WSJ: Behind the Bitcoin craze, the risks of MicroStrategy stock leverage are gradually emerging

Bitcoin Euphoria Threatens to Break These ETFs

Original author: Jack Pitcher, WSJ

原文翻译：zhouzhou、BlockBeats

Editors Note: This article analyzes the leveraged funds launched by Tuttle Capital and Defiance ETFs, which focus on MicroStrategy stocks to amplify their returns associated with Bitcoin. These funds use swaps and options to leverage, but face liquidity problems, resulting in performance that is lower than expected. Investors are disappointed with the funds skewed performance, and critics warn that these funds have exacerbated the volatility of MicroStrategys stock price and are risky and may lead to losses.

以下为原文内容（为了方便阅读和理解，对原文内容进行了重新整理）：

Investors have piled into funds seeking to amplify the daily returns of MicroStrategy stock, but those ETFs have recently failed to perform as expected.

Michael Saylor, founder of MicroStrategy, the software company that has turned into a 比特币-buying machine. Photo credit: LIAM KENNEDY/ BLOOMBERG NEWS

Investors have flocked to a pair of highly leveraged exchange-traded funds (ETFs) to try to profit from Bitcoins momentum, but the funds carry hidden risks that are not widely understood. The ETFs are designed to amplify the daily returns of MicroStrategy, a company that has transformed itself into a Bitcoin buying machine. Using complex derivatives trades, they aim to provide double the stocks daily return, whether its up or down.

These funds are inherently risky when they are launched by asset managers such as Tuttle Capital Management and Defiance ETFs. MicroStrategy itself is a leveraged bet on Bitcoin, holding about $35 billion in Bitcoin. However, optimistic investors have pushed its market value to nearly $90 billion, more than double the value of its Bitcoin holdings, so skeptics believe this situation cannot be sustained.

The Defiance Daily Target 2 X Long MSTR ETF and the T-Rex 2 X Long MSTR Daily Target ETF are designed for investors who want to make more aggressive bets on stocks. The two funds have swelled to about $5 billion in combined assets since launching in August and September, respectively.

Some analysts say these funds are driving MicroStrategy’s wild rally, and they warn that if the stock drops 51% in a single day, these ETFs could collapse completely, similar to what happened to some volatility-related ETFs after the 2018 market volatility event “Volmageddon.”

What’s worse is that the performance of these two 2X leveraged ETFs has not been working as expected recently. On Wednesday, MicroStrategy’s stock rose 9.9%, and the T-Rex fund rose only 13.9%, missing its 19.8% target. The T-Rex fund also disappointed when the stock fell. On Monday, when MicroStrategy fell 1.9%, the fund’s stock price fell 6.2%.

This sparked widespread discussion among investors on social media, with many questioning the discrepancy and saying they felt cheated.

Jesse Schwartz, a 36-year-old vintner and day trader in Washington state, had been using the funds to magnify his exposure to stocks, and he was particularly surprised to see that the stocks had not performed as advertised. Schwartz called his brokerage, Charles Schwab, to inquire about the discrepancy, but he was not satisfied with the companys explanation and ended up selling all his shares before the end of the week.

“It’s disappointing, to say the least,” Schwartz said. “I took on more risk on the downside and didn’t get rewarded on the upside.”

ETFs targeting single stocks have been launched by dozens by small fund managers since regulators approved them in 2022. So far, most of these funds have worked as expected. Popular funds that aim to double the daily returns of Nvidia and Tesla generally keep up with their goals, thanks to the financial contracts they use, known as total return swaps.

Supporters of these funds say they offer Main Street investors investment strategies that have long been used by Wall Street. Critics say they can be dangerous because they don’t provide diversification. In the case of the MicroStrategy funds, they leverage investors to expose them to highly volatile stocks that are tied to unpredictable price movements in the 加密货币currencies and cryptocurrencies.

Critics warn that the hype is part of a broader investor frenzy targeting speculative assets that could eventually collapse.

MicroStrategy holds about $35 billion in Bitcoin. Image credit: KEVIN SIKORSKY

Managers of MicroStrategy funds said they may have trouble achieving their goal of a 2x return because their prime brokers — firms that provide securities lending and other services to professional investors — have reached the limit on the amount of swap exposure they are willing to provide.

Leveraged ETFs typically achieve their desired effect by using swaps, which are widely available for the largest, most liquid stocks. The payout of a swap contract is directly tied to the performance of the underlying asset, allowing the fund to precisely double the daily performance of a stock or index.

Matt Tuttle, manager of Tuttle Capital and the Rex Shares 2x Leveraged MicroStrategy Fund, said he can’t get enough swaps he needs to support his fast-growing fund. He said his prime broker is currently offering him $20 million to $50 million in swaps, while he could have used $1.3 billion in swaps at one point last week.

Both Tuttle and Sylvia Jablonski, CEO of rival Defiance ETFs, said they are turning to the options market to achieve leveraged outcomes for MicroStrategy funds. Traders can effectively use options to double an asset’s daily returns, but analysts say it’s a less precise approach.

Options prices fluctuate, and large buyers like ETFs can move the market. Tuttle said the use of options is a major cause of increased tracking error.

The Defiance ETF fell nearly three times as much as the underlying stock on Nov. 25. On Friday, when MicroStrategy fell just 0.35%, the ETF fell 1.76%.

Analysts believe the launch of leveraged MicroStrategy ETFs has accelerated the stock’s volatility. These ETFs must increase or decrease their exposure every day to achieve the leverage effect. 市场 makers that offer swaps and options typically buy and sell actual MicroStrategy shares to hedge their risk.

“It’s like driving a car with lead weights tied to your feet. You still have control over the accelerator, but the default mode is floor,” said Dave Nadig, an ETF industry veteran who previously worked at VettaFi and FactSet.

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