Will It Ever Make the Cut?

Bitcoin true believers were dealt a blow on Friday when Strategy (MSTR), the world’s largest corporate holder of Bitcoin, was passed over for inclusion in the S&P 500. 

Last week, the internet buzzed with speculation that Michael Saylor’s pioneering bitcoin treasury company would be added to the benchmark stock index as part of its quarterly rebalancing. Instead, mobile app monetization company AppLovin (APP), digital trading platform Robinhood (HOOD), and engineering firm Emcor (EME) got the nod of approval, and Strategy was left out in the cold. 

Companies and their shareholders have good reason to want to be added to the S&P 500. An estimated $22 trillion is attached to products that track or are benchmarked to the index, according to Bloomberg ETF analyst James Seyffart. An analysis from financial services firm Stephens found that fund managers would have to buy an estimated 50 million Strategy shares worth approximately $16 billion if the company were added.

Who Picks the 500?

To be eligible to join the index, companies need to satisfy certain profitability and liquidity requirements. They need to be U.S. domiciled and have a market capitalization of at least $22.7 billion. They need to have been profitable in the most recent quarter and, in aggregate, over the last year. At least half of shares need to be available to the public, and a substantial portion of those shares need to be actively traded. 

After last quarter’s earnings report, in which Strategy reported a $10 billion profit thanks to soaring bitcoin prices, the company technically ticked all of those boxes. But so did other companies, and ultimately it’s up to the Index Committee, a confidential group of S&P Global employees, to decide who’s in and who’s out. 

The goal of the Index Committee “is to have an index that really is a great measure of the market,” David Blitzer, a former committee chair, told Bloomberg’s Trillions podcast in 2020. “The market goes up, the index goes up. Any statistics about the market, you can do the same calculation on the index and you’ll be very close. That’s the goal,” he added. 

Sector Competition, Volatility, Business Model Could Be Headwinds

Melissa Roberts, Managing Director at Stephens Equity Research, points out Friday’s additions were all the largest eligible companies in some respect: AppLovin was the largest company in the tech sector, Robinhood the largest in financials, and Emcor the largest in the S&P MidCap 400.

“It is a crowded landscape for S&P 500 eligible adds, so definitely lots of competition,” says Roberts.

Strategy’s exclusion could also stem from its volatility. Strategy’s beta of 3.83, which indicates shares move nearly 4% for every 1% move in the broader market, runs well ahead of Robinhood’s (2.36) and AppLovin’s (2.44). And even their betas exceed some of the index’s most volatile stocks, like Nvidia (NVDA) and Tesla (TSLA) with their betas of 2.1 and 2.07, respectively. 

Another reason could be the peculiarity of Strategy’s business and profits.

For example, in the second quarter of this calendar year, Apple sold $94 billion of products and services and, after deducting expenses, was left with $23.4 billion of profit.

Strategy, on the other hand, sold $114 million of software in the same period, but bought $6.7 billion of bitcoin. Logic says it lost money, but it adopted fair value accounting at the beginning of this year, and the change has made a big difference to its income statement. The value of Strategy’s bitcoin holdings increased $14 billion. Under Strategy’s new accounting scheme, $10 billion of that gain was booked as profit, but it’s unrealized profit until Strategy sells that bitcoin.

An S&P Global spokesperson declined to comment on the latest rebalancing. Strategy did not respond to a request for comment.

Does the Index Committee Dislike Crypto?

While the crypto treasury strategy that Saylor pioneered in 2021 has inspired a host of copycats accumulating bitcoin and other cryptocurrencies, like Ether (ETHUSD) and Solana (SOLUSD), mainstream finance has historically been slow to embrace crypto. But experts don’t think prejudice is getting in Strategy’s way.

“The index includes other companies involved in crypto, so I don’t think we should read too much into its exclusion,” says Roberts of Friday’s decision.

Crypto exchange Coinbase (COIN) became the first crypto-native company to join the index in May, and fintech company Block (XYZ), which has about $1 billion of Bitcoin in its corporate treasury, was added in July. Tesla (TSLA) also owns Bitcoin.

Saylor in late 2024 speculated that Strategy’s accounting change could open the door for it to join the S&P 500 this year, and it’s still possible that it might. Roberts notes that three S&P 500 companies are currently the target of pending deals. Any of those deals closing would open up a spot in the index. Plus, Strategy will get another shot when the S&P 500 undergoes its last rebalancing of the year in December.