The largest pension fund in the United States, CalPERS, has suffered a loss of 64 million USD in its investment in MicroStrategy, while MSCI has removed the alert, triggering billions in sell pressure.

The largest pension fund in the U.S., the California Public Employees' Retirement System (CalPERS), has suffered significant losses due to its investment in MicroStrategy (MSTR). The 448,000 shares of MSTR purchased for $144 million in the third quarter now have a market capitalization of only about $80 million, resulting in unrealized losses of 45%. More severely, JPMorgan has warned that MSTR may be removed from the MSCI USA Index and the Nasdaq 100 Index, with the MSCI removal alone potentially triggering $2.8 billion in passive fund dumping. This case exposes the potential risks for institutions investing in Bitcoin indirectly through equity proxy tools and serves as a wake-up call for TradFi's involvement in the crypto market.

Position Shrinkage: CalPERS' Microstrategy Investment Waterloo

According to the latest SEC filings, CalPERS purchased 448,157 shares of MicroStrategy in the third quarter, with a cost basis exceeding $144 million. However, with MSTR's stock price plummeting approximately 45% this quarter, closing around $175 on November 27, the market capitalization of this holding has shrunk to about $80 million, indicating an unrealized loss of up to $64 million in just a few months. This decline is highly correlated with Bitcoin's price movements during the same period and is also influenced by the widespread dumping of tech stocks and crypto-related assets.

Despite the staggering amount of losses, they still account for a small proportion of CalPERS' overall investment portfolio. As the largest public pension fund in the United States, managing over $550 billion in assets and serving 2 million public sector employees and retirees, MSTR's holdings only make up 0.015% of its total assets. This scale makes the losses manageable from an accounting perspective, but their symbolic significance far outweighs the financial impact—representing the first major setback for traditional top institutions in gaining exposure to Bitcoin through equity channels.

From the perspective of investment timing, CalPERS is building its position during a phase where the valuation premium of MicroStrategy is relatively high. The company's business model has always revolved around the cyclical strategy of “issuing stock - acquiring Bitcoin,” which often allows it to achieve a valuation premium far exceeding the market capitalization of its held Bitcoin during Bitcoin bull markets. However, when market sentiment turns cautious, the vulnerability of this leveraged Bitcoin investment strategy is fully exposed, which is also a structural reason for CalPERS' investment failures.

CalPERS investment micro-strategy key data

• Position Opening Time: Third Quarter of 2024
• Number of shares: 448,157 shares
• Cost of Position: 144 million USD (approximately 321 USD per share)
• Current market capitalization: approximately 80 million USD (per share 175 USD)
• Book losses: 64 million USD (decline of 45%)
• Fund proportion: accounts for approximately 0.015% of the total assets of 550 billion USD

Risk of Index Removal: The Sword of Damocles of Passive Fund Selling

Morgan Stanley analysts recently issued a warning that casts a deeper shadow over MicroStrategy's prospects. The bank pointed out that MSTR is likely to be removed from major stock benchmarks such as the MSCI USA Index and the Nasdaq 100, with this decision expected to be made by January 15. It is estimated that the removal from the MSCI Index alone could trigger up to $2.8 billion in passive fund outflows, and if other index providers follow suit, the selling pressure will be further amplified.

The index position is by no means a simple honor for MicroStrategy. Currently, the passive funds tracking the relevant benchmark index and holding MSTR amount to nearly 9 billion dollars, and the investment decisions of these funds completely follow the index composition, with no independent judgment on individual stocks' fundamentals or Bitcoin's prospects. Once the index provider makes a removal decision, regardless of how optimistic the fund managers are about Bitcoin, they must reduce their holdings or even liquidate MSTR shares as mandated.

This passive fund selling could create a vicious cycle. Index exclusion decisions are usually based on objective criteria such as liquidity, market capitalization, or industry classification, and the continuous decline in MSTR's stock price has threatened its ability to meet these standards. More seriously, the anticipated outflow of passive funds could prompt actively managed funds to reduce their positions in advance, further intensifying the downward pressure on the stock price, ultimately creating a self-fulfilling prophecy.

Historically, stocks removed from major indices often lead to long-term valuation discounts. Taking Tesla's performance before its inclusion in the S&P 500 in 2020 as an example, index expectations had driven its stock price to rise significantly. In contrast, companies that are removed from indices typically take longer to regain market confidence, especially those like MSTR that rely on high valuation premiums to maintain their Bitcoin accumulation strategies.

