By 
It all started so well. In a euphoric stock market, investors flocked to these financial products promising to multiply gains on their favorite stocks. Funds built like amplifiers: +1% on Tesla or MicroStrategy? Double or triple your portfolio. In just a few months, billions flocked to this new generation of leveraged ETFs, riding the wave of soaring tech markets and the appetite of retail traders. But today, these funds are in freefall. And the damage is severe.
The MSTU fund (MicroStrategy x2) has collapsed by 70% since its November peak. The same is true of the Tesla leveraged fund: -70 %. Losses that have left thousands of investors groggy.
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2023: the year of the frenzy
It all started with a simple idea: to offer a version of tech's star stocks on steroids. Index-leveraged ETFs had been around for a long time, but 2022 marked a turning point. US regulators approved a new generation of products: leveraged single-stock ETFs, which allow you to bet x2 or x3 on a single stock. Tesla, Nvidia, MicroStrategy: the darlings of stock market forums become the underlying assets of an unprecedented wave of speculation. The result: between January 2023 and January 2024, outstandings in these products exploded by 51%, reaching $134 billion according to Morningstar.
Morningstar
But the trap quickly closes
These products are designed for the short term. They replicate the daily movement of a leveraged asset. But over several days or weeks, the gaps widen... and losses can accumulate, even if the underlying stock rises. Example: since the end of 2021, the Nasdaq 100 has gained nearly +20%. The ProShares UltraPro QQQ, which is supposed to replicate 3x its daily performance, has nevertheless posted... -25%. This is due to an amplification mechanism that crushes gains over time in the event of volatility.
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The MicroStrategy example
In fact, these products have become very popular, without everyone really understanding how they work, and the best example... of the worst-case scenario is probably MicroStrategy. Defiance and Tuttle Capital's MSTU ETFs were launched to great fanfare at the end of 2023. +2500% in a straight line. Then -75% in free fall. That's the story of the T-REX 2X Long MSTR ETF (MSTU), a leveraged product launched to ride the MicroStrategy hype. For every 1% rise, the ETF climbs 2%. But the reverse is also true.
Behind MSTU, there's a name: Michael Saylor. And an obsession: Bitcoin. Since 2020, MicroStrategy no longer sells software - it accumulates BTC. To date, over $44.6 billion worth of Bitcoins are stored on the company's balance sheet, with an average purchase cost of $66,000. In other words, a bet on MSTR is a bet on bitcoin.
Bitcoin Treasuries
And therein lies the crux of the problem: when bitcoin climbs, all is well. But when it goes down, the whole fund goes down. REX Shares and Tuttle Capital, the firms behind MSTU, had sniffed out the good news. In September 2023, they launched two twin products: MSTU to play on the upside of MicroStrategy, MSTZ to bet on the downside. The reception was electric. At the same time, Defiance records 22 million volumes on the first day for a similar ETF. Unprecedented for a leveraged product, but the turnaround was brutal. Since November, both funds have lost over 70% of their value. And investors have suffered a historic slap in the face: nearly $1.7 billion in cumulative losses.
