MSCI's DATCO Retreat: A Tactical Pause or a Valuation Reset?

The market's recent turmoil has a clear starting point: a historic liquidation event on October 10, 2025. That day, more than $19 billion of crypto leverage was liquidated in a single day, a "tail risk" event that sent prices into a steep and prolonged sell-off. This wasn't just a price drop; it was a cascade triggered by the dangerous intersection of high leverage, concentrated trading venues, and frozen infrastructure. The crash followed a 100% China tariff threat, a common catalyst for risk-off moves, but the severity was amplified by the mechanics of the market itself.

Into this volatile environment stepped a direct regulatory threat. On the same day as the crash, MSCI published a consultation titled "Digital Asset Treasury Companies," proposing that firms whose primary business is holding digital assets be reclassified. The proposal, if finalized, would exclude companies like Michael Saylor's Strategy (MSTR) from major equity indexes if their digital asset holdings represent 50% or more of total assets. This was a targeted strike at the structural buyers that had fueled the crypto cycle.

The market's immediate reaction to this news, combined with the existing leverage, created a perfect storm. The proposal directly threatened the powerful flywheel that had driven DATs like Strategy: index inclusion → passive inflows → higher market cap → more fundraising → more digital asset purchases → greater index weight. By signaling a potential end to this cycle, MSCI injected profound uncertainty into a market already under stress. This created a margin spiral, where the fear of reduced demand for DAT stocks exacerbated the sell-off of the underlying crypto assets those companies held, feeding back into the liquidity crisis that had already begun.

The Reversal: A Consultation, Not a Solution

MSCI's retreat is tactical, not a resolution. The firm confirmed it will not proceed with the original proposal to exclude Digital Asset Treasury Companies (DATCOs) from its indexes. Instead, it is launching a broader consultation on how to treat non-operating companies. The stated reasons are investor feedback and the existence of "gray areas" in classifying crypto-heavy firms. MSCI noted that some DATCOs share characteristics with investment funds, making it difficult to draw a clean line between an operating company and a pure investment vehicle.

This creates a pause, not a clean break. The existing 50% asset threshold for DATCOs remains in place. That means companies like Strategy (MSTR) will stay in MSCI's global benchmarks for now, including the upcoming February 2026 review. The stock's 6% pop in after-market trading reflects this immediate relief. Yet the core ambiguity is now in flux. By deferring to a broader consultation, MSCI has effectively kicked the can down the road, leaving the eligibility of these firms in a state of uncertainty.

The valuation question for crypto treasury firms remains unanswered. The fundamental debate-whether these are operating companies or investment funds-has not been settled. MSCI's own statement highlights the need for "additional inclusion assessment criteria," suggesting the current framework is inadequate. This unresolved classification creates a persistent overhang. Without a clear benchmark for index eligibility, the market lacks a stable foundation for valuing these unique hybrids. The reversal eases the immediate threat, but it does nothing to resolve the underlying structural question that defines their business model and investor appeal.

Immediate Market Impact and Valuation Implications

The market's first reaction to MSCI's retreat was a clear relief rally. Strategy (MSTR) shares rose around 6% in after-market trading on the news. That pop is a direct, tactical response to the removal of an immediate, specific threat. Yet it does nothing to reverse the brutal year that preceded it. The stock remains down about 47.5% in 2025, a stark reminder of the underlying pressures that drove the October crash.

The reversal removes one catalyst for further exclusion, but it does not change the fundamental risks that defined the crisis. The core vulnerabilities-extreme leverage, concentrated trading venues, and frozen infrastructure-remain. The October crash was a margin spiral fueled by these mechanics, not a simple valuation correction. MSCI's retreat eases the regulatory overhang, but it leaves the underlying asset concentration and leverage risks intact. For a company whose model is built on holding vast amounts of crypto, those are persistent, structural concerns that the market must still price.

The new uncertainty introduced by the broader consultation period is a key risk. By deferring to a "broader consultation," MSCI has created a period of indefinite ambiguity. This could dampen institutional flows until clarity emerges, as passive investors may hesitate to commit capital to a benchmark that is itself under review. The market now faces a new, less-defined overhang. While the immediate threat of exclusion is off the table, the lack of a clear framework for index eligibility means the valuation foundation for these hybrid firms remains unstable. The setup is one of tactical relief overshadowed by lingering fundamental pressure.

Catalysts and Risks: What to Watch Next

The reversal is a tactical pause, not a resolution. The setup now hinges on three near-term developments that will determine if the relief rally holds or if the structural issues resurface.

First, watch for the outcome of MSCI's broader consultation. The firm has acknowledged that assessing index eligibility across a range of these types of entities may require additional inclusion assessment criteria. The market needs clarity on what those new rules will be. Until MSCI publishes a draft framework and receives final feedback, the classification of crypto-heavy firms remains a gray area. This ambiguity is a persistent overhang that could dampen institutional flows and keep valuations unstable.

Second, monitor crypto market leverage and exchange solvency metrics for signs of a repeat margin spiral. The October crash was a tail risk event that exposed how high leverage and frozen infrastructure can trigger a cascade. The core mechanics that drove that sell-off-elevated open interest, concentrated unified margin, and automatic deleveraging-have not been fixed. If funding rates climb again and exchange interfaces show signs of strain, it could reignite the same dangerous feedback loop, regardless of index status.

Finally, the next MSCI index review in February 2026 will be the first concrete test. The firm has confirmed that Strategy will remain in the firm's global benchmarks for now and that the existing 50% asset threshold for DATCOs is maintained. This review will show whether the consultation leads to a new, stable framework or simply prolongs uncertainty. A clear, forward-looking rulebook would be a positive catalyst. A continuation of the status quo or vague guidance would leave the valuation foundation for these hybrid firms in limbo.