MSTX: Take The Risk, Make The Gains

Summary MSTX, a leveraged ETF tied to MicroStrategy and Bitcoin, offers high potential returns but carries significant risk due to leverage and BTC volatility. Trump's pro-crypto stance and Bernstein's $200k BTC forecast support a bullish outlook for MSTX, despite inherent risks. MSTX's leveraged returns align with its goal, but volatility decay and non-diversification elevate risks, making it suitable for momentum traders. Despite high potential returns, MSTX is a momentum play, not a long-term hold, with the future of BTC being the key driver. It's been a while since I covered leveraged ETFs, so I'm back with an analysis of the Defiance Daily Target 2X Long MSTR ETF ( MSTX ), which is leveraged to its underlying security, MicroStrategy Incorporated ( MSTR ). As most investors are now aware, a major aspect of MSTR's growth strategy is its Bitcoin ( BTC-USD ) holding. With BTC rallying on the back of Trump 2.0 and now at dizzying highs that threaten to rapidly breach the $100k per BTC level, every single ETF associated with this crypto, as well as several others, has seen a fortnight-long rally that seems to have plenty of steam to keep moving up. Greed often brings danger and risk, and this is probably one of the most dangerous and risky scenarios there is in the world of investing today. BTC longs are having their day/week/fortnight/etc., and investor expectations around the future of cryptocurrencies have, for all intents and purposes, gotten far ahead of themselves. Ironically, though, that impetus is far from being fully priced in. When you look at it from that angle, a leveraged play like MSTX sounds exciting because it comes with the chance to create wealth overnight. It's almost reminiscent of the 'accidental millionaire' stories of investors who bought BTC at ridiculously low prices. That being said, however, this is when investors need to be most cautious. Although the signs are all largely positive around decentralized currencies, there are several other factors to consider at this macro level. Let's break it down in the context of investing in MSTX, which I would definitely not suggest at this time unless you're a momentum trader who knows their technicals. How Does MSTX Work to Provide 2x Leverage? MSTX achieves leverage by entering into swap agreements and trading options. These swaps are backed by collateral in the form of treasuries, bond ETFs (short-term), money market funds, corporate debt, and any combination thereof. The strategy also involves shorting the stock when it's headed downward, but as of November 19 , the fund mostly holds long swaps dated September and October 2025. On the options side, the fund holds short-term calls at strikes between $200 and $235. The fund also holds about 7.5% of its total assets in MSTR stock. The leveraged returns thus far have been in line with the fund's goal of achieving a daily 2x return on the underlying, as can be seen from this since-inception chart. Please note that the fund was launched in the middle of August this year. SA So the leveraged approach has clearly worked here, but I also posit that this has largely been the result of a largely predictable appreciation in BTC value since president-elect Trump was voted into office. It's also obvious that any weakness in BTC prices becomes more pronounced in MSTX's performance due to the leverage effect, and that's what I'd like to discuss next. Leverage Risks Leverage on an investment position is always subject to additional risk, but in the case of a leveraged ETF, there are even more risks piled on top. For instance, volatility decay is amplified in such an ETF because of the daily reset. In other words, if you hold such an ETF for any period greater than a single trading day, the daily rebalancing of assets to maintain the 2x leverage can have a significant detrimental effect - particularly if the movement on down days exceeds the movement on up days. And this is true even if the overall movement of the underlying security is positive. That's one of the biggest risks here, and the risk is so impactful that the SEC and FINRA have warned investors for years about it. Here's an extract from a more recent warning: ...because most leveraged and inverse ETFs reset each day, their performance can quickly diverge from the performance of the underlying index or benchmark. In other words, it is possible that you could suffer significant losses even if the long-term performance of the index showed a gain. The warning uses the terms 'index' and 'benchmark' because leveraged ETFs typically use an underlying index as the benchmark against which to compare returns. In the case of MSTX, however, the risk is further elevated because the underlying security is a single stock, not a basket of stocks that can often help absorb some amount of selling pressure. Invest in MSTX or No? That's the real question we're trying to answer here, but that answer isn't as straightforward as it might seem. Although MSTX has managed to achieve a price return of 464% since inception, there's absolutely no guarantee that it will appreciate further. In fact, one single day of BTC price reversal could wipe out a significant chunk of your gains on this ETF. The added risk here is the performance of MSTR itself. Since the fund is leveraged to this single stock, there's also the risk of non-diversification to think about and account for. In essence, you're literally doubling down on your core MSTR investment with this ETF. Of course, you don't really need to own MSTR to own MSTX, but that's where your gains are truly maximized. Owning both securities not only gives you the 2x leverage, but also the base gains from MSTR's positive price action. Moreover, it can help absorb some of the losses incurred with the ETF on BTC down days. In order to definitively address the investment dilemma, the real question we need to ask ourselves is whether or not we think there's much more of a runway for BTC prices in the near term. In order to determine this, let's look at the various catalysts that support a bullish BTC view. President-elect Trump is now pro-crypto This is probably the most bullish catalyst right now. Trump is unequivocally a 'converted' supporter of cryptocurrencies, and Fortune this week reported a phone call between the 47th President(-elect) of