Bitcoin bulls should steer clear of new leveraged MicroStrategy ETF

Leveraged ETFs chronically underperform comparable investments. There are better ways to place bullish bets on Bitcoin than MicroStrategy’s new ETF.

Acolytes of Bitcoin (BTC) billionaire Michael Saylor should steer clear of the new leveraged MicroStrategy (MSTR) exchange-traded fund (ETF). The ETF takes on needless risks and is almost certain to underperform spot BTC over time. There are better ways to bet on BTC.

On Aug. 15, Defiance ETFs — an asset manager specializing in “leveraged exposure to disruptive companies without the need for a margin account” — launched the Defiance Daily Target 1.75X Long MSTR ETF (MSTX). It reached $22 million in volume on its first day.

According to Defiance, MSTX is the “first single-stock long leveraged ETF for MicroStrategy” and “seeks to provide 175% long daily targeted exposure to” the stock. In practice, that means adding risky leverage to an already convoluted and speculative investment. It’s not worth the risk.

Business intelligence firm or Bitcoin hedge fund?

Originally a business intelligence firm, MicroStrategy transformed into a de-facto cryptocurrency hedge fund in 2020 when founder Michael Saylor started using the company’s balance sheet to buy up BTC.

Related: Expect Bitcoin ETF options to launch before 2025

The strategy paid off. Over the past four years, shares of MSTR surged by roughly 1,000%. The stock has outperformed BTC by some 50% and more than doubled the returns of investment legend Warren Buffet’s Berkshire Hathaway.

Since then, MicroStrategy has doubled down. On its Aug. 1 earnings call, MicroStrategy announced it was adopting a new lodestar for corporate performance: “Bitcoin Yield”, a measure of BTC-per-share.

The premise is that, as a public company, MicroStrategy can tactically leverage its balance sheet — mainly by borrowing or issuing shares — to accumulate BTC in a way that gradually ratchets up its BTC-per-share ratio, benefiting shareholders.

The idea makes sense, especially in light of MSTR’s frothy stock price. Plenty of companies — especially meme stocks — cash in on buoyant sentiment by raising cheap capital and investing in valuable assets. That’s exactly what GameStop did in June when it raised $2 billion after a speculative frenzy sent shares temporarily soaring by upwards of 400%.

The problem is that a good corporate treasury strategy doesn’t equate to a smart BTC play. In fact, MicroStrategy’s lofty share 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 estimated that MSTR would hit $2,150 per share (or $215 per share after MSTR’s 10-for-1 stock split on Aug. 9) if BTC hit $150,000 by the end of 2025. “Our valuation assumes that [MicroStrategy] will continue to aggressively accumulate Bitcoin during the next 1.5 years and that Bitcoin’s price will reach $150,000,” Palmer told Cointelegraph in an email.

The stock is trading around $132 as of August 2024, meaning Palmer is predicting that a 300% increase in BTC’s spot price would only juice MSTR shares by around 60%.

Don’t forget: despite its BTC buying binge, MicroStrategy is still a real company — and its enterprise software business isn’t doing well. MicroStrategy’s second-quarter revenues are down 7% compared to the past year. With an ailing business and a speculative balance sheet, MSTR is a convoluted investment play.

Leverage on top of leverage

Meanwhile, MicroStrategy’s approach is fraught with risks. As of June 30, the company held more than $3.7 billion in debt on its balance sheet. If BTC’s price action turns bearish — as it often does — MSTR could take a disproportionate hit.

Defiance’s leveraged ETF takes those risks and compounds them. MicroStrategy is already a leveraged bet on BTC. The Defiance ETF dials up that risk by 1.75x.

Making matters worse, leveraged ETFs chronically underperform comparable investments. The MSTX ETF doesn’t actually host MSTR shares. It holds a basket of derivatives — called swaps — to engineer leveraged exposure to MSTR’s price. Maintaining a daily leverage target means constantly rebalancing holdings, resulting in what is essentially a “Buy high, sell low” trading strategy. (You can scratch other leveraged BTC ETFs off the list for the same reason).

The Defiance ETF’s 1.29% annual management fee takes yet another cut out of returns. By comparison, spot BTC ETF management fees generally range from 0.15% to 0.25%, and issuers have waived those fees entirely for the first six months to a year post listing.

Better options for Bitcoin bulls

Vanilla spot BTC ETFs — such as Fidelity Wise Origin Bitcoin Fund (FBTC) and iShares Bitcoin Trust (IBIT) — offer more than enough BTC price exposure for most investors. Traders seeking to double down on BTC with leverage are better off buying BTC futures directly on futures exchanges.

Bitcoin “micro” futures — small contracts with low minimum buy-ins — are proliferating on futures exchanges, including Coinbase Derivatives and Chicago Mercantile Exchange (CME). Without daily rebalancing, futures are more suitable as long-term holds then leveraged ETFs.

Options on BTC ETFs are also likely launching soon, and could pose another attractive option. (As usual, you should do your own research before investing in futures — or you will lose money.)

MicroStrategy’s Saylor has urged investors to become “triple maxi” Bitcoin bulls and go all-in on BTC. His advice is questionable. If you’re betting big on BTC, you need all the luck you can get. Don’t stack the deck against yourself with a leveraged ETF.

Alex O’Donnell is a senior writer for Cointelegraph. He previously founded DeFi developer Umami Labs and worked for seven years as a financial journalist at Reuters, where he covered M&A and IPOs. He is also the crypto growth lead at startup accelerator Expert Dojo.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.