysts.

This warning surfaces at a precarious time for the firm. Shares of Strategy have depreciated more than Bitcoin itself in recent months, as the once-robust premium—known as the "mNAV" spread between its enterprise value and Bitcoin holdings—has dwindled to just above 1.1, marking the lowest point since the pandemic began.

Over the past six months, MSTR has seen its value plummet by approximately 40%, with an alarming 11% drop occurring in the last five trading days alone.

The model that propelled Strategy’s growth—raise equity, acquire Bitcoin, leverage reflexivity, and repeat—now encounters substantial structural headwinds: the stock has declined over 60% since reaching its peak in November of last year.

Perpetual preferred shares have experienced sharp sell-offs, as yields on its 10.5% notes have surged to 11.5%. Recently issued euro-denominated preferred shares fell below their discounted offer price within two weeks.

For years, Strategy’s presence in the Nasdaq 100, MSCI USA, MSCI World, and other benchmarks has quietly funneled Bitcoin into mainstream investment portfolios. The inflow from passive ETFs and mutual funds has been crucial in maintaining Strategy’s liquidity, valuation, and visibility among institutional investors.

However, a recent October consultation by MSCI revealed a significant shift, according to JPMorgan: market participants are increasingly viewing companies with digital asset treasuries as more akin to investment funds rather than traditional operating businesses. Since investment funds are not eligible for index inclusion, this poses a critical challenge for Strategy.

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As the landscape of digital assets continues to evolve, the implications of MSCI’s decisions could have far-reaching effects not only for MSTR but for the broader market dynamics involving digital currency holdings. Investors and stakeholders will need to remain vigilant as the January deadline approaches.