• MSCI consultation ongoing until December 31, 2024, with results announced January 15, 2025.

• Exclusion would affect at least 38 crypto firms, including Bitcoin miners and treasury holders, due to their investment fund-like characteristics.

• Analysts estimate MicroStrategy could lose up to $2.8 billion in value from index fund sales, with 16% of its market cap in passive funds.

MSCI digital asset treasuries exclusion could pressure crypto stocks in 2025. Learn how index changes impact firms like MicroStrategy and what it means for investors. Stay informed on regulatory shifts driving market dynamics.

What is the MSCI Decision on Digital Asset Treasuries Exclusion?

MSCI digital asset treasuries exclusion refers to the index provider’s potential move to bar companies holding more than 50% of their balance sheets in cryptocurrencies, such as Bitcoin, from its global equity indexes. This stems from a consultation launched in October 2024, where MSCI is evaluating whether these digital asset treasury companies (DATs) resemble ineligible investment funds rather than traditional operating businesses. The decision, expected in January 2025 with changes effective in February, could compel passive funds to divest, intensifying downward pressure on affected stocks.

How Will MSCI’s Exclusion Impact Crypto Companies?

The exclusion would primarily target firms like MicroStrategy, which holds substantial Bitcoin reserves, alongside crypto miners such as Riot Platforms and Marathon Digital Holdings. According to MSCI’s preliminary review, at least 38 companies fall under scrutiny, as their crypto-heavy treasuries deviate from standard equity fundamentals. Charlie Sherry, Head of Finance at BTC Markets, an Australian cryptocurrency exchange, noted that such firms “exhibit characteristics similar to investment funds,” prompting this risk-management step to preserve index integrity.

Short sentences highlight the mechanics: Index-tracking funds must mirror MSCI benchmarks, so exclusion triggers mandatory sales. This could erode stock prices significantly. For instance, JPMorgan analysts projected that MicroStrategy might see $2.8 billion in outflows if excluded, given that about $9 billion of its $56 billion market value resides in passive index funds. Sherry emphasized, “When most of the value comes from a balance-sheet asset rather than the underlying business, MSCI treats that as outside the scope of a traditional equity benchmark.” This approach underscores a conservative shift, moving away from viewing crypto treasuries as innovative to enforcing stricter eligibility criteria.

The MSCI lists at least 38 crypto companies could be affected by its decision. Source: MSCI

Sherry further explained that the consultation, open until December 31, 2024, seeks input on additional factors, like whether a company self-identifies as a DAT or raises funds mainly for crypto accumulation. Feedback received so far aligns with viewing these entities as non-traditional, supporting the likelihood of exclusion. As Sherry put it, “The index only puts changes like this into consultation when they’re already leaning that way,” indicating strong odds of implementation.

Frequently Asked Questions

What Companies Are at Risk from MSCI Digital Asset Treasuries Exclusion?

At least 38 firms are flagged, including MicroStrategy, Sharplink Gaming, Riot Platforms, and Marathon Digital Holdings. These companies hold over 50% of their assets in cryptocurrencies, qualifying them for potential removal under MSCI’s criteria focused on operational businesses rather than speculative holdings.

Will Other Indexes Like S&P 500 Follow MSCI’s Lead on Crypto Exclusions?

It’s uncertain if other providers will align immediately, as each follows independent methodologies. For example, S&P has already applied stricter views to similar cases, but a MSCI change might prompt reviews elsewhere. Crypto market intelligence from 10x Research suggests MicroStrategy remains on track for S&P 500 inclusion, with a 70% probability by year-end 2024.

Key Takeaways

• High Likelihood of Exclusion: MSCI’s consultation signals a probable ban on DATs, effective February 2025, to maintain traditional equity standards.
• Market Pressure on Stocks: Forced sales by index funds could lead to significant value drops, like the estimated $2.8 billion hit for MicroStrategy.
• Long-Term Benefits for Clarity: Defined rules reduce uncertainty, fostering institutional trust despite short-term volatility for crypto-focused firms.

Source: Matthew Sigel

Unclear Ripple Effects Across Indexes

While MSCI’s move might influence peers, Sherry cautioned it’s “hard to call at this stage.” Index providers monitor each other but prioritize their own client needs and rules. S&P’s precedent with MicroStrategy illustrates varied approaches, and no guaranteed chain reaction exists. Still, this could prompt broader scrutiny of crypto-integrated corporate strategies.

Conclusion

The prospective MSCI digital asset treasuries exclusion highlights evolving standards for crypto in traditional finance, potentially reshaping valuations for firms with heavy Bitcoin exposures. By prioritizing predictable business models, MSCI aims to safeguard index reliability amid sector maturation. Investors should monitor the January 15, 2025, announcement for impacts on holdings. As clearer frameworks emerge, they promise to bolster long-term confidence in digital assets, even if initial adjustments prove challenging—position yourself ahead of these regulatory shifts for informed decision-making.