The Defiance Daily Target 2X Long MSTR ETF (MSTX) experienced a sharp 5.02% pre-market plunge on Tuesday, following a sell-off in MicroStrategy's stock price. The decline appears to be driven by mounting investor concerns over two key issues.
Firstly, analysts have raised questions about MicroStrategy's aggressive Bitcoin acquisition strategy and the company's valuation being significantly higher than the value of its Bitcoin holdings. Over the past several weeks, MicroStrategy has made multi-billion dollar Bitcoin purchases funded by issuing new shares, leading to a market capitalization of nearly $90 billion – more than twice the value of its 331,200 Bitcoin holdings at current prices. This overvaluation risk has weighed heavily on MSTX, an ETF designed to provide 2x leveraged exposure to MicroStrategy's stock.
Secondly, reports have surfaced that MSTX has struggled to accurately track its intended 2x leverage target for MicroStrategy's stock price movements. This tracking discrepancy appears to have eroded investor confidence in the ETF's reliability as a trading tool, exacerbating the pre-market sell-off.
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