MSCI's Index Exclusion Risk and Its Implications for Strategy (MSTR)

The MSCI Global Investable Market Indexes have long served as a cornerstone for institutional capital allocation, shaping liquidity dynamics and investor behavior across global markets. However, recent proposals to exclude companies with significant exposure to digital asset treasuries (DATs) have sparked a critical debate about the intersection of index governance, liquidity risk, and market stability. Strategy Inc. (MSTR), a prominent player in the Bitcoin treasury space, now faces a potential delisting from MSCI indices-a move that could trigger billions in outflows and exacerbate liquidity challenges in an already volatile sector.

The Proposed Exclusion and Its Rationale

In December 2025, MSCI proposed excluding firms where digital assets exceed 50% of total assets from its Global Investable Market Indexes. This threshold targets 39 companies with a combined market capitalization of $113 billion, including Strategy, which holds a substantial Bitcoin-backed treasury. The rationale, as outlined by MSCI, is to align index composition with traditional investment fund classifications, effectively treating DATs as passive vehicles rather than operating businesses. Strategy has contested this characterization, arguing that its treasury and capital markets program operate as a dynamic business model with equity and fixed-income instruments.

Institutional Capital Flow Impacts

The exclusion of DAT-focused firms could trigger significant institutional capital outflows. For Strategy alone, removal from MSCI indices is estimated to result in $2.8 billion in outflows from passive funds tracking these indices. If other index providers follow suit, total outflows could reach $8.8 billion. This represents a material risk for a company where index-linked funds account for a substantial portion of ownership. Such outflows would not only depress valuation metrics but also reduce liquidity, as passive investors typically rebalance portfolios in lockstep with index changes.

Broader implications extend to the $10–$15 billion range across the 39 targeted companies, a figure that underscores the systemic risk of index-driven capital reallocation. Institutional investors, constrained by regulatory liquidity requirements such as the Net Stable Funding Ratio (NSFR), may face additional pressure to divest from assets deemed "illiquid" under evolving risk frameworks. This creates a feedback loop: reduced index inclusion → diminished liquidity → further capital flight.

Liquidity Dynamics and Price Volatility

Index exclusions amplify liquidity risks through multiple channels. First, trading volume for excluded securities often declines sharply as passive funds exit, reducing market depth and increasing bid-ask spreads. Second, price volatility intensifies as remaining liquidity providers-often high-frequency traders or active managers-adjust positions in response to shifting demand. For Strategy, which has historically experienced elevated volatility due to its Bitcoin exposure, these effects could compound existing challenges.

Third, fund flows become increasingly sensitive to index composition. A 2025 study highlighted that ETF liquidity premiums can widen by up to 30% following index reconstitutions, particularly for niche assets. In Strategy's case, exclusion from MSCI indices would likely reverse the inflow of Bitcoin exposure into institutional portfolios, further isolating the stock from broader market trends.

Strategic and Market Implications

Strategy's legal challenge to MSCI's proposal highlights a deeper tension: the arbitrary nature of the 50% threshold. As noted by analysts, Bitcoin's price fluctuations-unrelated to operational performance-could cause firms to oscillate in and out of index eligibility, creating artificial volatility. This undermines the stability of institutional capital flows and raises questions about the governance of index providers.

Moreover, the exclusion risks stifling innovation in the U.S. digital asset sector. By marginalizing DATs, MSCI's decision could deter institutional participation in Bitcoin-related ventures, ceding ground to jurisdictions with more accommodating regulatory frameworks. For investors, this signals a growing divergence between traditional index logic and the realities of a digital-first economy.

Conclusion

MSCI's proposed exclusion of DAT-focused firms, including Strategy, represents a pivotal moment for institutional capital flows and liquidity dynamics. The potential $8.8 billion in outflows, coupled with heightened volatility and reduced market depth, underscores the fragility of index-driven liquidity. While Strategy's challenge may delay or modify the exclusion, the broader implications-arbitrary thresholds, regulatory alignment, and innovation suppression-demand scrutiny. For investors, the lesson is clear: index governance is no longer a passive exercise but a high-stakes lever in shaping market outcomes.