MicroStrategy Inc.’s entry into the Nasdaq 100 opens up the largest corporate holder of Bitcoin to a new — and untapped – investor: the index-tracking juggernauts.
Yet Wall Street pros warn the oncoming march of these price-insensitive investors threatens a new source of vulnerability in a stock that has soared more than 500% this year on booming demand from retail investors, as well as hedge funds capitalizing on its volatility.
MicroStrategy’s Nasdaq admittance, scheduled for after the close of trading Friday, looks poised to prompt passive investors to buy roughly $2 billion of shares, a Bloomberg Intelligence estimate shows. The incorporation was cheered by crypto bulls as further evidence of mainstream adoption.
At the same time, price-agnostic indexing flows can work against a stock — exacerbating declines once momentum turns. For evidence, look no further than Super Micro Computer Inc., which will be dropped out of the tech-heavy benchmark at the same rebalancing event, after winning a prestigious spot in July amid the craze over artificial intelligence. The stock fell 8.3% Monday despite broad market buoyancy.
While Super Micro remains an extreme case — with concerns over corporate governance fueling a big stock rout — the index round trip serves as a reminder of the risks involved in passive investing.
Research earlier this year by Dimensional Fund Advisors, an active manager, found that this so-called index effect remains a feature of the investment landscape, with benchmark-tracking vehicles often systematically buying when the price is high and selling during the lows.
What constitutes the negative catalyst for MicroStrategy is hard to tell for now. To bulls, it appears to be the flywheel trade, where controversy-courting founder Michael Saylor sells more shares to buy Bitcoin, which pushes up the price of the digital currency and bolsters the stock anew — in turn allowing for further capital raising. But all that can’t last forever, according to Mike Bailey, director of research at FBB Capital Partners.
“Getting added to a widely-held basket of stocks will likely raise the profile of MSTR,” Bailey said. “But this is a double-edged sword, especially if we get a reversal in market speculation for crypto and other high risk/return assets.”
MicroStrategy, the dot-com-era software maker turned leveraged Bitcoin proxy, has become a major investment story this year as it accelerated an unconventional plan to raise capital solely to purchase and hold the cryptocurrency. It has announced multibillion-dollar acquisitions every Monday over the past six weeks, surging along with the token’s price — and raising questions in some circles about the strategy’s sustainability. It holds around $45 billion in Bitcoin.
Saylor “has made a massive winning bet on Bitcoin. It’s different in that there’s not a company producing or operating a product,” said George Cipolloni, a portfolio manager at Penn Mutual Asset Management. “As an investor from a risk standpoint, I get a little nervous with concentration.”
A spokesperson for MicroStrategy didn’t immediately respond to a request for comment.
Tom Lee at Fundstrat Capital is considering MicroStrategy for his Granny Shots US Large Cap ETF (GRNY), an actively-managed fund that focuses on multiple investment themes. At Bloomberg’s ETF in Depth conference Thursday, Lee said an inclusion in major indexes such as the Nasdaq 100 would make them officially consider holding the stock. As of Monday, the fund has not purchased the stock.
To some market participants, Saylor’s model is mostly hinged on a market where the spigot of money raising is widely open and Bitcoin has enjoyed a cacophony of tailwinds from regulatory approval on crypto-linked ETF products and a friendly incoming Donald Trump administration. With the buy-and-hold strategy, Bitcoin doesn’t generate any income for the company.
Anyone betting what’s so far a perfectly virtuous cycle for MicroStrategy to continue may need to heed the lesson from Super Micro. In an example of the outcome where reality fails to live up to euphoria, the stock tumbled as much as 80% after its July entry to the Nasdaq 100, with accounting concerns overwhelming the AI frenzy. The stock fell four straight days in the run-up to the latest Nasdaq announcement on its removal, plunging 17% over the stretch.
Any bad news for MicroStrategy could unleash a wave of selling by this new band of price-agnostic investors, according to Art Hogan, chief market strategist at B. Riley Wealth.
“The sword is going to cut both ways — additive now,” Hogan said, referring to passive flows. “If there’s a risk-off phase, which is completely natural and likely expected at the beginning of the year, and the Nasdaq 100 goes down, you’re going to delete market cap in what is a levered play on a very volatile asset class to begin with.”
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