Investors pursuing a straightforward method to capitalize on Bitcoin’s momentum have found themselves facing significant challenges with Strategy Inc. (NASDAQ:MSTR), a company closely associated with Michael Saylor’s cryptocurrency vision. The stock has plummeted over 60% from its recent highs, while its popular leveraged exchange-traded funds (ETFs)—MSTX and MSTU—have seen declines exceeding 80% this year, with MSTP experiencing a similar downturn since its introduction in June.
A closely monitored metric by the company’s executives, the mNAV premium, has dwindled to approximately 1.15, raising concerns about the company’s ability to maintain its obligations relative to Bitcoin holdings. CEO Phong Le highlighted on a recent podcast that if this metric falls below 1.0, it could necessitate the sale of Bitcoin to meet dividend and interest requirements—an action that would only be considered as a last resort.
To bolster investor confidence amid these troubles, Strategy has initiated a $1.4 billion reserve, funded through recent equity issuance, intended to cover at least 21 months of payouts. However, this move coincides with a broader downturn in the cryptocurrency market. In November alone, Strategy shares dropped by 34%, while Bitcoin’s value fell approximately 30% from its October peak, trading around $87,000. The stock even closed down 3.3% on a recent Monday after experiencing an intraday dip of up to 12%.
The leveraged ETFs associated with the company have faced even more severe repercussions from market volatility, as rapid fluctuations have turned daily movements into compounded losses. The combined assets for MSTX, MSTU, and MSTP have plummeted from over $2.3 billion in early October to roughly $830 million today. This precarious situation comes as retail traders who had once flocked to leveraged single-stock ETFs are now grappling with the potential for massive losses in a volatile environment.
Compounding these concerns are broader structural issues. Strategy’s reliance on equity issuance to finance its Bitcoin acquisitions has become increasingly problematic as its valuation premium has contracted. The company has subsequently turned to preferred shares and more expensive financing methods to sustain its purchasing habits. Analysts at JPMorgan have warned that Strategy may face exclusion from key benchmarks such as the MSCI USA and Nasdaq 100, an exclusion that could trigger billions in passive outflows.
Once viewed as a contender for inclusion in the S&P 500 index, Strategy’s declining demand for ETFs, shrinking mNAV cushion, and potential index removal indicate a troubling new chapter for investors who had initially heralded the stock as a high-risk, high-reward proxy for Bitcoin itself.
