Leveraged ETFs against Strategy Inc. (NASDAQ: MSTR) had a miserable five days when the company kept selling its own shares to fund the purchase of Bitcoin.
In the past five sessions, MSTR lost around 15%, and its leveraged ETFs plummeted as well:
- Defiance Leveraged Long + Income MSTR ETF (NASDAQ: MST) plunged around 29% in five days.
- Defiance Daily Target 2x Long MSTR ETF (NASDAQ: MSTX) also fell over 28%, reflecting almost 200% of the daily performance of Strategy.
- Similar to MSTX, the T-Rex 2X Long MSTR Daily Target ETF (BATS: MSTU) dropped almost 30%.
The funds amplify Strategy’s daily movement and are susceptible to protracted selloffs. Bullish investors have not fared well in the past week’s decline.
Strategy revealed another purchase of 850 Bitcoin costing $99.7 million, financed through an at-the-market stock offering. Though the purchase raised its overall holdings to 639,835 BTC, investors shuddered at new dilution, sending shares down.
Fuel to the slide came from weakness across the broader crypto complex. In the past five days, virtual assets hit the brakes. Ethereum fell below the pivotal $4,000 mark, and Bitcoin dropped 2.23% to trade at around $111,000, a crucial psychological barrier. The correction highlights just how closely crypto-paired equities currently track underlying coin prices—and just how unstable that correlation can be. If crypto prices continue to come under pressure, the selling may accelerate for stocks such as Strategy and, by proxy, its leveraged ETFs.
Strategy’s approach remains divisive. Recently, CEO Michael Saylor floated a “worst-case” scenario of selling Bitcoin to pay for dividends. The remark provoked withering criticism from short-seller Jim Chanos, who dismissed it as “financial gibberish.” With continuous equity issuance to create reserves, investors worry dilution will continue eating into shareholder value.
For investors, leveraged ETFs like MST, MSTX, and MSTU are turning out to be the two-edged swords that ETF textbook warns about: powerful during bull runs, but disastrous during bear runs like the one this week.
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