Bitcoin euphoria threatens to break these ETFs
Investors have flocked to a pair of turbocharged exchange-traded funds to ride the momentum in bitcoin, but they contain hidden risks that aren’t widely understood.
The ETFs seek to amplify the daily return of MicroStrategy, the software company that has turned itself into a bitcoin buying machine. Using complex derivative bets, they aim to offer double the daily return of the stock—to the upside or downside.
The funds, from asset managers Tuttle Capital Management and Defiance ETFs, are inherently risky. MicroStrategy itself is a leveraged bet on bitcoin, holding some $35 billion of the cryptocurrency. But bullish investors have swelled its market value to almost $90 billion, or more than twice the value of the bitcoin it holds. Skeptics say this is unsustainable.
The Defiance Daily Target 2X Long MSTR ETF and the T-Rex 2X Long MSTR Daily Target ETF were designed for investors who want to place an even more aggressive bet on the stock. Collectively the two funds have ballooned to roughly $5 billion in assets since launching in August and September respectively.
Some analysts say the funds are contributing to the furious rally in MicroStrategy shares. They warn that if the stock were to drop 51% in a single day, the ETFs could be completely wiped out, a blowup similar to what happened with some volatility-linked ETFs after the 2018 market episode dubbed Volmageddon.
On top of that, the two 2X ETFs haven’t been working as intended in recent days. MicroStrategy shares rose 9.9% Wednesday, but the T-Rex fund rose just 13.9%, instead of the 19.8% target. The fund’s performance disappointed when the stock declined, too. Its share price dropped 10.7% on Nov. 25 when MicroStrategy fell 4.4%.
The performance caused an uproar
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