Inside Strategy and MSTR’s index exclusion risk and what that means for Bitcoin

Key Points to Remember

What is the reason behind MSTR facing potential exclusion risk?

MSTR is at risk of exclusion from MSCI due to new rules targeting companies with significant Bitcoin holdings on their balance sheets.

What could be the financial impact if MSTR is delisted?

JPMorgan predicts forced passive outflows of $2.8 billion from MSCI alone, potentially escalating to over $8.8 billion if other index providers follow suit.

The Treasury market is experiencing heightened volatility in Q4, causing distress for investors as their algorithms struggle to navigate the turbulent waters, resulting in significant losses.

MSTR has also not been immune to the market turmoil. With consecutive quarters of decline, the stock has plummeted by almost 70% to $177, returning to levels last seen in Q4 2024, while Bitcoin’s decline was comparatively lower at 21% during the same period.

JP Morgan analysts have raised concerns about MSTR potentially being excluded from the upcoming MSCI review in January. This development raises questions about whether this could trigger a “sell-the-news” reaction.

The Challenges Faced by MSTR’s Valuation

MSTR’s financial foundation is showing signs of weakness.

In the past month alone, MSTR has experienced a 40% decline and is now down 68% from its all-time high. The company currently holds 649,870 Bitcoin at an average cost of $74,433 per coin, exposing it to significant risk.

With BTC hovering near the $80k mark, any further 8% drop could push MSTR into a negative position. This pressure has led to a sharp decline in the stock price, establishing $160 as a strong support level for MSTR.

Source: TradingView (MSTR/USDT)

This highlights the significance of JP Morgan’s concerns.

MicroStrategy’s traditional strategy of raising funds from the stock market to invest in BTC, leading to stock price appreciation, is no longer sustainable. When the stock price aligns with the BTC value, the premium required for further investments disappears, disrupting the cycle.

With the looming possibility of MSTR’s exclusion from MSCI, the risks are becoming more tangible. As the decision date approaches, analysts are closely monitoring the potential outcomes of this high-stakes event.

Impending Outflows as Microstrategy Confronts Index Vulnerabilities

MSCI’s updated criteria for Digital Asset Transition (DAT) have MSTR under scrutiny.

Companies with significant BTC holdings on their balance sheets could face reclassification or even removal from major indices, as indicated by MSCI’s guidelines.

Market sentiments are already reflecting these concerns, with MSTR’s valuation premium diminishing rapidly. This heightened uncertainty is keeping the stock vulnerable to a potential decline towards the $160 mark.

Source: X (Matthew Sigel)

The looming concern is evident in JPMorgan’s estimation of $2.8 billion in forced outflows if MSCI decides to remove MSTR. With other indexes potentially following suit, the cumulative outflows could exceed $8.8 billion.

In essence, MSTR stands at a critical juncture.

Despite continuing to accumulate BTC through debt, the strategy is becoming increasingly risky in a volatile market environment. The possibility of a complete MSCI exclusion in January is no longer a hypothetical scenario but a tangible risk that must be taken seriously.