The Defiance Daily Target 2X Long MSTR ETF (MSTX), a leveraged ETF tracking the stock of MicroStrategy, plunged 7.96% in pre-market trading on Monday. The sharp decline comes amid growing concerns over the valuation and risks associated with MicroStrategy's aggressive strategy of accumulating a massive Bitcoin position.
MicroStrategy, a software company turned "Bitcoin treasury company," has been issuing debt and equity at a rapid pace to fund its Bitcoin purchases. The company now holds over 2% of the total outstanding Bitcoins, worth more than $40 billion. However, MicroStrategy's market value is trading at a staggering premium of nearly 2.5 times the value of its Bitcoin holdings, raising eyebrows among investors and analysts.
Analysts and market observers have highlighted several potential risks surrounding MicroStrategy's approach, including the potential dilution from its equity issuances, the burden of debt, and the presence of leveraged ETFs like MSTX and MSTU, which could amplify volatility and exacerbate selling pressure if investors exit these products. Additionally, questions have been raised about the long-term viability of MicroStrategy's business model as a "Bitcoin treasury company" rather than a traditional software company.
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