With the launch of MSTU, a 2x daily ETF tied to MicroStrategy (MSTR), there’s been some confusion about how these products differ and what investors should expect. While many assume that MSTU will simply double the performance of MSTR, the reality is more complex. Let’s break down the nuances, including how MSTU would have performed compared to MSTR from when MicroStrategy first adopted its Bitcoin strategy, the risks involved, and alternative ways to achieve leveraged exposure to MSTR. Let’s dive into MSTR vs MSTU ETF comparison.

Background: MSTR’s Bitcoin Strategy

MicroStrategy (MSTR) adopted a Bitcoin-focused strategy on August 10, 2020, transforming the company’s stock performance into a proxy for Bitcoin exposure. Since then, MSTR’s stock has closely mirrored the ups and downs of Bitcoin, attracting investors looking for indirect BTC exposure. Given the success of this strategy, ETFs like MSTU were introduced to provide 2x leveraged exposure to MSTR, but understanding how this leverage works on a daily basis is crucial.

Understanding the 2x Daily Mechanism

One major misconception is that MSTU will consistently perform double the MSTR returns over the long term. However, MSTU’s 2x leverage applies only to daily performance. In other words, MSTU doesn’t simply track MSTR at twice the gains (or losses) over time—it recalculates its leverage daily, creating the potential for what’s known as volatility decay or beta decay.

Example of Beta Decay

Let’s illustrate this with an example:

• Imagine MSTR drops by 25% in one day. MSTU, with its 2x daily leverage, would fall by 50%.
• Now, if MSTR recovers by 33.33% the next day, returning to its starting value, MSTU’s 66.67% gain on that day would only bring it back to $83.33 on a starting value of $100.

The net effect? While MSTR returned to its original value, MSTU would still be down by 16.67% due to compounding losses and gains over multiple days. Over extended periods, this effect can cause leveraged ETFs to drift away from the underlying asset’s returns.

Performance Comparison: MSTU vs. MSTR (August 10, 2020 – Present)

To explore how MSTU would have performed versus MSTR had they both started at the same price on August 10, 2020 (the day MSTR adopted its Bitcoin strategy), we can examine historical price trends:

1. Cumulative Returns: MSTU would have significantly underperformed MSTR over this period. The daily leverage results in amplified losses during downturns, which compound over time, reducing the ETF’s overall return.
2. Price Divergence: Even though MSTU would track 2x MSTR daily, holding it from 2020 to the present would reveal that it actually lost ground due to volatility decay, despite MSTR’s overall growth.

A 2024 Snapshot: MSTU vs. MSTR

For a more recent perspective, let’s look at how MSTU would have tracked MSTR from the start of 2024. Here’s what we’d see:

• Price Reversion: MSTU would repeatedly “reset” to levels close to MSTR’s price, despite MSTR’s significant overall gains. This illustrates how short-term volatility can erode MSTU’s price even in a generally rising market.

In both cases, the daily leverage makes MSTU more suited to short-term trades rather than long-term holding if your goal is to mirror MSTR’s Bitcoin-linked performance over months or years.

Alternatives to Achieve 2x Exposure to MSTR

If you’re looking for leveraged exposure to MSTR over a longer period, here are two primary methods that might better serve your goals:

1. Using Margin: You could buy MSTR with a 2x margin, effectively doubling your exposure. However, this approach risks liquidation or a margin call if MSTR’s value declines significantly.
2. In-the-Money Call Options: Purchasing deep in-the-money (ITM) call options on MSTR could offer a way to leverage exposure without risking the decay inherent in daily-reset ETFs. These calls cost roughly half the price of 100 MSTR shares, and while they do have an expiration date, they don’t reset daily like MSTU.

Final Thoughts on Leveraged ETFs

MSTU and similar leveraged ETFs can be powerful tools for specific, short-term strategies. However, they come with unique risks and aren’t a simple 2-for-1 play on MSTR’s long-term performance. Volatility decay, the effects of compounding, and daily resets make them complex instruments that can lead to underperformance compared to simply holding MSTR over time.

The data here shows that understanding how these products work is crucial before diving in. While MSTU may still be valuable in certain short-term contexts, it’s not a substitute for MSTR if you’re looking to mirror long-term exposure to MicroStrategy’s Bitcoin-linked strategy.

If you have any ideas or alternative ways to analyze or present this data, feel free to share!

Also Read, The Future of Capital Markets: Michael Saylor’s MicroStrategy Bitcoin Vision

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