Beneath the Digital Waters: New Waves for MSTR?

Since the conclusion of 2020, Strategy has embarked on a significant Bitcoin accumulation journey, incorporating substantial cryptocurrency holdings into its financial reserves. By relying heavily on borrowing to extend its asset base, the organization finds itself confronting a critical dilemma. There is now a possibility that Strategy, along with similar reserve-driven entities, might be categorized under the funds umbrella, a scenario that could trigger substantial sell-offs.

MSCI’s Take on Crypto Holdings

MSCI has introduced a recommendation targeting publicly listed enterprises that maintain a considerable presence of crypto assets in their holdings. These companies, often serving as proxy cryptocurrency ETFs, trade on exchanges like typical corporations. Presently, they are not recognized as funds, allowing them broader access to portfolios and liquidity. However, MSCI suggests these firms exhibit properties akin to investment funds that are seen as unsuitable for inclusion into traditional indices.

What If MSCI Decides Otherwise?

With the decision deadline on January 15, a negative outcome could lead to a notable downturn in cryptocurrency values, at least in the near term. If MSCI reclassifies MicroStrategy as an investment fund, resulting in its exclusion from indices, the move could echo the impact seen when major platforms like Binance delisted certain assets, potentially affecting MSTR shares similarly. This reclassification would lead to major funds losing access to these companies, diminishing their market stability.

A potential exclusion from MSCI indices could see microstrategy experiencing passive outflows approximating $2.8 billion, according to projections from JPMorgan. Given that $9 billion of MSTR’s valuation inherently ties to passive, index-following funds, the exits might surpass these figures. Bitcoin reserve firms such as MARA and XXI, also featuring prominently in this landscape with significant Bitcoin holdings, could face comparable challenges.

MicroStrategy’s executive, Michael Saylor, offers a reassuring statement on the matter:

“Strategy is not a fund, trust, or holding company. We are a publicly traded enterprise with a 500 million dollar software business and a unique treasury strategy leveraging Bitcoin as productive capital…

Index classification does not define us. Our strategy is long-term, our belief in Bitcoin is unwavering, and our mission is steadfast: to build the first digital currency institution on a firm foundation of sound money and financial innovation.”

The organization’s resilience further comes into focus as they share a financial analytics chart dispelling concerns about insolvency due to declining prices.

“At the current BTC levels, assuming the price remains constant, we have a 71-year dividend coverage. And any BTC appreciation above 1.41% annually completely offsets our annual dividend obligations.”