Wall Street’s nerves are unraveling over MicroStrategy ETF leverage games

Wall Street is having a meltdown, and MicroStrategy is right in the middle of it. The company, best known for holding more Bitcoin than anyone else, has become the focal point of chaos surrounding two hyper-leveraged ETFs. These funds, designed to amplify MicroStrategy’s already insane stock movements, are pushing prime brokers and traders to their breaking points.

The chaos started with Matt Tuttle, the manager behind the T-Rex 2X Long MSTR Daily Target ETF (MSTU). His fund, which doubles the return of MicroStrategy’s stock, exploded onto the scene in September, immediately attracting hundreds of millions of dollars. But Tuttle hit a wall when the banks backing his swaps—the lifeblood of leveraged ETFs—said “enough.” Prime brokers had reached their risk limits, refusing to give him the exposure he needed to meet demand.

At one point, Tuttle needed $100 million in exposure to keep the fund running. Banks offered just $20 million. With no other options, he pivoted to buying call options, a move he admitted wouldn’t have been necessary if he was managing a fund tied to a blue-chip stock like Procter & Gamble. “MicroStrategy is a different beast,” Tuttle said. And that beast is tearing through Wall Street.

Prime brokers are feeling the heat

MicroStrategy’s stock is notorious for its volatility, and tying a leveraged ETF to it has stretched prime brokers to their limits. Only three banks—Cantor Fitzgerald, Marex, and Clear Street—were willing to work with Tuttle’s fund. Even they couldn’t handle the skyrocketing demand. Data shows the ETF, launched just weeks ago, is one of the most volatile Wall Street has ever seen.

The pressure is not just on Tuttle. Sylvia Jablonski, CEO of Defiance ETFs, is facing the same challenges. Her rival fund, the Defiance Daily Target 2X Long MSTR ETF (MSTX), launched in August. Initially offering 1.75x leverage, Jablonski had to up it to 2x just to compete with Tuttle. Like him, she’s also had to rely on call options to meet investor demand. 

“Banks have to evaluate their overall exposure to MicroStrategy before deciding how much risk they can handle,” Jablonski explained. That exposure, combined with MicroStrategy’s wild price swings, has brokers raising margin requirements across the board.

And then there’s the elephant in the room: Bitcoin. MicroStrategy owns more Bitcoin than any other publicly traded company, a strategy pushed by its chairman, Michael Saylor. The stock’s movements mirror Bitcoin’s but on steroids. 

This month alone, MicroStrategy announced its largest-ever Bitcoin purchase, which, combined with Donald Trump’s pro-crypto election win, has pushed its stock up 70% since November 5. The rally has made keeping these ETFs afloat even harder for everyone involved.

Volatility hits new highs

The numbers speak for themselves. MSTU has gained over 600% since its September debut. MSTX is up 480% since August. Together, the two funds control roughly $4 billion in assets. The kind of insane growth that makes headlines, but also sends chills down Wall Street’s spine.

“This is what happens when things go parabolic,” Tuttle said, admitting that his earlier need for $100 million in swap exposure now seems laughably small. Today, he often needs five times that amount. That level of demand is testing prime brokers like never before. A market maker familiar with the situation said the ETFs’ volatility is forcing brokers to demand higher margin payments, making an already tough job even harder.

Even Citron Research, the short-selling firm led by Andrew Left, has weighed in. In a post on X (formerly Twitter), the firm announced it’s betting against MicroStrategy, arguing its stock has detached from Bitcoin’s fundamentals.

The announcement caused MicroStrategy shares to plummet 22% on Thursday, marking their worst day since April. The stock closed at $397, down from an earlier high of $460, erasing a 15% intraday gain.

This comes despite Bitcoin’s rally to a record high. Citron’s take? Investors now have access to Bitcoin ETFs, so why bother with MicroStrategy as a proxy? “Bitcoin investing is easier than ever,” the firm said, explaining its decision to hedge with a short position on MicroStrategy.

Retail investors are driving the chaos

Here’s the thing about leveraged ETFs: they’re magnets for retail investors chasing fast money. These products, which only became available in the U.S. in 2022, amplify stock movements for massive returns—or equally massive losses. There are now over 90 single-stock leveraged ETFs, according to Bloomberg Intelligence. The biggest winners? Everyday investors looking for a piece of the action.

But these funds are not for the faint of heart. Tuttle spends his afternoons recalibrating his ETF’s exposure, working with traders and market makers to ensure everything lines up. The process involves tracking flows into the ETF and predicting how MicroStrategy’s stock will move. It’s a delicate balance, made even more complicated by the wild swings in Bitcoin and MicroStrategy’s stock.

Jablonski echoed these sentiments, explaining that managing these ETFs requires constant risk assessment. “When assets are this volatile, banks get stricter with their limits,” she said. For her fund, meeting the 2x leverage promised to investors often involves creative solutions, like buying options when swaps are off the table.

And let’s not forget the costs. Leveraged ETFs are expensive to maintain. The high volatility of MicroStrategy’s stock forces brokers to demand large margin deposits, adding yet another layer of complexity. A trader connected to the MicroStrategy swap business admitted these are some of the highest margins he’s seen.

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