Bitcoin Bets Go Into Overdrive As MSTR, Leveraged ETFs Surge

Strategy Inc. (NASDAQ:MSTR) has gained nearly 29% over the past five trading days, and the rally has been even more dramatic in the leveraged ETFs tied to the Bitcoin treasury company. The T-Rex 2X Long MSTR Daily Target ETF (BATS:MSTU), GraniteShares 2x Long MSTR Daily ETF (NASDAQ:MSTP) and Defiance Daily Target 2X Long MSTR ETF (NASDAQ:MSTX) have each surged roughly 60% over the same five-day period, according to market data. The gains have come despite a sharp pullback Wednesday, when MSTR fell 3.07% to $162.20 after closing at $167.33 on Tuesday. Bitcoin also slipped, trading around $84,383 on Wednesday versus $86,172 a day earlier. That one-day reversal offers a glimpse into why these ETFs have become such powerful momentum vehicles. See More: Top Momentum Stocks Wednesday Shows the Leverage Effect MSTU, MSTP and MSTX are designed to magnify MSTR’s daily moves, although their leverage levels differ. MSTU and MSTP target about 2X MSTR’s daily performance, meaning a 3% decline in MSTR can translate into roughly a 6% decline in the ETF before fees and tracking effects. MSTX uses a different leverage target, but Wednesday produced the same broad effect: a significantly larger percentage move than MSTR. That distinction is important because these funds seek leveraged daily returns. Compounding and MSTR’s path affect their five-day performance, so investors should not assume that holding a 2X ETF for five days will produce exactly twice MSTR’s five-day return. Recent numbers show how powerful compounding can be during a strong upward move. MSTR closed at $126.18 on Sep. 16 and reached $168.50 on Sep. 21 before pulling back over the next two sessions. Even after Wednesday’s decline, the stock remained nearly 29% higher over the five-day period. Strategy’s Bitcoin Purchase Reignited the Trade The latest rally coincided with Strategy resuming Bitcoin purchases. The company bought 950 BTC for $75.7 million between Sep. 14 and Sep. 20, taking its holdings to 846,000 BTC. The purchase averaged $79,670 per Bitcoin, including fees and expenses. Bitcoin subsequently climbed above $86,000, helping lift MSTR and other crypto-linked equities. Why the ETFs Are the Bigger Story Strategy’s Bitcoin holdings make MSTR unusually sensitive to moves in the cryptocurrency. The company’s total BTC holdings now exceed 4% of Bitcoin’s eventual 21 million-coin supply, according to recent reports. That creates a chain reaction for the ETFs. Bitcoin moves—MSTR moves—leveraged MSTR ETFs magnify the daily move. The latest five-day performance shows what happens when that chain works in the investors’ favor. But Wednesday’s decline shows the other side of the trade: even after a nearly 29% five-day gain in MSTR, a single down day can translate into a much larger loss for leveraged ETF holders. For investors looking at MSTU, MSTP or MSTX, therefore, the headline number isn’t simply how much MSTR has gained. It is how quickly the ETF’s daily leverage can magnify both sides of the MSTR trade. Read Also: EXCLUSIVE: Bitcoin ETF Inflows Are Back, But Watch This Signal Before Calling It A Bull Run Photo: Shutterstock