JPMorgan: S&P 500 refuses to include Strategy, sounding the alarm for encryption treasury companies

The S&P 500 Index Committee recently rejected Strategy's (formerly MicroStrategy) application for inclusion, despite the company meeting the technical qualification requirements. This decision is not only a blow to Strategy but is also seen by JPMorgan analysts as a warning signal for the entire "encryption treasury" industry. It indicates that index providers are adopting an increasingly cautious approach towards companies that transform their primary business into Bitcoin investment vehicles, which may be restricting the broader acceptance of crypto assets through TradFi channels.

The "discretionary" of S&P 500

The S&P 500 Index Committee exercised discretion in its selection process and rejected Strategy's application for inclusion. This decision comes at a time when a large number of similar companies are entering the market, and the committee's actions send a clear signal: although Strategy meets hard criteria such as market capitalization, trading volume, and profitability, the high concentration and volatility of its business model were the main reasons for the rejection.

Impact on the industry: JPMorgan analyst Nikolaos Panigirtzoglou believes that this is not just a warning for Strategy, but for the entire industry. He is concerned that other index providers who have included Strategy or similar companies (such as Nasdaq 100, MSCI, and Russell 2000) may reconsider their positions. According to my inquiry, Strategy is still a constituent of major indices such as Nasdaq 100 and Russell 2000.

Stock market performance: Affected by this news, the stock price of Strategy (MSTR) closed at 326.45 USD on September 10, while the price of Bitcoin (BTC) remained around 64,800 USD during the same period. The stock price trend of MSTR has been highly correlated with Bitcoin, as its business model is essentially a leveraged bet on cryptocurrencies.

Market Pressure and Financing Challenges

Encryption treasury companies are facing multiple dilemmas, and these challenges are fundamentally shaking their business models.

Nasdaq's New Regulation: Nasdaq has started requiring companies with substantial cryptocurrency reserves to obtain shareholder approval before issuing new shares to fund additional cryptocurrency purchases. This adds new hurdles to corporate financing activities and protects investors from potential dilution risks.

Investor sentiment fatigue: JPMorgan analysts point out that signs of "fatigue" have appeared in the market. Investors are becoming increasingly wary of these highly crowded trading strategies, leading to a sharp decline in equity issuance over the past few quarters, while the risk premium for debt financing continues to rise.

Evolution of Financing Models: In response to financing difficulties, some companies are experimenting with complex financing structures, such as Bitcoin-backed loans and convertible bonds linked to tokens, in an attempt to maintain their business models in an increasingly skeptical market environment.

Change in Capital Flows

The recent rejection of the S&P 500 also reflects a deeper shift in market capital flows. Capital may be moving from "encryption treasury" companies to those crypto companies that have actual operating businesses.

Comparison of business models: The value of encryption treasury companies is highly dependent on the performance of Bitcoin prices, and when Bitcoin prices fall, the losses they face can be magnified. In contrast, companies such as exchanges and mining enterprises create revenue through operational business, making their business models more sustainable.

Volatility Risk: The Index Committee has shown increasing caution towards this concentrated and high volatility risk. The business model of the Strategy effectively makes it a leveraged bet on cryptocurrency, a highly concentrated risk that the S&P 500 is unwilling to accept.

Conclusion

The S&P 500's refusal of the Strategy selection decision is a milestone event. It not only serves as a wake-up call for crypto treasury companies but also indicates that the pathway for crypto assets to enter the mainstream financial system through traditional index passive investment channels is encountering bottlenecks. This event highlights the inherent vulnerability of the crypto treasury model—its success is highly dependent on the price performance of a single asset. With tightening regulations and shifts in investor sentiment, the market is turning towards crypto businesses with stronger fundamental support. In the future, for crypto companies to gain recognition in the mainstream financial market, merely having a large reserve of assets may no longer be sufficient; they must establish sustainable business models that can generate actual revenue.