MicroStrategy Looks Poised to Join Influential Nasdaq-100 Index. Here’s What That Means for the Stock.

The analyst who co-wrote this piece owns shares of MicroStrategy (MSTR).

Despite all the bizarre memecoins and degen habits in 2024, ETFs are in the working for story of the 12 months in cryptocurrency investing.

And that story — which started when bitcoin and ether exchange-traded funds debuted to nice fanfare — won’t be over. After a sixfold surge in its inventory worth this 12 months, Michael Saylor’s bitcoin (BTC) funding agency MicroStrategy (MSTR) seems poised to be part of one in every of the greatest exchange-traded funds round, the $312 billion Invesco QQQ ETF (QQQ).

That fund tracks the Nasdaq-100 Index. Every December, Nasdaq shakes up the membership listing for that benchmark, which then filters into the Invesco fund (which copies Nasdaq’s selections precisely). The Nasdaq-100, roughly talking, tracks the 100 largest non-financial firms listed on the Nasdaq exchange. There are different eligibility standards that should be met — and MicroStrategy checks these bins.

“The index is passive and rules-based and it should just follow the rules. The market is indicating that MSTR belongs in the index and thus the ETF, and therefore it should be added,” mentioned James Seyffart, ETF analyst at Bloomberg Intelligence.

This conveys greater than bragging rights; it is membership in an unique membership alongside giants like Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT) in an ETF that repeatedly boosts day by day buying and selling quantity in the tens of billions of {dollars}. It ensures passive, everlasting capital will stream in.

Getting added “will open up flows to a new class of investors that would not otherwise have singularly bought a stock like MSTR on their own,” mentioned Jeff Park, head of alpha methods at Bitwise. “Indexing, in a way, is a financial tool, like banking is a financial tool, because it is a liquidity transformation tool.”

The resolution would additionally basically convey extra bitcoin into the index. Saylor has loaded up MicroStrategy with a $37 billion stockpile of bitcoin over the previous 4 years, reworking his decades-old software program agency into one in every of the largest crypto buyers in the world. To conceptualize how a lot bitcoin that’s, Bloomberg knowledge exhibits that the $37 billion holdings at the moment are price greater than Nvidia’s (NVDA) $34.8 billion (NVDA) and Tesla’s (TSLA) $33.6 billion money and marketable securities holdings. Now, the fortunes of a distinguished typical inventory index and ETF would experience to a good higher diploma on bitcoin. Tesla is already in the index and holds the cryptocurrency.

“For millions of passive investors, owning ETFs like QQQ (which tracks the Nasdaq-100) will provide indirect bitcoin exposure to their portfolios through MicroStrategy’s holdings,” mentioned Ben Werkman, founding father of quant analysis agency NumerisX. “Since these funds are often buyers at any price, their participation has the ability to potentially exert significant upward pressure on the price of the equity.”

This is all technically theoretical at this level. Nasdaq will announce its resolution on Dec. 13, with the membership shuffle happening every week later. The firm will base its resolution on market knowledge as of final Friday.

Among eligible firms, MicroStrategy is the 66th-biggest by market capitalization, in accordance to Seyffart; the 75 largest firms robotically get into the 100-stock index. That possible equates to greater than $1 billion of latest cash coming into the inventory as Invesco buys shares to match MicroStrategy’s weighting in the index.

A possible wrinkle: Will the Nasdaq committee that makes this resolution nonetheless take into account MicroStrategy a non-financial firm, mentioned Mark Palmer, managing director of The Benchmark Co. Has it strayed too removed from its software program roots?

“MicroStrategy at this point meets the eligibility criteria for inclusion,” Palmer mentioned. However, “its bitcoin acquisition technique may make [the Nasdaq committee’s] evaluation a bit much less easy.”

If MicroStrategy does get in, the ensuing impression — or lack thereof — may preview what may occur if the inventory will get sufficiently big to be part of the much more influential S&P 500 Index, one thing that would occur in early 2026, Palmer added.

Entering an index may be extraordinarily helpful for a publicly traded firm. The query is whether or not the majority of returns get front-run earlier than the inclusion or throughout the firm’s time in the index.

When Tesla (TSLA) entered the S&P 500 on Dec. 21 2020, it traded round $200 a share. The inventory had run up 10-fold since December 2019 heading into the inclusion. Tesla went on to make new highs in November 2021 at $400 a share. In different phrases, the greatest returns got here earlier than the index addition.

Nasdaq analysis exhibits outsized returns do have a tendency to precede the inventory coming into the index, not after.

Even nonetheless, MicroStrategy getting added could be one other step towards bitcoin changing into built-in into the typical monetary system.

Will Canny contributed reporting to this story.