MicroStrategy narrowly avoids trouble; why can it still stay in the Nasdaq 100 Index?

Nasdaq Inc. announced the results of the annual rebalancing of the Nasdaq 100 Index, with adjustments taking effect before the market open on December 22. Six companies were removed, and six new companies were added.

But the market’s most关注 is the fate of MicroStrategy, a Bitcoin holdings giant that was included in the index just last December. This company, which has made Bitcoin accumulation its core strategy, ultimately managed to retain its position in the Nasdaq 100 Index.

01 Annual Rebalancing

The annual rebalancing of the Nasdaq 100 Index is a routine event in the financial markets, but this year’s adjustment has attracted extra attention from the crypto industry. On December 13, Nasdaq officially announced the results, which will take effect before the market open on December 22.

This adjustment involves several well-known companies: Alnylam Pharmaceuticals, Ferring Pharmaceuticals, Insmed, Xinyuan Systems, Seagate Technology, and Western Digital becoming new constituents.

Companies removed include Biogen, CDW, GigaDevice, LuluLemon, ON Semiconductor, and Trade Desk. LuluLemon and The Trade Desk were removed due to poor stock performance, with declines of approximately 45% and 70% respectively this year.

For the newly added companies, especially Seagate Technology and Western Digital, this adjustment is significant. Both storage solution providers have seen stock price increases of over 200% this year, reflecting the demand driven by AI-powered storage markets.

02 MicroStrategy Model

MicroStrategy’s business model is fundamentally different from traditional tech companies. Since mid-2020, the company has been heavily investing in Bitcoin to hedge against inflation, initially using cash purchases, then shifting to increasing buying power through issuing stock and convertible bonds.

This strategy has led the company’s stock performance to outperform many major U.S. stocks, including leading AI companies. Since August 2020, MicroStrategy’s stock has risen over 2,500%, while Bitcoin’s price increased about 660% in the same period.

As of recent data, MicroStrategy holds 660,624 Bitcoins, worth approximately $59.55 billion, making it the largest publicly traded company Bitcoin holder. The company views Bitcoin as “digital gold” and plans to transform into a “Bitcoin bank.”

Unlike other tech companies, MicroStrategy introduced a unique metric: “BTC yield.” As of November 17, the company’s “year-to-date BTC yield” reached 41.8%, reflecting the growth in the number of Bitcoins per share.

03 Market Reaction

The news that MicroStrategy successfully remained in the Nasdaq 100 Index did not boost its stock price. On the day of the announcement, the stock fell 3.74%, and it has declined over 15% in the past month.

Market analysts’ reactions are mixed. Some crypto supporters believe that MicroStrategy’s inclusion in the main index is a recognition of Bitcoin as an asset class. However, more traditional analysts worry that MicroStrategy’s business model is overly dependent on Bitcoin price volatility.

Technical analysis shows that MicroStrategy’s stock has been declining from a high of about $450 in summer, currently trading around $178. Some traders predict it could fall to $100 by mid-January.

This stock performance reflects market concerns about the sustainability of MicroStrategy’s business model, especially amid sharp Bitcoin price fluctuations.

04 Classification Controversy

Despite MicroStrategy’s successful retention in the Nasdaq 100 Index, debates over its classification continue. The Nasdaq 100 explicitly states it only includes “non-financial companies,” but MicroStrategy’s business model makes it more akin to an investment firm rather than a traditional tech enterprise.

Major index provider MSCI is reviewing its classification standards for companies holding over 50% of Bitcoin assets, with a decision expected in January next year. This decision could significantly impact MicroStrategy.

JPMorgan has warned that if MSCI decides to exclude MicroStrategy from relevant indices, up to $2.8 billion in passive funds may be forced to sell the company’s stock.

MicroStrategy executives have written to MSCI emphasizing that the company is “not a passive Bitcoin accumulator but an operating enterprise issuing preferred stock and other tools to fund new purchases.”

05 Strategic Significance

For the crypto industry, MicroStrategy’s continued inclusion in the Nasdaq 100 Index is symbolically significant. This decision indicates increasing tolerance from mainstream financial markets for companies with Bitcoin as a core strategy.

From an investment channel perspective, by investing in funds tracking the Nasdaq 100, traditional investors can indirectly gain exposure to Bitcoin assets. It is estimated that MicroStrategy’s weight in the index could reach 0.47%, making it the 48th largest holding.

Market views suggest that MicroStrategy’s index status could attract more institutional investors to Bitcoin. The company’s Executive Chairman, Michael Saylor, has recently been engaging with sovereign wealth funds and family offices to promote Bitcoin as “digital capital” and “digital gold.”

This development may also encourage other listed companies to consider including Bitcoin on their balance sheets, although the scale may not be as large as MicroStrategy’s.

06 Unique Comparison

The difference between MicroStrategy and traditional tech companies is obvious. For investors seeking indirect exposure to Bitcoin, MicroStrategy offers a unique option but also comes with risks highly correlated with Bitcoin’s price.

Future Outlook

As a unique component of the Nasdaq 100 Index, MicroStrategy’s holdings of over 660,000 Bitcoins surpass many countries’ official reserves.

Despite ongoing debates about its business model, Nasdaq’s decision at least temporarily confirms the position of such Bitcoin-intensive companies in mainstream indices. MSCI is expected to announce in January whether to exclude these companies from the benchmark index, a decision that will undoubtedly shake both the crypto market and traditional finance sectors.