jakiro
Bao Yilong, Wall Street Insights
Michael Saylor’s Strategy is at risk of being dropped from mainstream benchmark indexes such as the MSCI US Index and the Nasdaq 100 Index.
JPMorgan analyst Nikolaos Panigirtzoglou warned in a note this week that,Strategy may lose its position in benchmark indexes such as MSCI US and Nasdaq 100.The research report states:
Although active managers are under no obligation to follow index movements, being removed from a major index will undoubtedly be viewed as a negative signal by market participants.
According to the report, if MSCI decides to remove it, this alone may lead to capital outflows of up to US$2.8 billion. If other index providers follow suit, the scale of capital outflows will further expand.Currently, passive fund exposure related to the company is close to $9 billion.
MSCI previously stated in a statement on October 10,Some market participants noted that digital asset treasury companies may be more similar to investment funds, which generally do not qualify for index inclusion..
As a result, MSCI proposes to exclude companies with digital asset holdings accounting for 50% or more of total assets from its global investable market index.A final decision on index inclusion is expected to be made by January 15.
For a company that rose to prominence by packaging its cryptocurrency exposure into a ticker symbol, being dropped from an index hits far more than just liquidity.The move would materially erode the institutional credibility it once relied on to attract mainstream investment portfolios and mark a reversal in its growth flywheel.
Strategy’s stock price fell by more than 5% on Thursday, and has plummeted by more than 60% since hitting a record high in November last year. The premium of its market value over the value of its holdings has almost disappeared.Bitcoin also plummeted more than 7% from its daily high on Thursday, falling to its lowest level in seven months.
Business model faces test
The rise of Strategy is based on a flywheel effect: sell stocks, buy Bitcoin, enjoy the rise, and repeat the operation.
At its peak, the company’s market value far exceeded the value of its holdings.But today, that premium has largely disappeared, with the company valued at just above its cryptocurrency reserves, suggesting investor confidence is rapidly fading.
Despite this, the stock has risen more than 1,300% since Saylor announced his first Bitcoin purchase in August 2020, outperforming all major stock indexes.
Just a few months ago in September, cryptocurrency optimists were betting that Strategy could soon be included in the S&P 500, with its market capitalization, profitability and trading liquidity deemed to meet the eligibility thresholds at the time.
The company still holds nearly 650,000 Bitcoins and continues to issue preferred shares to increase its holdings, but the market no longer rewards narrative alone.
The company’s enterprise value to Bitcoin holdings ratio (mNAV) once collapsed to about 0.95 times. This was the first time in the company’s history that its market value was lower than its Bitcoin holdings.
Financing pressure highlights vulnerability
The sell-off has spread to Strategy’s newer financing vehicles.
The price of the company’s perpetual preferred shares has fallen sharply, and the yield on the preferred shares issued in March this year with a coupon rate of 10.5% has climbed to 11.5%.A rare euro-denominated preferred stock offering earlier this month fell below its already discounted offer price in less than two weeks.
Michael Youngworth, head of global convertible bond strategy at Bank of America Global Research, said:
The premium has collapsed in recent weeks.This makes financing somewhat challenging.
These financing pressures highlight the extent to which Strategy’s business model relies on confidence, and how quickly that confidence can unravel.
Strategy helped define the “digital asset reserve” model, but this business model is now showing its limitations.Similar companies are selling tokens to maintain liquidity or adding more debt to delay the moment of liquidation.What was once seen as institutional adoption now looks more like mechanical, fragile structures.
