Retail investors who poured into Michael Saylor’s huge Bitcoin experiment are paying a steep price. Strategy Inc. the business once hailed for bundling crypto risk into a public stock is seeking to soothe investors after its shares dropped more than 60% from recent highs, amid a widespread digital-currency rout.
In an effort to allay concerns that it could have to sell Bitcoin if values continue to decline, Strategy announced on Monday that it had established a $1.4 billion reserve to pay dividends and interest.
But for many investors, the harm is already done. MSTX and MSTU, the most well-liked exchange-traded funds that track Strategy's erratic stock and offer double the daily return, have both fallen more than 80% this year.
Out of over 4,700 products that are now trading, this places them in the top 10 worst-performing funds in the US ETF market, only surpassed by niche short bets against semiconductor stocks and gold miners.
A third fund, known as MSTP, launched during the crypto frenzy in June, is down a similar amount since its introduction. Since early October, the three have lost almost $1.5 billion in assets.
When companies like Defiance and Tuttle Capital Management introduced the high-octane products that tracked one of Wall Street's most notable Bitcoin-proxy moves, retail investors flooded into these funds.
However, what started out as a simple way to boost cryptocurrency bets has turned into a warning about how leverage, volatility, and sentiment may go out of control.
Strategy shares fell 34% in November. Bitcoin has also plummeted roughly 30% from October highs and now trades near $87,000. After falling as much as 12% earlier in the day, Strategy ended Monday's trading session down 3.3%.
As of 6:20 a.m., Bitcoin had increased by 0.5%. on Tuesday in London. “The recent pullback in Bitcoin has hit Strategy’s stock hard, and 2x leveraged plays like MSTX and MSTU turn that into even larger losses,” said Roxanna Islam, head of sector and industry analysis at ETF shop TMX VettaFi.
“It’s a reminder that leveraged single-stock ETFs can look great on the way up, but can erase gains very quickly when the underlying trade goes the other way.”
Defiance chose not to respond. Emails requesting comment were not immediately answered by GraniteShares, the company behind MSTP, or Tuttle Capital.
A valuation calculation called market net asset value, or mNAV, which contrasts Strategy's enterprise value with its Bitcoin holdings, is at the heart of the issue.
That premium has mostly evaporated, bringing the ratio to approximately 1.15 a level executives have noted as a warning zone. In a podcast, CEO Phong Le stated that the company might have to sell Bitcoin as a last resort if it falls below 1.0 in order to fulfill payout obligations.
Funded by recent share sales, the recently announced reserve is intended to mitigate that risk. It covers at least 21 months of dividend and interest payments.
However, the news did little to halt the wider decline or allay worries about Strategy's reliance on retail appetite, its exposure to leverage, and the growing pressure on its funding mechanism.
Strategy has frequently traded common stock, a contentious tactic that dilutes current owners, to fund its Bitcoin purchasing binge.
The company has resorted to issuing preferred shares and other more expensive kinds of funding in order to continue purchasing cryptocurrency as its valuation premium has diminished.
Meanwhile, the ETF complex constructed around Strategy is faltering. According to data collated by Bloomberg, at least 15 of these instruments that are connected to its shares in different ways are currently trading, many of them down double digits this year.
Combined assets for MSTX, MSTU and MSTP have decreased from nearly $2.3 billion in early October to roughly $830 million today.
Despite increased institutional involvement and political backing from the Trump White House, the decline in cryptocurrency has led to significant withdrawals from miners, altcoins, and corporate treasuries that have a lot of tokens. Leveraged ETFs, which gained appeal among at-home traders earlier this year, are now among the hardest hit.
The funds' structure, which is designed to double Strategy's daily moves, has the potential to quickly backfire. Even if the stock closes flat, cumulative gains and losses can reduce returns in turbulent markets; this phenomenon is called volatility decay. When Strategy shares fell and whipsawed, the ETFs didn’t just track the loss they compounded it.
“Leveraged ETFs are generally a dangerous investment. According to Michael O'Rourke, chief market strategist at Jonestrading, "a leveraged ETF on shares of a stock that levers up to buy a highly speculative asset is a risk profile of its own."
Now, even Strategy’s inclusion in key stock indices is under danger. Analysts at JPMorgan warned the company might be removed from benchmarks like the MSCI USA and Nasdaq 100 a shift that might prompt billions in passive outflows. The shift is striking for a company that was once mentioned as a possible S&P 500 candidate.
