Institutional Risks and Rewards in Bitcoin-Backed Treasuries: Should Pension Funds Stick with MSTR?

In 2025, Bitcoin-backed treasuries have evolved from a niche experiment to a mainstream institutional strategy. Over 157,000 BTC-worth $16 billion-has been acquired by publicly traded companies and private investors, with 134 listed firms now holding 245,000 BTC in their balance sheets. This shift is driven by macroeconomic tailwinds: inflation, weak real yields, and geopolitical uncertainty have pushed corporate treasurers to treat Bitcoin as a scarce, portable, and borderless asset according to research. For pension funds, the question is no longer if to allocate to Bitcoin but how-and whether indirect exposure via crypto-exposed equities like MicroStrategy (MSTR) remains a viable path.

The Allure of MSTR: Diversification and Regulatory Workarounds

Pension funds have increasingly turned to MSTR as a proxy for Bitcoin exposure. By Q1 2025, 14 U.S. states had collectively invested $632 million in MSTR stock, leveraging its 629,000 BTC holdings as an inflation hedge according to data. Florida's Retirement System, for example, boosted its MSTR stake by 38% in Q1 2025, adding $88 million in indirect Bitcoin exposure. This strategy allows institutions to bypass custody and regulatory hurdles while benefiting from Bitcoin's price movements.

The regulatory environment has also tilted in favor of such allocations. The 2025 BITCOIN and CLARITY Acts classified tokens as commodities, normalizing crypto exposure through equity-linked strategies. Meanwhile, the U.S. Strategic Bitcoin Reserve and the approval of spot Bitcoin ETFs have institutionalized Bitcoin's role as a store of value. For pension funds, MSTR's equity structure offers a familiar legal framework, sidestepping the complexities of direct crypto custody.

Risks: Volatility, Index Exclusion, and Structural Weaknesses

Yet the risks are non-trivial. MSTR's stock is a leveraged bet on Bitcoin. Its beta of 1.40 to Bitcoin means it amplifies price swings: when Bitcoin fell 30% in Q3 2025, MSTR's stock dropped 42%. This volatility has already cost pension funds. California's CalPERS saw its MSTR investment plummet from $144 million to $80 million, a $64 million loss.

A more systemic risk looms: index exclusion. MSCI is considering removing companies with digital assets exceeding 50% of total assets from major indices. If MSTR is excluded, index funds would be forced to sell, triggering a cascade of outflows. Analysts estimate this could result in $8.8 billion in losses for MSTR holders. The company's business model-issuing equity and convertible debt to fund Bitcoin purchases-also depends on a valuation premium over Bitcoin's net asset value. As prices fall and this premium compresses, the economic rationale for MSTR's strategy weakens.

MSTR vs. Bitcoin ETFs: A Tale of Two Exposures

The debate between indirect exposure via MSTR and direct Bitcoin ETFs hinges on risk-adjusted returns and regulatory stability. Bitcoin ETFs like BlackRock's iShares Bitcoin Trust (IBIT) offer lower volatility (50.6% vs. MSTR's 96.7%) and simpler tracking of Bitcoin's price. While MSTR has outperformed in some metrics (higher Sharpe and Sortino ratios), its structural risks-dilution, leverage, and index fragility-make ETFs a more stable choice for pension funds according to analysis.

Wisconsin and Michigan have already diversified their strategies. Wisconsin's $387.3 million investment in IBIT contrasts with Michigan's focus on MSTR, highlighting the spectrum of institutional approaches. The CLARITY Act's consumer protection provisions may further shift allocations toward direct custody models.

The Path Forward: Balancing Innovation and Fiduciary Duty

For pension funds, the key is balancing innovation with fiduciary obligations. MSTR's indirect exposure offers a bridge to Bitcoin in a regulatory gray area, but its risks-volatility, index exclusion, and structural fragility-demand careful hedging. Diversifying across both equity-linked strategies and ETFs could mitigate these risks while maintaining exposure to Bitcoin's long-term value proposition.

As the U.S. Strategic Bitcoin Reserve and global regulatory clarity continue to evolve, pension funds must ask: Is MSTR a stepping stone or a liability? The answer may hinge on whether they prioritize short-term gains or long-term stability in a market where Bitcoin's role as a store of value is increasingly undeniable.