How MicroStrategy's share buybacks surpassed QQQ in trading volume

Vyacheslav Dvornikov

Nov 27, 2024

While stock and debt markets were recovering from the excitement related to Donald Trump's election victory, activity was accelerating in niches popular with speculatively minded investors, notes Bloomberg. One of them is cryptocurrencies, another is ETFs that allow you to bet on the change in the value of a single stock with leverage (leveraged ETFs). Last week, trading volume in such funds reached a record $86 billion.

To understand the scale of the events: as noted Eric Balchunas, senior ETF analyst at Bloomberg, on November 20, two funds that allow a 2X leverage bet on MicroStrategy stocks ranked 5th and 8th in trading volume among all funds, and combined — in second place, ahead of QQQ (Invesco fund tracking the Nasdaq-100). 

On the same day, MicroStrategy became the most traded stock on American exchanges, surpassing Nvidia and Tesla. If you've never heard of this company, it's not surprising: since 2020, this software manufacturer has become a proxy for bitcoin, which the company began actively purchasing with borrowed money. It currently has $38 billion of it, and the company's market capitalization is $90 billion.

A bit more data: since the beginning of the year, MicroStrategy has increased sixfold to the peaks of November 20, and since the elections on November 5 — by 112%. Meanwhile, bitcoin over the same period — only by 33%. The latest wave of growth is associated with the expectation that under Donald Trump, cryptocurrency regulation will be relaxed. The current head of the SEC, Gary Gensler, under whom it was tightened, promised to step down on January 20, the day of Trump's inauguration. Also in November, the company announced its largest bitcoin purchase in its history ($5.4 billion over the past week). In addition, a few days before the elections, the company hired several investment banks to raise $42 billion over three years through the issuance of stocks and bonds to buy more bitcoins.

Why it matters

The surge in trading volume of leveraged funds on MicroStrategy stocks is symptomatic of a market that has become obsessed with the belief in get-rich-quick schemes, says David Trainer, founder of the research firm New Constructs. "If you like bitcoin, buy it. But don't invest in a company that is losing money and at the same time buying bitcoin, because then you are kind of doubling your risk," says Trainer. Leveraged ETFs further amplify these risks.

Trainer points out that MicroStrategy is a bad business by conventional standards. For example, it has shown a net loss for the last three quarters. Essentially, its stock value depends only on the value of bitcoin. For instance, in 2022, during the "crypto winter," its shares fell by 74%. From November 20 to 26, MicroStrategy shares fell by 25%.

What is happening with MicroStrategy and the funds on its stocks raises skepticism among many analysts. "This euphoria is rampant speculation at the level of the 2000 peak," says Michael O'Rourke, chief market strategist at JonesTrading. "It's a symptom of a market that has become obsessed with the belief in get-rich-quick schemes," notes David Trainer, founder of the research firm New Constructs.

Even some investors who are generally positive about bitcoin express concern about the risks. Mike Novogratz, billionaire, CEO of cryptocurrency company Galaxy Digital, and well-known "crypto bull," warned that bitcoin could fall by 20% after reaching a peak of $100,000 — partly due to leveraged bets on MicroStrategy available through exchange-traded funds.

In the US, leveraged ETFs became available to retail investors in 2022. Regulators warned about their riskiness, but as Bloomberg notes, such funds attract investors with the possibility of quick profits. Currently, there are just over 90 leveraged or inverse (allowing you to bet on a decline) ETFs that follow a single stock, according to Bloomberg Intelligence. The number of such funds is likely to increase with new underlying assets: ProShares filed an application to register a fund that will track the price of uranium with 2X leverage.