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MicroStrategy shares face the risk of being excluded from indices as its bitcoin strategy grows:
MicroStrategy has transformed itself into a leveraged bitcoin fund since the pandemic. The company has reached a market value of $103 billion while maintaining its position in key stock indices like the Nasdaq100, MSCI USA, and Russell 2000. This situation has allowed bitcoin to infiltrate both individual and institutional investor portfolios through index-tracking investments.
Approximately $14 billion has been invested in MicroStrategy through ETFs and mutual funds referencing the stock indices the company is part of. When considering other institutional investors tasked with tracking these indices, the figure between passive and active investments approaches $50 billion. Brokerage firms hold another $8 billion, while the remaining $45 billion is thought to likely represent the direct ownership of individual investors.
Passive funds constitute about one-fifth of company ownership at $21 billion. This situation creates a vulnerability as MicroStrategy's valuation is dependent on the continuation of its presence in the indices. According to JPMorgan strategists, the company faces the risk of exclusion if it fails to meet index criteria in the future or if those criteria change.
This challenge becomes even more pronounced as MicroStrategy's market value grows due to its aggressive bitcoin purchasing strategy. This creates a self-reinforcing cycle: more bitcoin purchases lead to higher bitcoin prices, which in turn increases market value and index weights. This cycle raises the risk of both bullish and bearish volatility.
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