Retail investors who invested heavily in Michael Saylor’s ambitious Bitcoin venture are now facing significant losses. Strategy Inc., once celebrated for combining cryptocurrency exposure with public stock investments, has seen its shares plummet over 60% from recent peaks amid a sweeping downturn in digital currency markets. In a bid to restore confidence, the company announced a $1.4 billion reserve aimed at covering dividend and interest payments, hoping to alleviate concerns that it might be forced to liquidate Bitcoin holdings in the event of further declines.
However, the damage appears to be extensive. The popular exchange-traded funds (ETFs) linked to Strategy’s stock, namely MSTX and MSTU, both designed to deliver double daily returns, have suffered over an 80% decline this year. These funds rank amongst the worst-performing in the U.S. ETF market, trailing behind lesser-known short positions against gold miners and semiconductor stocks. A third fund, MSTP, launched during the height of crypto enthusiasm in June, has recorded similar losses since its inception. Collectively, these three ETFs have seen approximately $1.5 billion wiped from their asset base since early October.
The plunge was particularly painful for retail investors who flocked to these funds when firms like Defiance and Tuttle Capital Management rolled out high-risk products tracking one of Wall Street’s well-known Bitcoin proxy trades. What began as a means to amplify investment in cryptocurrency has evolved into a cautionary narrative regarding the risks associated with leverage, market volatility, and shifting investor sentiment.
In November, Strategy’s stock dropped by 34%, reflecting a broader trend as Bitcoin itself decreased about 30% from its highs in October, now trading near $87,000. Strategy’s shares fell by 3.3% on Monday, after experiencing an intraday slump of up to 12%. Meanwhile, Bitcoin made a modest recovery, increasing 0.5% in early London trading the following day.
Roxanna Islam, head of sector and industry research at ETF shop TMX VettaFi, noted that the recent decline in Bitcoin value has severely impacted Strategy’s stock. The effects are particularly pronounced for leveraged ETFs like MSTX and MSTU, which magnify losses when the underlying asset declines. “This situation serves as a reminder that while leveraged single-stock ETFs can deliver appealing returns during market upswings, they can also rapidly deplete gains when trends reverse,” she remarked.
At the heart of the issue is a valuation metric known as mNAV, or market net asset value, which compares Strategy’s total enterprise value to its Bitcoin assets. The previously favorable premium has nearly vanished, bringing the ratio down to approximately 1.15—an area executives have identified as a warning sign. CEO Phong Le acknowledged that falling below 1.0 could compel the firm to liquidate Bitcoin holdings to fulfill payout obligations, although he clarified this would be a last-resort measure. The recently established reserve, bolstered by recent equity sales, is intended to mitigate that risk, covering at least 21 months of dividend and interest payouts. Nonetheless, the announcement did little to halt the wider decline or ease concerns about Strategy’s reliance on leverage, dependence on retail investor enthusiasm, and increasing pressure on its funding structure.
To finance its Bitcoin acquisitions, Strategy has frequently resorted to selling common stock, a tactic that has stirred controversy due to effectively diluting existing shareholder stakes. As the valuation premium has waned, the company has turned to issuing preferred shares and other more expensive forms of capital to sustain its crypto purchasing strategy. Meanwhile, the interconnected ETF landscape surrounding Strategy is facing its own challenges. At least 15 funds tied to Strategy’s shares are currently trading, many witnessing significant losses this year, according to Bloomberg data. Assets in MSTX, MSTU, and MSTP have fallen from over $2.3 billion in early October to approximately $830 million today.
The downturn in the crypto market—despite increased involvement from institutional players and political backing from the former Trump administration—has led to steep declines across various digital currencies, including miners and token-heavy corporate treasuries. Leveraged ETFs, which saw a surge in popularity among retail traders earlier in the year, are now among the most severely affected investments. This structure—designed to double the daily performance of Strategy’s stock—can easily backfire. In volatile market conditions, the compounding of gains and losses can erode returns, even if the stock remains stable, a phenomenon referred to as volatility decay. As Strategy’s shares fluctuated erratically, the ETFs not only followed the decline but exaggerated it as well.
Experts like Michael O’Rourke, chief market strategist at JonesTrading, caution against the inherent risks associated with leveraged ETFs, especially those that invest in speculative assets. The potential impact of this turmoil is also being felt regarding Strategy’s status in major stock indices. Analysts at JPMorgan have suggested that the firm could face expulsion from prominent benchmarks such as the MSCI USA and Nasdaq 100, a transition that could result in significant passive fund outflows. This marks a stark contrast for a company once considered a potential candidate for the S&P 500.
