Alright, fine. We can talk about Microstrategy.

Leverage on leverage on leverage.

Prior to beginning this piece: Everything in this newsletter is for informational purposes only. The views expressed are not to be taken as financial advice. For advice tailored to your specific situation, please contact your financial professional.

With bitcoin’s recent performance, the spotlight has been on Microstrategy. Microstrategy is a software company that hit it big in the .com era and then crashed back to earth in 2000. Either way, no one really cares about what their actual business does. Check out their performance since inception… I am unaware of any comebacks quite like this one:

Everyone is focused on Michael Saylor’s recently adopted bitcoin strategy, especially with bitcoin catching a bid.

You could make the argument that Microstrategy was one of the first ways to get bitcoin exposure in the trad-fi world. Saylor has snowballed that exposure using leverage to accumulate even more bitcoin.

Michael Saylor and Microstrategy now own over 2% of the maximum supply of bitcoin. It is pretty nuts.

Between equity and debt issuance, Saylor has been stacking sats for a while now. The company currently holds 423,650 bitcoin. They are the true definition of a whale.

So, now that we got the Saylor lore out of the way, we can understand why this matters. Holders of Microstrategy have done incredibly well over the last few years. Naturally, when an asset does well, it creates buzz. This creates more buying and more FOMO.

And in 2024, this apparently creates the need for more leverage. Don’t quote me on this, but it appears that Microstrategy tracks right around 3x leverage relative to bitcoin. When bitcoin is up 5%, Microstrategy is up somewhere around 15%.

Now is that enough leverage? God no. We need more. There is now both a 2x long and 2x short Microstrategy ETF.

I have had people ask questions about these types of ETFs. They also exist for your run-of-the-mill indices as well. Think S&P 500 3x long or short ETFs.

Usually, people ask something like this, “If I believe in this position and I am willing to hold it through its peaks and troughs, why wouldn’t I own the leveraged version?”

It is fairly simple but tons of people miss this. Leverage is an odd thing. Even more so when it is used within these ETFs. These ETFs specifically target the leveraged daily performance of the underlying asset.

They don’t make any promises, and their rebalancing can throw things completely out of whack. Per this specific Microstrategy 2x leveraged ETF’s prospectus, “The Adviser attempts to consistently apply leverage to obtain MSTR exposure for the Fund equal to 200% of the value of its net assets and expects to rebalance the Fund’s holdings daily to maintain such exposure.”

While day traders may love the product, it isn’t a great fit for those investing for the long term.

Here is a chart of how leveraged assets can perform severely differently than the underlying asset they are actually supposed to track.

While the Spot Bitcoin ETF is down 3% in the last 10 trading days, Microstrategy is down 17% and the 2x Microstrategy ETF is down 41%. Just a tad more than 200% of the actual Microstrategy performance.

Leverage can be a make or break. It can be responsible for immense wealth creation when used properly but when it is paired with a highly speculative gamble, it can be devastating.

As the talk of the town is bitcoin, please take caution with the products associated with the digital asset.

Diving headfirst into speculative products can be a dangerous game.