Crypto’s Retail Traders Hit Hard as Strategy ETFs Plunge 80%

BTC-USD +2.11% MSTR -3.25% STRC -0.26% STRD -0.14% STRF -2.27%

(Bloomberg) -- Retail investors who piled into Michael Saylor’s grand Bitcoin experiment are paying a heavy price.

Strategy Inc. — the company once hailed for wrapping crypto exposure into a public stock — is scrambling to calm markets after its shares plunged more than 60% from recent highs, amid a sweeping digital-currency rout. On Monday, Strategy said it had created a $1.4 billion reserve to fund dividend and interest payments, hoping to calm fears that it may be forced to sell Bitcoin if prices fall further.

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But for many investors, the damage is already done. The most popular exchange-traded funds tracking Strategy’s volatile stock — MSTX and MSTU, which offer double the daily return — have both dropped more than 80% this year. That puts them among the 10 worst-performing funds in the entire US ETF market, out of more than 4,700 products currently trading — just behind obscure short bets against gold miners and semiconductor stocks. A third fund, known as MSTP, launched during the crypto mania in June, is down a similar amount since its debut. Together, the trio has lost about $1.5 billion in assets since early October.

Retail investors had poured into these funds when firms like Defiance and Tuttle Capital Management launched the high-octane products tracking one of Wall Street’s most prominent Bitcoin-proxy trades.

But what began as an easy way to supercharge bets on crypto has become a cautionary tale of how leverage, volatility and sentiment can spiral. Strategy shares lost 34% in November. Bitcoin has also dropped about 30% from October highs and now trades near $87,000. Strategy closed down 3.3% on Monday, after slumping as much as 12% earlier in the day.

Bitcoin was up 1.2% as of 8:36 a.m. in New York on Tuesday.

“The recent pullback in Bitcoin has hit Strategy’s stock hard, and 2x leveraged plays like MSTX and MSTU turn that into even larger losses,” said Roxanna Islam, head of sector and industry research at ETF shop TMX VettaFi. “It’s a reminder that leveraged single-stock ETFs can look great on the way up, but can erase gains very quickly when the underlying trade goes the other way.”

Defiance declined to comment. GraniteShares, which is behind MSTP, didn’t comment. Matt Tuttle of Tuttle Capital Management said Strategy’s shifting valuation relative to its Bitcoin stash creates both long and short opportunities for traders.

“When it’s at a premium, especially a large one, then having an inverse can be a great tool,” Tuttle said. “When it’s at a discount, which I think it is now, then that could be a great time to go long with leverage.” Strategy’s market cap is currently below the value of its holdings.

At the center of concern is another key valuation metric known as mNAV — or market net asset value — which compares Strategy’s enterprise value to its Bitcoin holdings. That premium has largely vanished, bringing the ratio to around 1.15 — a level executives have flagged as a warning zone. CEO Phong Le said on a podcast that slipping below 1.0 could force the company to sell Bitcoin to meet payout obligations, albeit only as a last resort.

The newly announced reserve, funded by recent equity sales, is designed to head off that risk. It covers at least 21 months of dividend and interest payments. But the announcement did little to stop the broader slide — or address concerns about Strategy’s exposure to leverage, its dependence on retail appetite, and the mounting strain on its funding model.

To finance its Bitcoin buying spree, Strategy has repeatedly sold common stock, a controversial strategy that dilutes existing shareholders. As its valuation premium has eroded, the company has turned to issuing preferred shares and other costlier forms of capital to keep buying crypto.

Meanwhile, the ETF complex built around Strategy is struggling. At least 15 such products tied to its shares in various ways are now trading — many down double digits this year, according to data compiled by Bloomberg. Combined assets for MSTX, MSTU and MSTP have fallen from over $2.3 billion in early October to around $830 million today.

Crypto’s downturn — despite greater institutional participation and political support from the Trump White House — has triggered sharp drawdowns across miners, altcoins, and token-heavy corporate treasuries. Leveraged ETFs, which gained traction among at-home traders earlier this year, are now among the hardest hit.

The funds are built to double Strategy’s daily moves — a structure that can backfire fast. In volatile markets, compounding gains and losses can chip away at returns even if the stock ends flat, a dynamic known as volatility decay. When Strategy shares tumbled and whipsawed, the ETFs didn’t just track the decline — they magnified it.

“Leveraged ETFs are generally a dangerous investment. A leveraged ETF on shares of a stock that levers up to buy a highly speculative asset is a risk profile of its own,” said Michael O’Rourke, chief market strategist at Jonestrading.

Now, even Strategy’s place in major stock indexes is under threat. Analysts at JPMorgan warned the company could be removed from benchmarks like the MSCI USA and Nasdaq 100 — a shift that might trigger billions in passive outflows. For a firm once floated as a potential S&P 500 candidate, the reversal is stark.

--With assistance from Ye Xie.

(Updates with comment from one of the issuers and Bitcoin’s Tuesday price.)

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