Strategy and bitcoin-buying firms face wider exclusion from stock indexes

By Elizabeth Howcroft

PARIS, Dec 19 (Reuters) - Michael Saylor's Strategy could soon be dropped from MSCI and potentially other major stock indexes, which analysts say could cost the bitcoin-hoarding giant up to $9 billion in demand for its shares and hurt the wider appeal of the sector.

After queries from clients, MSCI in October proposed ditching from its global benchmarks companies whose digital asset holdings represent 50% or more of their total assets. It says they resemble investment funds, which it does not include in its benchmarks. But many such firms argue that they are operational companies developing novel products, and that MSCI's proposals unfairly discriminate against crypto. 

Shares in Strategy, which began life as software firm MicroStrategy, skyrocketed 3,000% after it began buying bitcoin in 2020, although they have since fallen sharply, and are down about 43% this year amid the cryptocurrency's slump.

Dozens more companies have been inspired to buy and hold crypto tokens on their own balance sheets in the hopes they will gain value, although questions are growing over the sustainability of these businesses.

MSCI is holding a public consultation and will announce a decision by January 15. Analysts say that if it excludes digital asset treasury (DAT) companies, other index providers could follow. 

"The conversation already extends beyond just MSCI... to the eligibility of DATs in equity indexes in general," Kaasha Saini, head of index strategy at Jefferies, told Reuters, adding that she expects most equity indexes would move to follow MSCI.

STRATEGY: EXCLUSION COULD "CHILL" INDUSTRY

Passive asset managers are estimated to hold as much as 30% of a large-cap company's free float, according to Saini, meaning exclusion could trigger significant outflows. That's especially problematic for the DAT industry, since many companies fund their token purchases by selling stock.

A spokesperson for Strategy, which has increasingly taken on debt to fund its token purchases, did not respond to a request for comment. Saylor this month dismissed worries over potential MSCI exclusion, telling Reuters it wouldn't matter. 

But in a subsequent public letter to MSCI, he and Strategy CEO Phong Le estimated DAT exclusion would result in $2.8 billion of its stock being liquidated and "chill" the industry.

The proposal would shut DATs out of the roughly $15 trillion passive-investment universe, "drastically weakening their competitive position", they wrote.

Analysts at TD Cowen estimated in November that $2.5 billion of Strategy's market value comes from MSCI, and $5.5 billion from other indexes. JPMorgan estimated that Strategy faces $2.8 billion of outflows if MSCI kicks the company out, rising to $8.8 billion if it is excluded from other indexes, which include the Nasdaq 100, CRSP US Total Market Index and various LSEG-owned Russell indexes.

Strategy had a market value of around $45 billion on Thursday.

CRSP declined to comment. A spokesperson for LSEG said it continuously monitors client feedback and any methodology consultations would follow its governance processes.

 Nasdaq declined to comment. It kept Strategy in its Nasdaq 100 index during this month's annual reshuffle.

TREASURY COMPANY CRAZE

As of September, at least 200 DATs had a combined capitalisation of around $150 billion, up more than threefold from a year earlier, according to law firm DLA Piper. As crypto prices have dropped, however, some companies have traded below the net asset value of their tokens. 

Besides Strategy, MSCI's preliminary list names 38 companies at risk of exclusion, with a combined issuer market cap of $46.7 billion as of September 30, including French bitcoin-buying company Capital B.

Alexandre Laizet, Capital B's director of bitcoin strategy, said the quantity of its shares held by passive funds was "not that significant now" but in terms of future adoption, it was "quite important" for the company to have access to passive flows. 

Matt Cole, CEO of U.S. bitcoin-buyer Strive, which is not on the list, said the proposals have mostly been priced in by the market.

"On a longer-term basis, I think it raises the cost of capital for all bitcoin treasury companies," Cole said.

(Reporting by Elizabeth Howcroft; Additional reporting by Hannah Lang; Editing by Michelle Price, Tommy Reggiori Wilkes and Kirsten Donovan)