Defiance ETFs launched a leveraged MSTR ETF in August, and rivals REX Shares and Tuttle Capital Management followed suit in September with even more turbo-charged versions. Bloomberg ETF analyst Eric Balchunas termed it the “hot sauce arms race.”
MicroStrategy to Lend Bitcoin for Yield?
MicroStrategy had its genesis as a business intelligence company, but it inverted into a cryptocurrency hedge fund back in 2020, through the founder Michael Saylor, who decided on Leveraged MicroStrategy ETFs in order to leverage the balance sheet to buy Bitcoin.
For the firm, Leveraged MicroStrategy ETFs are shifted to “Bitcoin Yield” as a metric of success now implies its commitment to increasing Bitcoin holdings per share for its shareholders. It did this on August 1, 2023, while continuing to find ways to leverage its balance sheet even more.
On September 16, the firm announced a $700 million debt offering that was in part intended to be used to acquire additional Bitcoins. Analyst Mark Palmer at Benchmark went further to say that the company could even start lending out Bitcoin to create more yield.
MicroStrategy ETFs Heat Up: 2X Long and Short Options Now Available
As part of its developing Bitcoin strategy, new ETFs targeting the company’s performance have launched. Defiance ETFs launched the Defiance Daily Target 1.75X Long MSTR ETF on August 15, providing 175% leveraged exposure.
On the other hand, REX Shares and Tuttle Capital Management launched two on September 18, the T-REX 2X Long MSTR Daily Target ETF and the T-REX 2X Inverse MSTR Daily Target ETF target leveraged long and short, respectively.
These ETFs extend the growing interest in MSTR as a stock proxy for Bitcoin exposure to investors looking to capitalize on its high volatility and performance linked to cryptocurrency markets.
In their first week of trading, the leveraged MicroStrategy ETFs have pulled in more than $70 million, according to data presented by Bloomberg ETF analyst Eric Balchunas, via a September 27 tweet on X.
According to Balchunas:
“Both of these coming out of the gate so hot indicates there’s some pretty strong demand for this type of high-octane, high-risk-high-reward investment.”
Leveraged ETFs: High Risk, High Reward
A leveraged exchange-traded fund is an ETF that attempts to amplify the return of an underlying benchmark index, such as the S&P 500, through the use of debt or financial derivatives. Most typically try to achieve returns that are 2x or 3x the daily performance of the underlying.
This may make spectacular short-term gains, but it also amplifies potential losses. However, it’s still to see whether Leveraged MicroStrategy ETFs will be successful as expected.
Because of that, traditional ETFs seek to mimic an index on a 1:1 basis by holding the underlying securities. The opposite would be in the leverage ETFs with strategies such as borrowing or derivatives to achieve a higher return ratio.
Explaining it more simply, the 2x leveraged ETF would have a structure through which it could get twice the daily return of the index. In other words, if the S&P 500 rises, say by 1%, the ETF could go up by 2%. Because when an index drops 1%, it can drop an ETF as much as 2%, making it a much riskier investment, especially for a longer-term holding as the result of daily compounding.
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