Index Exclusion Risks and Crypto-Backed Firms: Market Neutrality and Institutional Bias in Index Design

The integration of crypto-backed firms into traditional financial indices has become a contentious battleground for institutional investors, regulators, and market participants. As digital assets transition from speculative novelties to strategic assets, the criteria governing their inclusion in major benchmarks-such as the S&P 500 and MSCI's Global Investable Market Indexes-reveal deep-seated debates about market neutrality and institutional bias. These debates are not merely technical but ideological, reflecting broader tensions between innovation and tradition in global finance.

MSCI's Proposed Exclusion and Its Implications

MSCI's recent proposal to exclude companies holding 50% or more of their assets in digital assets has ignited fierce criticism. The firm argues that such firms resemble passive investment vehicles rather than operating businesses, a classification that would relegate them to alternative asset categories. However, this threshold has been widely criticized as arbitrary and inconsistent with long-standing index principles. For instance, Strategy (MSTR), a prominent digital asset treasury company (DAT), holds Bitcoin as a core asset but operates through active business models, including software development and corporate services. By contrast, traditional asset classes like oil producers or real estate investment trusts (REITs) are not excluded for holding large concentrations of their respective assets.

The volatility of digital assets further complicates MSCI's proposal. A company's eligibility could fluctuate based on market price swings, not operational performance. For example, a DAT's Bitcoin holdings might dip below or exceed the 50% threshold due to price movements alone, leading to destabilizing in-and-out effects in index composition. This undermines the stability and predictability that indices are designed to provide.

The treatment of crypto-backed firms highlights institutional bias in index design. Traditional asset classes, such as energy or real estate, are often evaluated through revenue and operational activity rather than balance-sheet composition. Oil producers with 80% of their value tied to hydrocarbon reserves remain in indices, while DATs face exclusion for similar concentrations in Bitcoin. This inconsistency suggests that index providers apply double standards, favoring legacy sectors over emerging ones.

Strategy has argued that MSCI's proposal violates the principle of neutrality by introducing asset-specific rules. As stated in a recent analysis, "The exclusion criteria deviate from long-standing index principles, which have traditionally focused on revenue, earnings, and operational activity rather than balance-sheet composition." This critique is supported by institutional investors who warn that such rules could stifle U.S. leadership in digital innovation and redirect capital away from the sector. As one investor warned, "such rules could stifle U.S. leadership in digital innovation and redirect capital away from the sector."

Market neutrality in index design requires consistent, transparent criteria that apply equally across asset classes. However, MSCI's proposal introduces instability by prioritizing asset concentration over operational metrics. This approach risks distorting capital flows, as passive funds tracking these indices would be forced to divest from excluded companies, potentially triggering billions in outflows. For example, if Strategy and Marathon Digital Holdings are excluded, their stock prices could face downward pressure unrelated to their business fundamentals. This could lead to significant market disruption.

Academic studies further underscore the need for neutrality. Research indicates that cryptocurrencies exhibit risk-adjusted returns and factor exposures comparable to traditional assets, despite their unique volatility profiles. Institutional adoption is also accelerating, driven by regulatory clarity and standardized data infrastructure, such as the Lukka Digital Asset Classification Standard (LDACS), which enables cross-asset comparisons. These developments challenge the notion that digital assets are inherently unsuitable for traditional indices.

The Path Forward: Balancing Innovation and Stability
The debate over index inclusion criteria is not merely academic-it has real-world implications for investors. If MSCI's proposal is implemented, it could create a fragmented market where crypto-backed firms are treated as second-class citizens. Conversely, maintaining neutrality could foster broader institutional adoption, aligning with U.S. policy goals to position the country as a leader in digital finance. As one market analyst noted, "maintaining neutrality could foster broader institutional adoption, aligning with U.S. policy goals to position the country as a leader in digital finance."

Investors must remain vigilant. The consultation period for MSCI's proposal closes on December 31, 2025, with a final decision expected by January 15, 2026. Until then, the market will continue to test the boundaries of innovation and tradition. For now, the question remains: Will index providers adapt to the evolving financial landscape, or will they entrench institutional bias under the guise of neutrality?