The analyst who co-wrote this piece owns shares of MicroStrategy (MSTR).
Regardless of all of the bizarre memecoins and degen habits in 2024, ETFs are within 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 — may not be over. After a sixfold surge in its inventory worth this 12 months, Michael Saylor’s bitcoin (BTC) funding agency MicroStrategy (MSTR) appears poised to hitch one of many greatest exchange-traded funds round, the $312 billion Invesco QQQ ETF (QQQ).
That fund tracks the Nasdaq-100 Index. Each December, Nasdaq shakes up the membership checklist for that benchmark, which then filters into the Invesco fund (which copies Nasdaq’s choices precisely). The Nasdaq-100, roughly talking, tracks the 100 largest non-financial firms listed on the Nasdaq trade. There are different eligibility standards that should be met — and MicroStrategy checks these containers.
“The index is passive and rules-based and it ought to simply comply with the principles. The market is indicating that MSTR belongs within the index and thus the ETF, and due to this fact it ought to 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 frequently boosts day by day buying and selling quantity within the tens of billions of {dollars}. It ensures passive, everlasting capital will circulation in.
Getting added “will open up flows to a brand new class of traders that will not in any other case have singularly purchased a inventory like MSTR on their very own,” mentioned Jeff Park, head of alpha methods at Bitwise. “Indexing, in a approach, is a monetary instrument, like banking is a monetary instrument, as a result of it’s a liquidity transformation instrument.”
The choice 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 of many largest crypto traders on this planet. To conceptualize how a lot bitcoin that’s, Bloomberg knowledge reveals that the $37 billion holdings are actually 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 outstanding standard inventory index and ETF would trip to an excellent higher diploma on bitcoin. Tesla is already within the index and holds the cryptocurrency.
“For hundreds of thousands of passive traders, proudly owning ETFs like QQQ (which tracks the Nasdaq-100) will present oblique bitcoin publicity to their portfolios by means of MicroStrategy’s holdings,” mentioned Ben Werkman, founding father of quant analysis agency NumerisX. “Since these funds are sometimes patrons at any worth, their participation has the flexibility to doubtlessly exert important upward strain on the worth of the fairness.”
$MSTR Nasdaq 100 Monitoring – 11/22/2024
MSTR climbed once more right now reclaiming 5 spots on the Nasdaq 100 monitoring touchdown themselves in slot #48 on the checklist.
This present place would include an estimated allocation from the highest 3 funds of $1.05B.
4 extra buying and selling days till the… https://t.co/sLfLWa1RzI pic.twitter.com/eAe2mGDDpz
— Ben Werkman (@BenWerkman) November 22, 2024
That is all technically theoretical at this level. Nasdaq will announce its choice on Dec. 13, with the membership shuffle going down per week later. The corporate will base its choice on market knowledge as of final Friday.
Amongst eligible firms, MicroStrategy is the 66th-biggest by market capitalization, in line with Seyffart; the 75 largest firms mechanically get into the 100-stock index. That probably equates to greater than $1 billion of latest cash coming into the inventory as Invesco buys shares to match MicroStrategy’s weighting within the index.
A possible wrinkle: Will the Nasdaq committee that makes this choice nonetheless think about 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 level meets the eligibility standards for inclusion,” Palmer mentioned. Nonetheless, “its bitcoin acquisition technique might make [the Nasdaq committee’s] evaluation a bit much less simple.”
If MicroStrategy does get in, the ensuing influence — or lack thereof — might preview what would possibly occur if the inventory will get large enough to hitch the much more influential S&P 500 Index, one thing that might occur in early 2026, Palmer added.
Getting into an index might be extraordinarily helpful for a publicly traded firm. The query is whether or not nearly all of returns get front-run earlier than the inclusion or in the course of the firm’s time within 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 perfect returns got here earlier than the index addition.
Nasdaq analysis reveals outsized returns do are likely to precede the inventory getting into the index, not after.
Even nonetheless, MicroStrategy getting added could be one other step towards bitcoin turning into built-in into the standard monetary system.
Will Canny contributed reporting to this story.
