The California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the United States, has seen a significant downturn in its investment in MicroStrategy (MSTR). A recent filing with the Securities and Exchange Commission (SEC) reveals the fund’s stake, initially purchased for over $144 million, is now valued at approximately $80 million.

This substantial loss highlights the risks associated with using equity proxies to gain exposure to the volatile cryptocurrency market. The investment, which consists of 448,157 shares acquired in the third quarter, has tracked the recent slump in both Bitcoin and tech-related stocks.

While the loss is considerable, it represents a small fraction of the fund’s total portfolio. CalPERS manages over $550 billion in assets for more than two million public sector workers and retirees, making the financial impact manageable.

Index Removal Risk Adds to Investor Concerns

The decline in MicroStrategy’s stock, which has fallen about 45% this quarter, is compounded by a significant external threat: its potential removal from major stock indexes. This risk stems from the stock’s poor performance and the broader negative sentiment surrounding high-volatility assets.

Analysts at JPMorgan have warned that MicroStrategy could be dropped from key benchmarks like the MSCI USA index and the Nasdaq 100. Such a move could trigger substantial forced selling from passive investment funds that are required to track these indexes. It’s estimated that an exclusion from the MSCI index alone could lead to outflows of up to $2.8 billion.

Nearly $9 billion in market exposure is tied to passive funds holding MicroStrategy as part of their index-tracking strategies. A decision on the company’s index status is expected by January 15, and a removal would compel many of these funds to sell their shares, regardless of their fundamental outlook on the company or Bitcoin.

The Disappearing Premium on a Leveraged Bitcoin Play

MicroStrategy built its reputation as a bridge for institutional investors to access Bitcoin through traditional stock markets. The company’s core strategy involved selling its own stock to fund massive Bitcoin purchases, a model that proved highly successful during crypto bull runs.

At its peak, MicroStrategy’s market value traded at a significant premium to the actual value of its Bitcoin holdings. This premium reflected strong investor enthusiasm for its aggressive, leveraged approach to accumulating the digital asset.

However, that premium has now all but vanished. The company’s valuation is only slightly above the market value of its Bitcoin reserves, signaling that investors are no longer willing to pay extra for this type of exposure. For CalPERS and other institutions, the situation is a stark reminder that crypto-proxy stocks carry their own unique risks and are not immune to sharp drawdowns when market sentiment sours.