Retail investors who eagerly followed Michael Saylor’s Bitcoin vision are currently grappling with significant losses. The situation has worsened around Strategy Inc.’s stock, leading to a sharp unwinding of leveraged products associated with the company. Reports indicate that this downturn has wiped out the gains accumulated during the crypto boom, causing funds tied to Strategy’s volatile betting strategies to struggle in retaining investor assets.
Previously viewed as a straightforward way to invest in Bitcoin through a publicly traded stock, Strategy Inc. has seen its shares plummet over 60% from recent highs. In response to investor anxiety about potential Bitcoin liquidations amid falling prices, the company announced its establishment of a $1.4 billion reserve to ensure timely dividend and interest payments.
However, many investors believe this reassurance has arrived too late. Funds like MSTX and MSTU, both designed to provide double the daily return on Strategy’s stock, have each experienced losses exceeding 80% this year, landing them among the worst-performing products in a vast universe of over 4,700 U.S. ETFs. Another fund, MSTP, which was launched in June, is facing a similar decline. Collectively, these three funds have shed approximately $1.5 billion in assets since early October.
Retail interest surged earlier when firms such as Defiance and Tuttle Capital Management introduced these high-risk products, capitalizing on Wall Street’s enthusiasm around Bitcoin investments. In November alone, Strategy’s stock dropped 34%. Currently, Bitcoin, having fallen roughly 30% from its October peak, is trading near $87,000. Strategy’s stock also closed lower after experiencing intraday volatility.
Experts have pointed out the dangers associated with leveraged products in a bearish market. Roxanna Islam, the head of sector research at TMX VettaFi, remarked that the downturn in Bitcoin has adversely affected Strategy’s stock. Leveraged ETFs amplify the losses when the underlying investment path turns negative, especially in markets characterized by volatility.
Concerns over funding strains and potential index exclusion are also mounting. The metric mNAV, which compares Strategy’s enterprise value against its Bitcoin holdings, indicates that the premium has largely diminished, now standing at approximately 1.15. Company executives have acknowledged that slipping below a 1.0 ratio could necessitate Bitcoin sales to fulfill payout obligations, albeit as a last resort. The recent reserve, created from new equity sales, is intended to sustain at least 21 months of dividend and interest obligations, yet it has not fully alleviated worries regarding Strategy’s financial stability.
As Strategy continues to acquire Bitcoin, it has frequently issued common stock, diluting existing shareholders. With its valuation premium shrinking, the company has shifted to relying on preferred shares and other more expensive capital options to pursue its cryptocurrency strategy.
The ETF ecosystem tied to Strategy is similarly in distress. With at least 15 associated products, many are down by double digits this year. The combined assets of the MSTX, MSTU, and MSTP funds have fallen from over $2.3 billion in early October to approximately $830 million.
The broader decline in the cryptocurrency market, despite increased institutional investment and political backing, has negatively impacted miners, altcoins, and companies with substantial crypto treasuries. Leveraged ETFs, particularly popular among retail traders earlier in the year, are among the most severely affected.
In volatile markets, the compounding effect known as volatility decay can gradually deplete performance, even if the underlying stock remains flat. As Strategy’s shares entered a period of decline, leveraged ETFs have significantly exacerbated the losses.
Market analysts have also raised the possibility that Strategy could be excluded from major stock indices such as the MSCI USA and the Nasdaq 100, a transition that could trigger billions of dollars in passive investment outflows. This dramatic reversal marks a significant shift for a company once seen as a contender for inclusion in the S&P 500.
