The largest pension fund in the U.S., CalPERS, suffers huge losses from its investment in MicroStrategy! MSTR position has unrealized losses of 40%.

The California Public Employees' Retirement System (CalPERS) has encountered a short positions market due to the recent pullback in MicroStrategy's stock price, with its initial Bitcoin proxy stock position shrinking from over $144 million to $80 million in just a few months. According to the latest filing with the SEC, CalPERS purchased 448,157 shares of MSTR in the third quarter, currently facing unrealized losses of over $50 million, with a loss margin exceeding 40%.

CalPERS unrealized losses exceed 50 million USD: Institution steps on a landmine with Bitcoin proxy stocks

(Source: SEC)

According to the latest documents submitted to the U.S. Securities and Exchange Commission, CalPERS purchased 448,157 shares of MicroStrategy in the third quarter, investing over $144 million. This investment exposes the fund directly to Bitcoin-related concept stocks in traditional financial markets. However, the current value of this holding is only about $80 million, resulting in unrealized losses of over $50 million, with a loss ratio exceeding 40%.

This figure may be disastrous for the average investor, but it is still manageable for the giant CalPERS. CalPERS manages over $550 billion in retirement and pension funds, and the MicroStrategy position accounts for a very small proportion of its massive investment portfolio, with this loss representing only about 0.01% of total assets. However, this investment failure has still raised questions about institutional cryptocurrency investment strategies.

CalPERS chose to gain Bitcoin exposure through MicroStrategy instead of directly purchasing Bitcoin spot ETFs, a decision that now seems extremely unfavorable. As a Bitcoin proxy stock, MicroStrategy's stock price volatility often exceeds that of Bitcoin itself. In a bull market, this leverage effect can amplify gains, but in a bear market or pullback period, losses will also be magnified.

What is even more noteworthy is that CalPERS, as the largest public pension fund in the United States, has investment decisions that are indicative. This significant loss may make other conservative institutional investors more cautious about crypto-related investments, delaying the influx of institutional funds into the crypto market. For the crypto community, which has always hoped for institutional funds to drive a bull market, this is not good news.

MicroStrategy Faces Risk of Being Removed from MSCI and Nasdaq Indices: $8.8 Billion Sell Pressure Alert

The problem mainly stems from the decline in MicroStrategy's own stock price. The stock closed at around $175 on Wednesday, down about 45% so far this quarter. This drop is highly synchronized with the volatility of Bitcoin itself, and combined with the overall pressure on tech stocks and high Beta crypto-related assets, it has intensified selling pressure. To make matters worse, the sentiment on Wall Street has also worsened.

J.P. Morgan analysts recently warned that MicroStrategy may be removed from major indices like the MSCI USA Index and Nasdaq 100. They estimate that the removal from just the MSCI USA Index could trigger passive selling pressure of up to $2.8 billion. If other index providers follow suit, the selling pressure could further expand to $8.8 billion. Such a scale of passive selling pressure would be catastrophic for any stock.

The Index's Triple Blow to MicroStrategy

Passive capital outflows: ETFs and mutual funds tracking the index will be forced to sell MicroStrategy shares.

Liquidity Exhaustion: Losing the status of index constituents will reduce trading activity and market depth.

Valuation Reassessment: No longer regarded as a mainstream tech stock, the valuation multiples may be further compressed.

The criteria for index exclusion are usually based on market capitalization, liquidity, and the nature of the business. MicroStrategy's main business is actually holding Bitcoin, rather than traditional software services, which makes its position in index classification awkward. Many index providers may view MicroStrategy more as a cryptocurrency fund than a technology company.

MicroStrategy has long been regarded as an alternative tool for traditional institutions seeking exposure to Bitcoin through the stock market. Its potential loss of index component status may weaken its role as a “bridge between traditional finance and the crypto market.” For those institutions that cannot directly invest in Bitcoin ETFs due to regulatory or investment policy restrictions, MicroStrategy has been one of the few viable options. If it is removed from major indices, this alternative function will be significantly diminished.

Bitcoin Leverage Narrative Failure: Premium Collapse and Valuation Reversion to Reserves

MicroStrategy's growth model has always been simple and clear: issue stocks, use the funds to buy more Bitcoin, rely on the bull market to estimate higher valuations, and then issue more stocks to buy Bitcoin again. At the peak of this cycle, MicroStrategy's market capitalization far exceeds the net worth of its held Bitcoin, and the market is willing to pay a high premium in exchange for its highly leveraged narrative on Bitcoin.

This premium used to reach astonishing levels. At the peak in early 2024, MicroStrategy's market value was 2-3 times higher than the value of the Bitcoin it held, with investors willing to pay a high premium for this “Bitcoin leverage.” The logic behind this premium lies in MicroStrategy's ability to continuously increase its Bitcoin holdings through the issuance of convertible bonds and stocks, providing shareholders with returns that exceed those of directly holding Bitcoin.

However, the premium has significantly narrowed now. The company's current valuation is only slightly higher than the value of its Bitcoin reserves, indicating that investors are becoming more conservative towards this leveraged Bitcoin exposure model. When the premium disappears, the investment logic of MicroStrategy becomes fragile: why take on the operational risks and stock volatility of the company instead of directly investing in Bitcoin spot ETFs?

The reasons for the collapse of the premium are multifaceted. First, the launch of Bitcoin spot ETFs provides investors with a more direct and lower-cost exposure tool to Bitcoin. Second, MicroStrategy's continuous issuance of stocks and convertible bonds to purchase Bitcoin dilutes the equity of existing shareholders during a bear market. Third, as the price of Bitcoin fluctuates, MicroStrategy's balance sheet also bears pressure, and its financial leverage risks begin to emerge.

For CalPERS, this premium collapse means double losses. Not only does the decline in Bitcoin prices lead to a shrinkage of the assets held by MicroStrategy, but the market valuation multiple of MicroStrategy's stock is also being compressed. This double whammy makes the magnitude of losses far exceed that of directly holding a Bitcoin ETF.

Institutional Investment in Crypto Warning: Leverage is Not Always an Advantage

CalPERS's heavy losses provide important lessons for institutional investors in crypto assets. First, leverage can amplify gains during a bull market, but it can also amplify losses during a pullback. MicroStrategy's high beta characteristics lead to larger declines when Bitcoin falls. Second, investing in proxy stocks rather than directly in the underlying assets introduces additional company risk and valuation risk.

More importantly, timing is crucial. CalPERS built its position in the third quarter, just near the peak of MicroStrategy. If they could have entered at an earlier point or a lower price, the current losses could be much smaller. This also serves as a reminder to institutional investors that chasing prices often leads to significant losses.