There’s an ETF for that? MicroStrategy (MSTR) Stock

How MicroStrategy works

The best way to describe MicroStrategy’s business model — which has moved far beyond its roots in software and business intelligence — is as a “Bitcoin-debt flywheel.”

Here’s how it works: MicroStrategy’s stock price trades at a significant premium above the net asset value (NAV) of its Bitcoin holdings. This premium is largely fueled by the use of convertible bonds to raise capital.

Investors lend MicroStrategy money through bonds with low interest rates and the option to convert their bonds into MSTR shares. This setup gives bondholders downside protection — fixed interest payments and repayment of principal — while also offering upside tied to Bitcoin’s price.

If Bitcoin rallies, MSTR’s stock price tends to soar. Bondholders can then convert their bonds into shares, profiting from the premium that MSTR trades at relative to Bitcoin’s NAV. Since MicroStrategy often trades well above the value of its underlying Bitcoin, the conversion can be quite lucrative.

What does MicroStrategy do with the capital raised from these convertible bonds? It buys even more Bitcoin. The result is a self-reinforcing cycle: as Bitcoin’s price rises, MicroStrategy’s stock rallies, allowing it to keep raising capital at favorable terms to acquire more Bitcoin — all while maintaining that premium valuation.

The flywheel spins beautifully… as long as Bitcoin keeps going up and MicroStrategy trades at a premium high enough to offset dilution.

How the MicroStrategy ETFs work

The single-stock leveraged and inverse MicroStrategy ETFs serve as tactical trading tools for investors looking to magnify their exposure to MSTR — either long or short.

Why is MicroStrategy such an attractive trading vehicle? For starters, it’s incredibly volatile, with a staggering 75.22% standard deviation. It also tends to move more or less in line with Bitcoin’s price while remaining liquid with an active options chain.

The problem, however, is that shorting MSTR typically requires a ton of margin, and options are usually prohibitively expensive given the stock’s extreme volatility. For investors who want to amplify their exposure, these ETFs simplify the process — all you need to do is buy shares and sit on them.

Two main providers dominate this niche:

• Defiance ETFs, which offers the Defiance Daily Target 2X Long MSTR ETF
  MSTX
  -7.56%
  and Defiance Daily Target 2X Short MSTR ETF
  SMST
  +6.77%
• REX Shares, which operates the T-REX 2X Long MSTR Daily Target ETF
  MSTU
  -7.44%
  and T-REX 2X Inverse MSTR Daily Target ETF
  MSTZ
  +7.29%

These ETFs work by using derivatives, primarily swaps with counterparties, collateralized by money market instruments. Options may also be used if necessary.

Swaps are the tool of choice for leveraged and inverse ETFs because they offer a cost-effective and efficient way to gain amplified exposure to the underlying stock, especially when the stock is volatile and shorting directly would be complex or expensive.

What are the risks with these ETFs?

A crucial point to note is that all four ETFs have the word “Daily” in their names. This means their leverage and inverse targets are designed to be accurate only for a single day. Over longer periods, due to the effects of daily compounding, the results can drift significantly from the expected return.

This drift can work in your favor during trending markets but can be devastating in choppy ones. To understand how compounding affects returns, T-Rex offers a handy chart in its prospectus that illustrates this effect, as seen below:

Finally, a burning question many readers likely have: Can these ETFs blow up? My answer is an emphatic yes. The T-Rex prospectus explicitly outlines scenarios where this could occur:

“The Fund could theoretically lose an amount greater than its net assets in the event of a security decline of more than 50%. This would result in a total loss of a shareholder’s investment in one day even if MSTR subsequently moves in the opposite direction and eliminates all or a portion of its earlier daily change. A total loss may occur in a single day even if MSTR does not lose all of its value.”

In short, these ETFs are not for the faint of heart. Trade at your own risk.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.