Strategy entered the Nasdaq 100, a stock market index of the 100 largest companies by market capitalization on the tech-focused stock exchange, in December 2024
This allowed Strategy to reap the benefits of passive capital flows from funds and investors holding the Nasdaq 100.
The exclusion of crypto treasury companies from stock indexes could trigger an automatic sell-off of their shares from funds and asset managers that are mandated to buy specific types of financial instruments, and could negatively impact crypto markets.
What's the context?
The above is an excerpt from a recent report on Cointelegraph covering an upcoming MSICI listing criteria change that would force any treasury company with 50% or more of its balance sheet in crypto to lose its index status.
Being excluded from major market indexes means that passive capital will flow out of these markets.
The report itself fixates on a community reaction to the news, particularly those calling to boycott JPMorgan.
Over the years, we've talked about idle capital, for the most part, this has been about capital sitting still in bank accounts, either as idle deposits (unused reserves) or within savings account.
We've never really talked about capital within funds. Sometimes this is actual idle capital when they aren't invested but generally, with funds, we can consider these capital more of a passive investment capital.
The big question is: how is that impacting innovation within crypto and beyond?
Passive investment trend
This is from a substack article on how investments have evolved overtime.
But before I dive into the linked article. In 2019, CNBC reported that 60% of equity assets were controlled by passive investment funds.
The substack article says that market cap-weighted index funds control over $13 trillion in US equities alone.
Some key points from the article:
Passive index investing has become the go-to way for people to save and grow money.
The author argues that we treat the stock market like a “savings account” — which is problematic.
As more capital goes into index funds, these funds can influence market behavior to a greater degree.
The problem: trading control for convenient yield
Isn't it interesting that risk increases significantly when we chase convenience?
Yet, this is what actively gets sold and people keep buying it.
The reason why index funds are growing strong is because people don't want to deal with active investments. They don't want to do the research, they just want the returns. They don't want to manually manage investments, they want to automate.
It kind of makes sense why some companies just keep growing in shares market value, when so much money is parked in index funds, the indexed assets simply autonomously keeps eating up capital inflow.
There's probably not significant real public interest, just capital flowing into index funds that have been fetching nice returns.
It's just capital chasing yield being DCA'd into assets that will just get bought by more funds later one and steadily, the trend is up and funds returns grows.
In a lot of ways, this stiffens innovation, for crypto and beyond. There's a great centralization problem that many investors probably don't realize.
The investment world needs to return to promoting active investor involvements. People need to return to investing for the right reasons, not some expected annual yield.