Bitcoin bulls should avoid the new leveraged MicroStrategy ETF.
Bitcoin (BTC) follower billionaire Michael Saylor should avoid the new leveraged MicroStrategy (MSTR) exchange-traded fund (ETF). This ETF carries unnecessary risk and is very likely to underperform spot BTC over time. There are better ways to bet on BTC.
On August 15, Defiance ETFs, an asset manager specializing in “leveraged exposure to innovative companies without the need for a margin account,” launched the Defiance Daily Target 1.75X Long MSTR ETF (MSTX). The first day’s volume reached $22 million.
According to Defiance, MSTX is “MicroStrategy’s first single-stock long leveraged ETF” and seeks to “provide 175% long daily target exposure to equities.” In practice, this means adding risky leverage to an already complex and speculative investment. It’s not worth the risk.
Is it a business intelligence firm or a Bitcoin hedge fund?
Originally a business intelligence firm, MicroStrategy transformed into a de facto cryptocurrency hedge fund in 2020 when founder Michael Saylor began buying BTC using the company’s balance sheet.
Related: Bitcoin ETF Options Expected to Launch Before 2025
The strategy paid off. Over the past four years, MSTR’s stock price has risen by about 1,000%. The stock has outperformed BTC by about 50% and more than doubled the returns of investment legend Warren Buffett’s Berkshire Hathaway.
Since then, MicroStrategy has doubled. In its earnings call on August 1, MicroStrategy announced it was adopting a new metric for corporate performance called “Bitcoin Yield,” which measures BTC per share.
The premise is that MicroStrategy, as a public company, can strategically leverage its balance sheet, primarily by borrowing or issuing shares, to accumulate BTC, which can then be used to gradually increase the BTC/share ratio and benefit shareholders.
This idea is especially valid given MSTR’s bubbly stock price. Many companies, especially meme stocks, raise cheap capital and cash in on the excitement by investing in valuable assets. That’s exactly what GameStop did in June, when it raised $2 billion after a speculative frenzy temporarily sent its stock price soaring more than 400%.
The problem is that good corporate financial strategy is not the same as a smart BTC play. In fact, MicroStrategy’s high stock price makes it harder than ever for the stock to outperform BTC.
Related: Ethereum Gas Fees: Too Low or Too High? No One Can Decide
Benchmark FinTech analyst Mark Palmer estimates that MSTR could reach $2,150 per share ($215 per share following MSTR’s 10-for-1 stock split on Aug. 9) if BTC reaches $150,000 by the end of 2025. “Our valuation is based on the assumption that (MicroStrategy) continues to aggressively accumulate Bitcoin over the next 1.5 years and that the Bitcoin price reaches $150,000,” Palmer told Cointelegraph in an email.
As of August 2024, the stock is trading at around $132, meaning that Palmer predicts that if the spot price of BTC rises by 300%, MSTR stock will only rise by about 60%.
Don’t forget, despite the BTC buying frenzy, MicroStrategy is still a real company, and its enterprise software business is not doing well. MicroStrategy’s Q2 revenue was down 7% year-over-year. With a weak business and a speculative balance sheet, MSTR is a complicated investment play.
Leverage on top of leverage
Meanwhile, MicroStrategy’s approach is fraught with risk. As of June 30, the company had over $3.7 billion in debt on its balance sheet. If BTC’s price action turns bearish (as it often does), MSTR could be hit disproportionately.
Defiance’s leveraged ETF takes this risk and compounds it. MicroStrategy is already a leveraged bet on BTC. The Defiance ETF multiplies that risk by 1.75x.
What makes things worse is that leveraged ETFs chronically underperform similar investments. The MSTX ETF doesn’t actually hold MSTR stock. It holds a basket of derivatives called swaps to create leveraged exposure to the price of MSTR. Maintaining a daily leverage target means constantly rebalancing the holdings, which essentially becomes a “buy high, sell low” trading strategy. (You can cross off other leveraged BTC ETFs from the list for the same reason).
The Defiance ETF’s annual management fee of 1.29% takes another bite out of returns. By comparison, spot BTC ETF management fees typically range from 0.15% to 0.25%, and the issuer has waived this fee entirely for the first six months to one year after listing.
A better option for Bitcoin bullishness
Vanilla spot BTC ETFs like Fidelity Wise Origin Bitcoin Fund (FBTC) and iShares Bitcoin Trust (IBIT) provide ample BTC price exposure for most investors. Traders looking to double their BTC with leverage are better off buying BTC futures directly on a futures exchange.
Bitcoin “micro” futures (small contracts with low minimum bids) are proliferating on futures exchanges including Coinbase Derivatives and the Chicago Mercantile Exchange (CME). Futures that do not rebalance daily are better suited for long-term holding than leveraged ETFs.
Options on BTC ETFs are also likely to be launched soon, which could be another attractive option. (As always, do your own research before investing in futures, or you could lose money.)
Saylor of MicroStrategy urged investors to go all-in on BTC as the “triple maxi” Bitcoin bull market rages on. His advice is questionable. If you’re betting big on BTC, you need all the luck you can get. Don’t use leveraged ETFs to your advantage.
Alex O’Donnell He is a senior writer at Cointelegraph. He previously founded DeFi developer Umami Labs and worked as a financial journalist at Reuters for seven years, covering M&A and IPOs. He is also the head of crypto growth at startup accelerator Expert Dojo.
This article is for general information purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
