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In a Crowded ETF Market, This One Might Be the Riskiest
According to a report from Reuters, the number of exchange-traded funds (ETFs) listed on the U.S. equity market will set a new record this year. Around 50 ETFs are listed monthly on the U.S. equity markets, up from 48 in 2023 and 38 in 2022. Rising investor demand and the tax advantages offered by this product class have driven growth in recent years.
While there are plenty of passive ETFs, active ETFs, sector ETFs, and thematic ETFs, one of the riskiest new funds on the market might be the Defiance Daily Target 1.75x Long MSTR ETF (MSTX), which provides investors the opportunity to gain exposure to Bitcoin (BTCUSD) by investing in MicroStrategy (MSTR), the largest corporate holder of the cryptocurrency.
The fund is designed to offer 1.75x the daily return on shares of MicroStrategy, and has attracted more than $50 million in inflows to date - and Interactive Brokers (IBKR) data cited by Reuters suggests that the MSTX fund is the most volatile ETF on the market.
Heightened volatility is meant to be a feature and not a bug for most leveraged ETFs, though most issuers warn against holding periods of longer than one day. While investors who can stomach the increased risk - and navigate the additional layers of leverage - may want to consider looking more closely at MSTX for short-term trades, the stock it's based on has developed into an interesting derivative play on the crypto market in its own right.
Is MicroStrategy Stock a Good Buy Right Now?
Valued at $28.6 billion by market cap, MicroStrategy (MSTR) began accumulating Bitcoin on its balance sheet four years back. With $67 million in cash on its balance sheet, the company owns 226,500 Bitcoin, worth about $14.75 billion at current prices.
Over the years, MicroStrategy has aggressively increased exposure to the world’s largest cryptocurrency, which means its stock prices are now tied to the digital asset. In fact, MicroStrategy has raised debt and equity capital to fund its Bitcoin purchases, allowing the stock to return more than 946% to shareholders in the past five years.
MicroStrategy's former CEO and executive chairman Michael Saylor views Bitcoin as a store of value and an attractive investment asset with the potential for long-term appreciation, and has positioned MSTR as a “Bitcoin development company.” The company’s BTC strategy has paid rich dividends until now, as prices have risen from $9,600 to $63,000 in the last five years.
Moreover, MicroStrategy purchased BTC at an average price of $36,821, much lower than the current trading price. So, if it liquidated its entire BTC holdings, it would earn a profit of more than $5.2 billion.
That said, investing in MicroStrategy carries significant risks, given its net debt of close to $4 billion. Comparatively, in the last six months, its operating cash flow totaled just $5.2 million, which is not enough to service debt payments.
And MicroStrategy is unlikely to liquidate its BTC holdings to pay its debt, suggesting it will continue to raise equity capital primarily via convertible notes. In the last four years, its outstanding shares have more than doubled, diluting shareholder wealth in the process.
Cantor Fitzgerald Begins Covering MSTR
Each of the seven analysts covering MSTR stock currently has a “strong buy” recommendation.
Investment bank Cantor Fitzgerald recently began covering MicroStrategy with an “Overweight” rating, as the firm expects Bitcoin demand to accelerate meaningfully. Today, MicroStrategy holds 1.1% of all the BTC that will ever be mined, and is a reasonable proxy for the digital asset.
The investment firm clarified, “Unlike the dollar, which is worth more today than it is tomorrow, Cantor believes Bitcoin will be worth more in the future than it is today.”
Notably, Bitcoin’s supply declines by 50% every four years, making it deflationary in nature. According to Cantor, institutions are underinvested in Bitcoin, while governments are likely to add BTC to their Treasury reserves. These demand dynamics should drive Bitcoin's price higher, as it currently trades over 15% below all-time highs.
The mean target price for MSTR stock is $205.94, indicating an upside potential of about 40% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