Disappearance of Premium: Leveraged Bitcoin Games Lose Institutional Favor

MicroStrategy's core competitive advantage as a “Bitcoin equity proxy tool”—valuation premium—has significantly evaporated during the market adjustment. At the peak of the Bitcoin bull market, the company's market capitalization typically exceeded the total value of its held Bitcoin by 30%-50%, with this premium reflecting market recognition of its aggressive Bitcoin investment strategy. However, the latest data shows that MSTR's valuation is now close to the actual value of its Bitcoin reserves, indicating that investors are no longer willing to pay an additional premium for this leveraged Bitcoin investment.

The phenomenon of the disappearance of this premium is behind a structural shift in institutional investment preferences. The approval and popularization of Bitcoin spot ETFs in 2023-2024 provide traditional financial institutions with a more direct and cost-effective channel for exposure to Bitcoin. Compared to indirect investments through MSTR stock, spot ETFs not only have lower management fees but also avoid company-level operational risks and valuation premium fluctuations, fundamentally questioning the unique positioning of MicroStrategy.

From the perspective of market behavior, the investment community of MicroStrategy is experiencing significant differentiation. Early institutional investors who regarded it as a compliant investment alternative to Bitcoin have mostly shifted to spot ETFs; whereas the remaining investors are more traditional stock investors focused on the intrinsic corporate value of the company. This change in the investor structure explains why the sensitivity of MSTR's stock price to fluctuations in Bitcoin's price has significantly decreased recently.

For institutions still holding positions in MSTR, the current situation is quite tricky. Directly cutting losses means realizing unrealized losses, while continuing to hold faces additional downside risks from index deletions. Some analysts suggest hedging downside risks through options strategies, but in an environment of high implied volatility, the cost of such insurance is also quite expensive.

Reflection and Outlook on Institutional Crypto Investment Path

CalPERS's MSTR investment dilemma provides a valuable case study for the crypto asset allocation strategies of the entire TradFi industry. This incident highlights the potential pitfalls of indirect exposure to cryptocurrencies through equity instruments, including company-specific risks, valuation premium volatility, and high correlation with traditional financial markets. In contrast, directly holding Bitcoin or investing through a spot ETF, while still facing market risks, at least avoids the additional risks of an intermediary layer.

From a regulatory compliance perspective, the acceptance path of institutional investors towards encryption assets is becoming more diversified. In addition to stocks of listed companies like MicroStrategy, Bitcoin spot ETFs offer a more liquid option, private equity funds are beginning to provide direct investments in blockchain infrastructure, and even some aggressive institutions have attempted to conduct direct trading through mainstream CEX. This diversification of channels reduces the impact on the overall allocation caused by issues arising from any single investment tool.

Looking ahead, traditional pension funds and endowments may place greater emphasis on risk diversification in their allocation to crypto assets. Although CalPERS' recent losses were relatively small, they are significant enough to prompt other conservative institutions to reassess their investment strategies in crypto assets. A more likely scenario is that large institutions will adopt a multi-tiered allocation strategy: core positions held through spot ETFs, satellite positions exploring DeFi yield opportunities, and alternative positions investing in blockchain equity projects.

The evolution of market structure is also changing the investment logic of institutions. As Bitcoin and Ethereum are increasingly recognized as institutional-grade assets, and the regulatory framework becomes clearer, traditional financial giants may skip transitional solutions like micro-strategy and directly build professional encryption asset management departments. In this trend, the historical mission of agency stocks, which once served as a bridge, may be approaching its end.

Warning Stone on the Road of Integration Between TradFi and Encryption

The setback of CalPERS in investing in MicroStrategy is neither the starting point for traditional institutions to enter the crypto space nor will it be the endpoint. It is more like a warning stone on the road to growth, reminding market participants to be aware of the path dependence risks in the financial innovation process. Once more elegant solutions like Bitcoin spot ETFs emerge, previously necessary innovations may quickly become outdated. For institutions still exploring crypto asset allocation, the value of this case lies in recognizing that the sustainability of investment tools is equally important as the performance of their underlying assets in a rapidly evolving market. As the infrastructure of the crypto market matures, the participation of institutional investors is shifting from “borrowing” to “direct connection,” and this transformation may define the next phase of the institutional crypto adoption narrative.