MSCI Index Poised to Exclude Crypto Treasuries, Sparking Market Concerns

The MSCI index is reportedly considering excluding companies with significant cryptocurrency holdings on their balance sheets, a move that could exert "meaningful pressure" on digital asset treasury companies (DATs). This potential exclusion, stemming from MSCI's consultation with the investment community, signals a tightening of definitions by major index providers and a shift towards more conservative investment criteria.

Key Takeaways

• MSCI is consulting on excluding companies with over 50% of their balance sheet in crypto assets.

• The move is seen as likely by industry analysts, with a decision expected by January 15th.

• Affected companies could face significant selling pressure from index-tracking funds.

• This represents a more conservative approach from index providers compared to the previous year.

Potential Exclusion and Market Impact

MSCI announced in October its consultation regarding the exclusion of Bitcoin (BTC) and other digital asset treasury companies (DATs) that hold more than 50% of their balance sheet in crypto assets. Feedback suggests that these DATs exhibit characteristics similar to investment funds, which are typically ineligible for index inclusion. Charlie Sherry, Head of Finance at BTC Markets, believes the odds are "solidly in favour" of exclusion, noting that MSCI usually initiates consultations when already leaning towards a change.

The consultation period ends on December 31st, with the final decision to be announced on January 15th, and any changes implemented in February. MSCI is also seeking input on additional parameters, such as whether a company self-identifies as a DAT or has raised capital primarily to accumulate crypto.

If DATs are excluded, index-tracking funds would be compelled to sell their holdings, creating substantial pressure on the affected companies. A preliminary list identifies 38 crypto companies under MSCI's scrutiny, including MicroStrategy, Sharplink Gaming, Riot Platforms, and Marathon Digital Holdings.

Sherry explained that MSCI views companies whose value is derived primarily from balance-sheet assets rather than their core business as outside the scope of traditional equity benchmarks. This decision is framed as a risk-management measure to ensure indexes align with predictable business fundamentals.

A Shift in Market Tone

This potential exclusion marks a notable shift from the past year, when crypto-heavy corporate strategies were often lauded as financial innovations. The current tightening of definitions by large index providers indicates a market moving away from an "everything is adoption" phase towards a more conservative filtering process.

JPMorgan analysts have warned that MicroStrategy could see a significant portion of its market value shed if the MSCI exclusion proceeds. Approximately $9 billion of its estimated $56 billion market value is held in passive funds tracked by indexes.

Broader Implications for the Crypto Space

It remains uncertain whether other index providers will follow MSCI's lead. While index providers often monitor each other's actions, they do not always move in unison. Sherry pointed out that S&P's treatment of MicroStrategy sets a precedent for a stricter view, but each provider has its own methodology and client base.

However, clearer rules regarding corporate classification are ultimately beneficial for the cryptocurrency sector. When companies understand how their treasury decisions will be treated, it reduces uncertainty for both issuers and investors. Well-defined frameworks can bolster long-term institutional confidence, even if short-term impacts are challenging for companies heavily reliant on Bitcoin holdings.

Sources

• MSCI index likely to kick out crypto treasuries, exec warns, mx.advfn.com.

• MSCI index likely to kick out crypto treasuries, exec warns — TradingView News, TradingView.

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