KEY POINTS
- Back noted that auto-rebalancing only puts the ETF in the face of higher risks in a volatile market
- MicroStrategy’s valuation is largely tied to its Bitcoin strategy that landed it a 214K BTC stash
- Kerrisdale Capital said late last month it was short on MSTR due to its potential overpricing
Michael Saylor’s MicroStrategy recently launched a new exchange-traded fund (ETF), the Defiance 2X Short MSTR ETF, but not everyone was pleased with the product that was created to short the Bitcoin giant’s stock.
Adam Back, CEO of blockchain technology firm Blockstream, took to X (formerly Twitter) to express his thoughts about the ETF, which he said was a “terrible product.” He argued that the ETF will only face higher risks due to auto-rebalancing – the process wherein an investor’s investment portfolio is brought back to its original target allocations as set forth by an investment plan for the purpose of maintaining the risk-return profile initially set – in a highly-volatile market.
have to say this is a terrible product 🙂 even if you believed MSTR premium above #bitcoin NAV was too high, you’re 2x auto-rebalancing naked short MSTR which is very bitcoin correlated. and these rebalancing strategies slip like crazy, on a volatile underlying, bleeding your…
— Adam Back (@adam3us) April 7, 2024
MicroStrategy’s new ETF was designed to profit from possible downtrends in the MSTR stock price by taking a short position against the tech company’s shares, according to a filing with the U.S. Securities and Exchange Commission (SEC).
For Back, a short ETF won’t be a wise investment, considering how MicroStrategy holds more than 214,000 BTC, accounting for over 1% of the world’s total Bitcoin supply. “MSTR is bitcoin correlated and volatile!” Back pointed out.
even if MSTR premium compressed but BTC price doubles, you’re 2x short! price will overwhelm NAV correction, so you’ll get rekt anyway. and auto-rebalancing volatile underlying assets erodes capital to slippage in sideways chop FAST. and MSTR is bitcoin correlated and volatile!
— Adam Back (@adam3us) April 7, 2024
As MicroStrategy’s valuation has become significantly tied to its Bitcoin strategy, Back believes a short exposure through the new ETF will result in “bleeding your capital dangerously fast.”
Back’s criticism of the new ETF comes about a week after investment management firm Kerrisdale Capital went “short” on MicroStrategy, saying the MSTR stock was overpriced, considering how the company no longer “presented a rare, unique way to gain access” to the world’s first decentralized cryptocurrency.
Kerrisdale argued that Bitcoin can now be obtained through various channels, which can no longer defend why MSTR “trades at an unjustifiable premium to the digital asset that drives its value.”
MicroStrategy kicked off its Bitcoin strategy much earlier than other companies that started betting on the digital currency in recent years. Despite criticism over the said strategy, the company has focused on holding on to its massive Bitcoin treasury.
Just last week, Saylor said, “everything before Satoshi [Nakamoto] will be viewed as BS.” His post on X garnered much engagement from Bitcoiners who, like him, believe the world’s largest cryptocurrency by market cap is the future of the finance sector.
He also suggested at the Abundance360 Summit that investors may want to directly invest in Bitcoin instead of buying MSTR stock since MicroStrategy won’t be around in 1,000 years, but the master of all digital coins will be.
