Michael Saylor's Strategy is facing the risk of being removed from mainstream benchmark indices such as the MSCI USA Index and the Nasdaq 100 Index.

This week, J.P. Morgan analyst Nikolaos Panigirtzoglou warned in a report that Strategy Corp. could lose its position in benchmark indices like the MSCI USA and Nasdaq 100. The report pointed out:

Although active managers are not obligated to follow index changes, being delisted from major indices will undoubtedly be viewed as a negative signal by market participants.

According to the report, if MSCI decides to remove it, this alone could lead to outflows of up to $2.8 billion. If other index providers follow suit, the scale of outflows would further expand. Currently, the passive fund exposure related to the company is close to $9 billion.

Previously, in a statement on October 10, MSCI stated that some market participants pointed out that digital asset treasury companies might more closely resemble investment funds, which typically do not qualify for index inclusion.

Therefore, MSCI proposed excluding companies with digital asset holdings accounting for 50% or more of their total assets from its global investable market indices. A final decision regarding index inclusion is expected to be made by January 15.

For a company that rose by packaging crypto exposure into a stock ticker, being removed from indices is a blow that goes far beyond liquidity. This move would substantially weaken the institutional credibility it once relied on to attract mainstream portfolios and mark a reversal of its growth flywheel.

Strategy's stock price fell over 5% on Thursday. Since hitting a record high last November, it has plummeted over 60%, and the premium of its market capitalization over the value of its coin holdings has almost completely vanished. Bitcoin also plunged over 7% from its daily high on Thursday, falling to its lowest level in seven months.

Business Model Tested

Strategy's rise was built on a flywheel effect: sell shares, buy Bitcoin, enjoy the rally, repeat.

At its peak, the company's market capitalization far exceeded the value of its holdings. But now, this premium has largely disappeared, with the company's valuation only slightly above its crypto reserves, indicating that investor confidence is rapidly waning.

Nevertheless, since Saylor announced the first Bitcoin purchase in August 2020, the stock has still accumulated gains of over 1300%, outperforming all major stock indices.

Just a few months ago in September, crypto optimists were betting that Strategy might soon be included in the S&P 500 index, as its market capitalization, profitability, and trading liquidity were then seen as meeting the eligibility threshold.

The company still holds nearly 650,000 Bitcoins and continues to issue preferred shares to increase its holdings, but the market no longer rewards based on narrative alone.

The company's enterprise value to Bitcoin holdings ratio (mNAV) once collapsed to approximately 0.95x, marking the first time in the company's history that its market capitalization fell below the value of its Bitcoin holdings.

Funding Pressure Highlights Vulnerability

The selling wave has spread to Strategy's newer financing instruments.

The price of the company's perpetual preferred shares fell sharply. The yield on the preferred shares with a 10.5% coupon issued in March this year has climbed to 11.5%. A rare euro-denominated preferred share issuance launched earlier this month fell below its already discounted issue price in less than two weeks.

Michael Youngworth, Head of Global Convertible Bond Strategy at Bank of America Global Research, said:

"The premium has collapsed in recent weeks. That makes financing a bit challenging."

These funding pressures highlight the extent to which Strategy's business model relies on confidence and how quickly that confidence can disintegrate.

Strategy helped define the "digital asset reserve" model, but this business model is now showing its limitations. Peer companies are selling tokens to maintain liquidity or taking on more debt to delay the day of reckoning. What was once seen as a phenomenon of institutional adoption now appears more like a mechanically fragile structure.