Digital Asset Treasury Companies Face Potential Exclusion from MSCI Index: Impact and Implications

Digital asset treasury companies could face significant repercussions if the MSCI, a key stock market index, decides to exclude them in January. This possibility is reportedly highly likely, as announced by one analyst speaking to Cointelegraph.

MSCI Index Consultation on Exclusion of Digital Asset Treasury Companies

Announced in October by MSCI Index, there is an ongoing deliberation within the investment community considering the exclusion of Bitcoin and other digital asset treasury companies (DATs). To be affected by the possible exclusion, companies should have over 50% of crypto assets in their balance sheet. It has been suggested that DATs display characteristics analogous to investment funds which are currently ineligible for index inclusion. Charlie Sherry, the Head of Finance at the Australian cryptocurrency exchange BTC markets believes that the chance of MSCI excluding DATs is high. According to Sherry, the stock market index typically only moves to consultation on changes like this if it already leans in this direction.

Consultation Timeline

The consultation is slated to continue till the 31st of December. The results will be made public by the 15th of January of the new year, with any resulting changes rolling out in February. The consultation is also open to considering additional parameters, such as companies defining themselves as DATs or those raising capital primarily for crypto accumulation.

Effects of Excluding DATs

If the exclusion of DATs goes ahead as planned, Sherry opined that index-tracking funds would be required to sell. This alone would impose considerable pressure on the companies affected. A total of 38 crypto companies have been potentially identified by the MSCI for this change, including notable corporations such as Michael Saylor’ Strategy, Sharplink Gaming, and popular crypto miners Riot Platforms and Marathon Digital Holdings.

Value and Traditional Equity Benchmark

Sherry elaborated that when most of a company’s value originates from a balance-sheet asset rather than the underlying business, MSCI considers it outside the scope of the traditional equity benchmark. This is viewed as a risk management decision intended to align indexes based on predictable business fundamentals. But the possible move may have repercussions, as a Wednesday note from JPMorgan analysts warned that Strategy could lose around $2.8 billion if the MSCI moves forward with its planned exclusion.

Index Providers’ Decision Influence

Responding to queries regarding the possibility of the MSCI’s decision influencing other index providers, Sherry mentioned that while index providers frequently watch each other’s decisions, it doesn’t necessarily mean they always align. For example, the S&P has shown that there’s precedent for a more restrictive view when dealing with MicroStrategy, as every provider follows their own distinct methodology while considering their specific client base.

Strategy for Inclusion in S&P 500

Despite the potentially murky waters ahead, Strategy – a noted DAT – seems set for possible inclusion into the S&P 500, as announced by 10X Research, a cryptocurrency market intelligence firm. In October of this year, the company predicted a hefty 70% probability that Strategy will be included in the noted index by the end of the year. Sherry added that the development of more transparent rules regarding corporate classification would significantly benefit the crypto space in the long-term. As companies begin to comprehend how their treasury decisions will be treated, the resulting predictability will remove any uncertainty both for issuers and investors. This forward movement and clarity are seen as a potent advantage in the rapidly evolving world of cryptocurrency and digital assets.