the United States and the CEO and founder of Coinbase, Brian Armstrong. I'm posting an extended extract because several points from that report are relevant to a bullish MSTX thesis (emphasis mine): This newfound influence was reflected in a phone call this week between President-elect Donald Trump to Brian Armstrong, founder and CEO of Coinbase. Armstrong and his company poured nearly $50 million into supporting pro-crypto candidates, whose ranks now include Trump , a onetime Bitcoin skeptic who became a full-on convert to digital currency earlier this year. In recent months, Trump has floated ideas like a crypto advisory council and a strategic reserve for Bitcoin. He also counts a number of longtime crypto boosters in his inner circle, including Elon Musk and the CEO of Cantor Fitzgerald, Howard Lutnick , whose firm helps manage the reserves of stablecoin giant Tether and who on Tuesday was tapped to be Commerce Secretary. A person familiar with the call, who spoke on the condition of anonymity, said Armstrong and Trump did not discuss specific appointments but instead spoke about crypto on a broader level. Coinbase declined to comment on the call. The Wall Street Journal reported on Monday that the two would meet . There have also been unconfirmed reports on X that another prominent crypto CEO, Ripple’s Brad Garlinghouse, has had direct access to the President-elect. A Ripple spokesperson told Fortune the company does not discuss private conversations. There's some conjecture here, naturally, but all signs point to the fact that cryptocurrencies have the broad support of the Trump administration, which bodes well for MSTX over the next four years at a minimum. Bernstein predicts $200k BTC in 2025 Brokerage firm Bernstein issued a forecast back in June that saw a $200,000 price target for BTC-USD in the next year. That potentially gives it a +100% upside from its current price of over $92k (as of this writing), which might look optimistic but is nevertheless in line with the bullish sentiment around crypto in general and BTC in particular. Bernstein via The Block That's a fairly confident claim that projects $1 million BTC over the next decade. Bernstein analysts Gautam Chhugani and Mahika Sapra, in a note to clients at the time, said this: We believe that the U.S regulated ETFs were the watershed moment for crypto that brought in structural demand from traditional pools of capital,” the analysts wrote. “Around $15 billion of net new flows have been brought in by the ETFs combined. We expect Bitcoin ETFs to be equivalent to ~7% of bitcoin in circulation by 2025 and ~15% of bitcoin supply by 2033. Crowdsourced Projections on Binance are more conservative but still very bullish Binance has a forecasting tool on its website that allows visitors to input their estimates of growth rates for BTC price over the next several years. Interestingly, these numbers are much more conservative than those of professional analysts and show a 2030 estimate of $122,985.97 based on growth estimates from users. Now, crowdsourcing predictions and projections is not a new phenomenon. Indeed, here's a nugget that dates back to the early 20th century: The classic wisdom-of-the-crowds finding involves point estimation of a continuous quantity. At a 1906 country fair in Plymouth , 800 people participated in a contest to estimate the weight of a slaughtered and dressed ox. Statistician Francis Galton observed that the median guess, 1207 pounds, was accurate within 1% of the true weight of 1198 pounds. [6] This has contributed to the insight in cognitive science that a crowd's individual judgments can be modeled as a probability distribution of responses with the median centered near the true value of the quantity to be estimated. [7] Further evidence supporting the accuracy of crowdsourced predictions comes from a decade ago, when the office of the U.S. Director of National Intelligence sponsored a 3000-participant study called the Good Judgement Project . To cut to the chase, here's what they found (emphasis mine): The group has tackled 250 questions in the experiment so far. None of them have been simple; current questions include whether Turkey will get a new constitution and whether the U.S. and the E.U. will reach a trade deal. But the group consistently got answers right more often than individual experts , just through some simple online research and, in some cases, discussions with each other. The crowdsourced predictions are even reportedly more accurate than those from intelligence agents . One report says that when “superpredictors,” the people who are right most often, are grouped together in teams, they can outperform agents with classified information by as much as 30% . So we now have experts predicting $200k BTC and the "wisdom of crowds" projecting $123k BTC by 2025, presumably marked by the end of the calendar year. This actually answers the question we asked in the subheading - should you or should you not invest in MSTX? By definition, since MSTX is an indirect reflection of BTC performance, the consensus all around appears to be decidedly bullish, with upside potential from the current price being between 33% and 116%. The crowds have spoken, and the president-elect appears to have put his stamp of approval on the whole thing. MSTX, therefore, has a Buy recommendation from me. The Downside and The Takeaway There's obviously a ton of risks associated with this stellar potential return on your investment. That return, leveraged 2x based on MSTX's recent historical price return, implies a lower-end upside potential of 66%. So, what balances out that reward? The biggest risk I see is a systemic failure to support the growth of cryptocurrencies, and of all the catalysts on the horizon, the president-elect's political agenda is logically going to be the biggest driver of BTC - either up or down. Judging by the developments I've covered, it seems like a marginal risk at this point, but you never know. Overall, I'd say the future is extremely bright for BTC and, thereby, MSTR and, thereby, MSTX. I call a Strong Buy, but with a caveat that this is purely a momentum play and not a long-term holding by any measure. That momentum is currently very strong, so it makes sense to increase your risk exposure a little and try to make significant gains while it lasts.