What to know:
- MicroStrategy, Michael Saylor’s bitcoin-buying corporation, looks like it might get added to the Nasdaq-100 Index and, therefore, the $312 billion Invesco QQQ ETF (QQQ).
- This would increase the index’s exposure to bitcoin.
- Membership would “open up flows to a new class of investors that would not otherwise have singularly bought a stock like MSTR on their own,” one expert said.
As a seasoned crypto investor with over a decade of experience under my belt, I must admit that the potential addition of MicroStrategy to the Nasdaq-100 Index is nothing short of intriguing. The prospect of this bitcoin-heavy corporation joining the ranks of tech giants like Apple, Microsoft, and Nvidia, within the $312 billion Invesco QQQ ETF, opens up a whole new world of opportunities for passive investors who might not have considered buying MSTR on their own.
The analyst who co-wrote this piece owns shares of MicroStrategy (MSTR).
In 2024, despite the odd meme-based cryptocurrencies and unconventional investor behavior, Exchange Traded Funds (ETFs) could very well be the standout tale of the year within the realm of cryptocurrency investment.
The story that started with the launch of Bitcoin and Ethereum Exchange-Traded Funds (ETFs), which garnered much attention, may not have reached its conclusion yet. This year, MicroStrategy Inc., a bitcoin investment firm led by Michael Saylor (BTC) has witnessed a sixfold increase in its stock price, indicating it could potentially become part of the Invesco QQQ ETF ($312 billion), one of the largest ETFs available.
The Invesco fund follows the Nasdaq-100 Index, which undergoes a review of its member companies every December. This adjustment is then reflected in the fund. Essentially, the Nasdaq-100 consists of the 100 largest non-financial firms listed on the Nasdaq stock exchange. However, there are additional criteria for eligibility, and MicroStrategy meets these requirements.
According to James Seyffart of Bloomberg Intelligence, since the index is rule-bound and passive, it should adhere to its rules. The market signals suggest that MSTR should be included in the index as well as the ETF, so they should add it accordingly.
This isn’t just about boasting; it represents entry into an elite circle, sharing space with titans such as Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT), within a tradeable fund that consistently trades billions of dollars every day. It ensures a constant, perpetual influx of passive capital.
Addition to the platform will provide access to a different category of investors who might not typically purchase shares of MSTR individually, as Jeff Park, head of alpha strategies at Bitwise, explained. “Indexing,” in essence, serves as a financial instrument similar to banking, since it transforms liquidity.
Making this decision will significantly increase the amount of Bitcoin within the index. Over the past four years, MicroStrategy, previously a software company, has amassed a staggering $37 billion worth of Bitcoin, making it one of the world’s largest crypto investors. To put this into perspective, Bloomberg data indicates that these Bitcoin holdings are now more valuable than Nvidia’s ($34.8 billion) and Tesla’s ($33.6 billion) cash and marketable securities combined. Therefore, the performance of a well-known traditional stock index and ETF will become even more closely tied to the fate of Bitcoin, as both Tesla (already included in the index) and Bitcoin are now significant factors.
Ben Werkman, founder of NumerisX quant research firm, stated that for many investors who passively own ETFs like QQQ (which follows the Nasdaq-100), they will gain indirect exposure to bitcoin through MicroStrategy’s holdings. In essence, this means that their portfolios may benefit from Bitcoin’s price movements due to MicroStrategy’s ownership. Since these funds typically buy stocks at any cost, their investment could potentially cause a substantial increase in the stock’s price.
As a crypto investor, I saw MSTR surge once again today, regaining five positions on the Nasdaq 100 tracking chart, now nestled comfortably at slot #48. This new position is expected to attract an approximate allocation of $1.05B from the top three funds. With just four trading days left until…
— Ben Werkman (@BenWerkman) November 22, 2024
At the moment, we’re dealing with hypothetical situations because the final call lies with Nasdaq, which they plan to make on December 13th. If their decision is affirmative, changes in membership will occur a week later. Their choice will be influenced by market data that was gathered as of last Friday.
Among qualifying businesses, MicroStrategy ranks 66th in terms of market capitalization, Seyffart reports; the top 75 companies are automatically included in a 100-stock index. This likely means that more than $1 billion is expected to flow into the company’s stock as Invesco purchases shares to align with MicroStrategy’s influence within this index.
A possible concern: Will the Nasdaq panel evaluating this matter view MicroStrategy as a non-financial entity, according to Mark Palmer, a managing director at The Benchmark Co. Could it be that MicroStrategy has ventured too far away from its original software focus?
In Palmer’s words, “MicroStrategy currently qualifies to be included.” Yet, he added that MicroStrategy’s approach towards acquiring bitcoin might complicate the Nasdaq committee’s evaluation process slightly.
If MicroStrategy manages to enter, the subsequent effect – whether significant or insignificant – may offer a glimpse into what we might expect if the stock reaches a size that qualifies it for inclusion in the S&P 500 Index, a possibility that could occur as early as 2026, according to Palmer.
Is it advantageous for most companies trading publicly to have their indices updated? The point of contention lies in whether significant profits are made by anticipating the index inclusion (beforehand) or if they accrue while the company is part of the index.
As a researcher, I observed that when Tesla (TSLA) joined the S&P 500 on December 21, 2020, it was trading approximately $200 per share. Interestingly, this stock had experienced a 10-fold increase from December 2019 leading up to its inclusion in the index. Subsequently, Tesla reached new heights in November 2021, trading at $400 per share. In essence, the most significant gains were realized prior to the index addition.
Nasdaq research shows outsized returns do tend to precede the stock entering the index, not after.
Even still, MicroStrategy getting added would be another step toward bitcoin becoming integrated into the conventional financial system.
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2024-12-03 20:17