The Defiance Daily Target 2X Long MSTR ETF (MSTX) rallied a staggering 9.83% in Friday's pre-market session, reflecting the frenzy surrounding MicroStrategy Inc's leveraged bet on Bitcoin.
MicroStrategy, the enterprise software company whose stock MSTX is designed to track with 2x leverage, has been issuing convertible debt to fund aggressive purchases of Bitcoin. This strategy, dubbed an "infinite money glitch" by online traders, has allowed MicroStrategy to accumulate over 380,000 BTC, fueling a massive surge in both Bitcoin's price and MicroStrategy's stock.
However, a recent Fool.com article warns that this leveraged approach is alarmingly reminiscent of past bubbles and is ultimately unsustainable. The authors point to Bitcoin's historic volatility, with multiple 50%+ drawdowns, as well as the reduced liquidity from MicroStrategy's Bitcoin hoarding. Perhaps most concerning is the astronomical 124% premium that MicroStrategy stock trades at compared to the value of its Bitcoin holdings alone.
Drawing parallels to the subprime mortgage crisis, the article cautions that such leverage-driven manias have always ended disastrously on Wall Street. While the timing is uncertain, the authors conclude that this excessive premium and debt-fueled Bitcoin buying is setting MicroStrategy up for an inevitable reckoning based on historical precedent.
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