MicroStrategy, Macro Losses

The boom in leveraged ETFs has been driven by speculators searching for outsized returns. But as explained by Newton’s Universal Law of Gravitation, what goes up must come down. The Defiance Daily Target 2X Long MicroStrategy ETF (NASDAQ: MSTX) aims for daily results of two times the daily percentage change in the share price of MicroStrategy Incorporated (NASDAQ: MSTR). Recent conjecture surrounding the impacts of tariffs has destabilized cryptocurrency markets, negatively affecting the underlying MicroStrategy’s share price as they hold nearly 500,000 Bitcoins. Some investors believe that inflationary pressures from tariffs will decrease demand for risk assets like Bitcoin. Additionally, anticipation of a slowing economy and the release of poor macroeconomic indicator data, such as decreased home sales and a larger than expected drop in the University of Michigan Consumer Sentiment index are reflected in MSTX’s share price. MSTX closed at $42.22 on February 18th and $23.06 on February 25th, down 45% in one week, more than double the losses of MSTR (-21%) during the same period. Are these returns a sign of capitulation, or has the market lost long-term confidence in the future of MSTR and BTC?

As visible in the chart below from our Securities Lending Dashboard, Utilization and the Short Interest Indicator briefly dipped, but from February 19th to the 25th, both spiked.  As explained in An Excursion into ETFs, short sellers of leveraged ETFs may benefit from the drag on Net Asset Value (NAV) of high trading expenses and management fees. Additionally, short sellers can take advantage of a leveraged fund’s inherent volatility by capturing beta decay because losses in a leveraged ETF are harder to recover. As the share price has dropped over the past week, we see that the on-loan quantity has more than doubled from 3M to 7M shares, or 20% of the 33M-share float. Despite the surge in on-loan quantity, IBKR’s Shortable Shares meet current demand, and we are being shown inventory from six small- and mid-size lenders. 

MSTX Utilization and Short Interest Indicator January 27, 2025 – February 25, 2025

Source: Interactive Brokers Securities Lending Dashboard. Data is provided by Orbisa

Note that the Securities Lending Dashboard can be used to analyze short sale metrics for MSTX and other stocks. Current IBKR clients can receive a free trial of the dashboard by clicking here.

This swell in on-loan quantity is accompanied by a higher borrow fee, which moved from 10% to 15% in the past week, displayed by the red line in the chart below. As the share price (represented by the blue line) generally declined over the week, shortable shares fluctuated to meet investor demand, shown by the orange line below. When reviewing borrow fees and the overall cost of a short position, IBKR clients can use the Short Sale Cost calculator. This page also provides a calculator that reveals the amount of interest paid on short sale proceeds cash balances. In determining the daily borrow fee cost, the short position quantity is multiplied by the collateral mark (previous day’s close price * 1.02, rounded up to the nearest point). This balance is then multiplied by the borrow fee, and the resulting value is divided by 360. The final value is the daily dollar amount that will be charged for the borrow fee on the short position. 

Only time will reveal the future of MSTX, but traders can observe the daily price movement range that the options market estimates using the Rule of 16. For example, the MSTX March 21 2025 24 Call carries implied volatility (IV) of 156%. This annualized IV can be converted to a daily dollar move by dividing by 16, which is the square root of 256 trading days per year. In dividing 156% by 16, we are left with the option market’s anticipated daily up or down price movement of 9.75% at today’s IV levels.

MSTX Short History – February 24th, 2025 – February 28th, 2025

Source: Interactive Brokers Trader Workstation Fundamentals Explorer Short Selling Tab