S&P 500's refusal to include Strategy could halt crypto fever - JPMorgan

The refusal of S&P Dow Jones Indices to include Strategy, the largest publicly traded bitcoin holder, in the S&P 500 index raises questions about the viability of the business model for corporate investment in cryptocurrency, JPMorgan said. The S&P 500 does not include closed-end funds and ETFs, and Strategy has essentially become just that, a fund. This is a signal to all other companies turning their assets into bitcoin treasuries that entry into the main index of the U.S. stock market is closed to them.

S&P Dow Jones Indices' decision last week not to include the former MicroStrategy in the S&P 500 broad market index despite its compliance with capitalization requirements and other key metrics is significant, according to JPMorgan strategists led by Nikolaos Panigirtzoglou, a note from MarketWatch. It's a clear signal for other companies investing in cryptocurrency assets, they said.

The index does not include closed-end funds and ETFs. Although Strategy is not formally an investment company, it essentially operates as such: the bulk of its market capitalization is based on bitcoin stocks rather than information technology activities. Until 2020, MicroStrategy was known as an enterprise software developer until founder Michael Saylor decided to refocus on bitcoin storage.

"This is a signal that the committee, which has discretion over inclusion in the index, is concerned about keeping companies like MicroStrategy, which are effectively bitcoin funds, out of the S&P 500. This rejection is a blow not only to MicroStrategy, but also to other companies forming crypto-treasuries following its example," the strategists said.

This situation has uncovered existing limitations on how deeply cryptocurrencies can penetrate investment portfolios through indirect routes. "Moreover, there is a risk that other index providers that already include companies like MicroStrategy in their stock indices may reconsider this approach," JPMorgan added.

According to analysts, the Nasdaq exchange has already begun requiring some crypto-asset companies to seek shareholder approval before issuing new shares to fund crypto purchases. "As doubts grow about the sustainability of the business model of corporate crypto-treasuries, the risk that both investors and index providers will favor true crypto companies with operating businesses - such as exchanges and miners - increases," the analysts conclude.

This week the cryptocurrencies sector has seen high volatility. Shares of EightCo Holdings, which used to specialize in packaging of goods and now decided to invest in Worldcoin token, rose sharply after the news about cryptocurrency investments. The same happened with the shares of CaliberCos, formerly a real estate management company: now it invests in Chainlink token. The capitalization of Chinese company Mogu doubled on Thursday after announcing plans to invest $20 million in cryptocurrency.

However, most of the so-called digital-storage companies have already lost value since their crypto-announcements. Strategy's premium to the underlying value of bitcoins held has shrunk from more than 3 to 1.6, MarketWatch notes.

Since 2020, when the company switched from releasing enterprise software to buying bitcoin, its shares are no longer valued on future earnings. They are now valued by the mNAV (market-adjusted Net Asset Value) multiple, which shows at what ratio to the book value of the company's bitcoin reserves Strategy's shares are trading on the market. However, when the value of bitcoin decreases and the token is purchased at a high rate, the mNAV drops. Investors are already unhappy that Strategy keeps issuing shares and uses the money from the additional issue to buy bitcoin.

Analysts warn that companies invested in the token at its current value could go bankrupt if bitcoin gets cheaper.

"What happens if bitcoin drops 50%? - asks Charles Edwards, founder of Capriole, a specialized hedge fund. - Interest in corporate crypto reserves would wane, mNAV multiples would shrink, and hundreds of companies would begin to reassess their treasury strategies."

This article was AI-translated and verified by a human editor