MicroStrategy Faces Index Exclusion as Bitcoin Slump Worsens

MicroStrategy, formerly known as Michael Saylor’s Strategy, faces a critical juncture as JPMorgan Chase analysts warn of potential exclusion from major benchmark indices including MSCI USA and the Nasdaq 100. This threat emerges amid a cryptocurrency market downturn that has wiped out over $1 trillion in total market capitalization over the past month. As the largest public holder of Bitcoin with over 650,000 coins, MicroStrategy’s unique business model has placed it directly in the crosshairs of changing market dynamics and regulatory scrutiny.

The potential index exclusion carries substantial financial consequences. According to JPMorgan analysts led by Nikolaos Panigirtzoglou, removal from key indices could trigger passive outflows estimated between $2.8 billion and $8.8 billion if MSCI proceeds with a decision expected by January 15. This represents a significant portion of the company’s current market exposure, as passive funds connected to MicroStrategy account for nearly $9 billion in market capitalization. “While active managers are not bound to adhere to index changes, exclusion from major indices would undoubtedly be viewed negatively by market participants,” the JPMorgan analysts noted, highlighting potential impacts on liquidity, funding costs, and overall investor appeal.

MicroStrategy’s business strategy has relied on a cyclical approach of selling stock to buy Bitcoin, capitalizing on price rallies, and repeating the process. At its peak, the company’s market capitalization far exceeded the value of its Bitcoin holdings, creating a substantial premium that attracted momentum and crypto-focused investors. However, that premium has completely evaporated as the company’s valuation now aligns closely with its crypto reserves—a stark indication of rapidly fading investor confidence.

The numbers tell a compelling story of this decline. Since peaking last November, MicroStrategy shares (MSTR) have declined by over 60%, mirroring the broader cryptocurrency market collapse. Despite this dramatic slump, the company remains up over 1,300% since Michael Saylor first began purchasing Bitcoin in August 2020, significantly outperforming major equity indices throughout this period. This historical performance, however, provides little comfort to current investors watching the premium disappear and facing potential index exclusion.

The selloff has extended beyond common shares into the company’s newer funding structures. Prices of its perpetual preferred shares—an essential component of Saylor’s recent strategies—have seen sharp declines. Additionally, yields on securities issued in March have risen to 11.5%, up from a previous 10.5%, indicating increasing investor concern about the company’s risk profile. A recent euro-denominated preferred stock offering has already dropped below its discounted offering price in under two weeks, further demonstrating the challenging funding environment.

The potential index exclusion stems from broader regulatory and classification concerns within the financial industry. MSCI, in its ongoing consultations with stakeholders, has indicated that some market participants believe digital asset treasury firms (DATs) may function more like investment funds, which are typically ineligible for index inclusion. In response to these perspectives, MSCI has proposed excluding companies whose holdings in digital assets constitute 50% or more of their total assets from its global investment market indexes.

This proposed rule change directly targets companies like MicroStrategy that have built their corporate strategy around cryptocurrency accumulation. Michael Youngworth, head of global convertible bond strategy at Bank of America Global Research, captured the current sentiment perfectly: “That premium has collapsed in recent weeks,” adding that the present situation makes capital raising increasingly challenging. The combination of collapsing premiums, rising funding costs, and potential index exclusion creates a perfect storm for MicroStrategy’s business model.

The implications extend beyond MicroStrategy alone, serving as a cautionary tale for other corporations considering significant cryptocurrency exposure. As traditional financial institutions like JPMorgan Chase and Bank of America analyze the situation, their warnings highlight the growing tension between innovative corporate strategies and established financial market structures. The outcome of MSCI’s decision, expected by January 15, will not only determine MicroStrategy’s future index status but could set precedent for how digital asset-heavy companies are treated within mainstream financial markets moving forward.