Bitcoin Is Leaching Into Stock Index Funds. Here's How. — Barrons.com

By Ian SalisburyIndex fund investors might have little interest in betting on cryptocurrencies, as they seek solid returns from well-known stock market benchmarks. But that doesn't mean they don't own Bitcoin.Index funds are designed to give investors a way to invest in the stock market, which tends to rise over time — without making big bets on what will turn out to be "The Next Big Thing." Investing in crypto is culturally the opposite, with its celebration of bold speculation and trendy new digital assets.But recently Bitcoin has been finding its way into many index funds thanks to a backdoor of sorts — MicroStrategy, the erstwhile software company that has turned itself into a vessel for Bitcoin. The company owns 592,100 Bitcoins valued at more than $62 billion — a hoard it continues to grow with proceeds from the sale of preferred stock, including $1.2 billion worth issued earlier this month.MicroStrategy's market capitalization, which stood at $104 billion on Friday, makes the company large enough to qualify for a number of popular stock market indexes. These include the Russell 1000 and 3000 and the Nasdaq 100. (It's worth noting MicroStrategy isn't part of the S&P 500, whose members are selected by an index committee at S&P Global Indices.)Still MicroStrategy (and thus its Bitcoin) has earned a place in a number of popular funds. The $337 billion Invesco QQQ Trust has about 0.53% of its portfolio invested in MicroStrategy, according to Morningstar data. While that may not sound like much, that's about on par with the fund's holdings of major names like Intel, Mondelez International, and DoorDash.Other funds like the $1.8 trillion Vanguard Total Stock Market Index ETF and the $15 billion iShares Russell 3000 ETF also have small holdings, amounting to less than 0.2% of fund assets.Given those index funds' enormous size, even a tiny portion of their overall portfolios can translate into billions in investment dollars for MicroStrategy. A recent report by J.P. Morgan's Global Markets Strategy team suggests that, collectively, index funds own about $14 billion of MicroStrategy stock.Add in active mutual funds and institutional investors — which don't invest in index mutual funds but still track indexes as benchmarks — and overall fund holdings of MicroStrategy reach close to $50 billion, J.P. Morgan estimates.One potential problem for the stock: Lately Bitcoin's price has been rising, while MicroStrategy has been steadily buying more of it. Both factors have worked in concert to push up MicroStrategy's market value. Meanwhile, the higher market value has led index funds to buy more shares.However, that dynamic could one day reverse. If Bitcoin falls and MicroStrategy's market cap sinks, index funds could quickly turn from buyers into sellers, creating a possible pile-on."The more Bitcoin MicroStrategy buys, the higher the Bitcoin price, thus inducing even higher market cap and even higher weights in equity indices," wrote J.P. Morgan's strategy team led by Nikolaos Panigirtzoglou. "This self-reinforcing circle increases the risk of a boom and bust cycle, making MicroStrategy investors less comfortable with buying MicroStrategy stock."MicroStrategy didn't respond to a request for comment.Index fund investors might not have much interest in Bitcoin — or MicroStrategy. But buying an index fund means letting the market decide. These investors can at least take solace: At well under 1% of any particular index fund's portfolio, any potential losses from MicroStrategy won't sting much.Write to Ian Salisbury at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.