Strategy may be excluded from the NASDAQ 100 and other indices, fearing a loss of tens of billions of dollars.

Baoyi Long, Wall Street Journal

Michael Saylor's Strategy is facing the risk of being removed from mainstream benchmark indices such as the MSCI US Index and the Nasdaq 100 Index.

This week, JPMorgan analyst Nikolaos Panigirtzoglou warned in a report that Strategy may lose its position in benchmark indices such as MSCI USA and Nasdaq 100. The research report pointed out:

Although active managers are not obligated to follow index changes, being removed from major indices would undoubtedly be seen as a negative signal by market participants.

According to the report, if MSCI decides to remove it, this alone could lead to as much as $2.8 billion in outflows, and if other index providers follow suit, the scale of capital outflow will further expand. Currently, the passive fund exposure related to the company is approaching $9 billion.

In a statement on October 10, MSCI indicated that some market participants noted that digital asset treasury companies may be more similar to investment funds, which typically do not meet the inclusion criteria for indices.

Therefore, MSCI proposed to exclude companies with digital asset holdings of 50% or more of total assets from its global investable market indices. The final decision regarding index inclusion is expected to be made by January 15.

For a company that has risen by packaging cryptocurrency exposure into stock codes, the impact of being removed from the index goes far beyond liquidity. This move will significantly undermine the institutional credibility that once attracted mainstream portfolios, marking a reversal of its growth flywheel.

On Thursday, Strategy's stock price fell more than 5%, and it has plummeted more than 60% since hitting a record high last November, with its market value almost completely losing the premium over the value of the held coins. Bitcoin also plunged more than 7% from its daily high on Thursday, reaching its lowest level in 7 months.

Business Model Faces Test

The rise of Strategy is based on a flywheel effect: selling stocks, buying Bitcoin, enjoying the uptrend, and repeating the process.

At its peak, the company's market value far exceeded the value of its held assets. However, today, this premium has largely disappeared, and the company's valuation is just slightly above its cryptocurrency reserves, indicating that investor confidence is rapidly waning.

Nevertheless, since Saylor announced the first purchase of Bitcoin in August 2020, the stock has accumulated an increase of over 1300%, outperforming all major stock indices.

Just a few months ago in September, cryptocurrency optimists were betting that Strategy might soon be included in the S&P 500 index, as its market capitalization, profitability, and trading liquidity were all considered to meet the qualification thresholds at that time.

The company currently still holds nearly 650,000 bitcoins and continues to issue preferred shares to increase its holdings, but the market no longer provides returns solely based on narratives.

The company's enterprise value to Bitcoin holdings ratio (mNAV) once collapsed to about 0.95 times, marking the first time in the company's history that its market value fell below the value of its Bitcoin holdings.

Financing pressure highlights vulnerability

The sell-off wave has affected the newer financing tools of Strategy.

The price of the company's perpetual preferred shares has fallen sharply, with the yield on the preferred shares issued in March this year at a coupon rate of 10.5% rising to 11.5%. A rare euro-denominated preferred share issuance launched earlier this month has dropped below the already discounted issue price in less than two weeks.

Michael Youngworth, head of global convertible bond strategy at Bank of America Global Research, stated:

The premium has collapsed in recent weeks. This has made financing somewhat challenging.

These financing pressures highlight the extent to which Strategy's business model relies on confidence and how quickly that confidence can dissolve.

The strategy helps define the “digital asset reserve” model, but this business model is now showing its limitations. Similar companies are selling tokens to maintain liquidity or increasing more debt to delay the moment of liquidation. What was once seen as a phenomenon of institutional adoption now appears more like a mechanically fragile structure.