Indian retail investors who enthusiastically embraced Michael Saylor's vision of Bitcoin as a corporate treasury asset are now grappling with severe financial setbacks. The sharp downturn in shares of MicroStrategy Inc., a company that famously leveraged its balance sheet to amass Bitcoin, has triggered massive losses in specialised exchange-traded funds (ETFs) that amplified the stock's daily moves.
The Unwinding of a High-Octane Trade
The turmoil stems from a dramatic slide in MicroStrategy's stock price, which has plunged more than 60% from its recent peaks. This decline has directly impacted several leveraged ETFs that promised double the daily return of the company's shares. Funds named MSTX and MSTU have each collapsed by more than 80% this year, ranking them among the ten worst performers in a US ETF universe of over 4,700 products. A third fund, MSTP, launched in June, has dropped by a similar magnitude. Collectively, this trio has seen approximately $1.5 billion in assets vanish since early October.
These products, created by firms like Defiance and Tuttle Capital Management, gained popularity as a simple, high-leverage way for everyday traders to gain exposure to one of Wall Street's most prominent Bitcoin-proxy trades. However, the strategy has backfired spectacularly. While Bitcoin itself is down roughly 30% from its October peak, trading near $87,000, MicroStrategy's stock fell 34% in November alone, closing 3.3% lower on Monday after an intraday drop of 12%.
"The recent pullback in Bitcoin has hit MicroStrategy's stock hard, and 2x leveraged plays like MSTX and MSTU turn that into even larger losses," explained Roxanna Islam, head of sector and industry research at TMX VettaFi. She added that such instruments are a stark reminder that leveraged single-stock ETFs can erase gains rapidly when the underlying trade reverses.
Underlying Strains and a $1.4 Billion Buffer
At the heart of the market's anxiety is MicroStrategy's financial model. The company is closely watched for its mNAV metric, which compares its enterprise value to its Bitcoin holdings. The premium in this ratio has largely evaporated, dropping to about 1.15—a level company executives have flagged as a caution zone. CEO Phong Le indicated on a podcast that falling below 1.0 could theoretically force the firm to sell Bitcoin to meet obligations, though only as a last resort.
In a bid to calm nerves, MicroStrategy announced on Monday that it had established a $1.4 billion reserve, funded through recent equity sales, to manage dividend and interest payouts for at least 21 months. This step is intended to alleviate fears of a forced Bitcoin sale if prices continue to drop. However, concerns persist regarding the company's dependence on leverage, its reliance on retail investor flows, and the overall strain on its capital structure.
To continue its Bitcoin acquisition strategy, MicroStrategy has repeatedly issued common stock, diluting existing shareholders. With its valuation premium shrinking, the company has increasingly turned to preferred shares and other more expensive forms of capital to fund its crypto purchases.
Broader Fallout and Benchmark Threat
The pain extends beyond the three main leveraged ETFs. The entire ecosystem linked to MicroStrategy is under pressure, with at least 15 products tied to the stock currently trading, many of them down double digits this year. The broader cryptocurrency slump, unfolding despite increased institutional interest and political support from figures like Donald Trump, has also dragged down mining companies, alternative coins, and other firms with heavy crypto holdings.
Analysts at JPMorgan have issued a warning that adds another layer of risk: MicroStrategy could potentially be excluded from major indices like the MSCI USA and the Nasdaq 100. Such a move could trigger billions of dollars in passive fund outflows, a striking reversal for a firm once considered a potential candidate for the S&P 500.
Market strategist Michael O'Rourke of Jonestrading summarised the peril succinctly: "Leveraged ETFs are generally a dangerous investment. A leveraged ETF on shares of a stock that levers up to buy a highly speculative asset is a risk profile of its own." For the many retail investors in India and globally who chased the promise of amplified Bitcoin returns, this lesson has proven to be a costly one.
