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Cryptocurrency experts have warned against the use of double-leveraged Bitcoin (CRYPTO: BTC) exchange-traded funds, emphasizing that these are designed for short-term trading strategies due to their daily rebalancing and inherent volatility. While the long-term investors risk significant losses.
What Happened: The double-leveraged ETFs tracking Strategy Inc. (NASDAQ:MSTR), formerly MicroStrategy, have raised concerns among cryptocurrency experts. The firm now known as just ‘Strategy’ is a Michael Saylor-led company heavily invested in Bitcoin.
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While these ETFs, like T-Rex 2X Long MSTR Daily Target ETF (BATS:MSTU) launched in September, and Defiance Daily Target 2x Long MSTR ETF (NASDAQ:MSTX) launched in August, promise amplified daily returns, experts warn they are unsuitable for long-term investment strategies.
“Leveraged ETFs such as MSTU and MSTX offer multiples of the daily performance of the underlying stock, MicroStrategy Inc,” Srinivas L, MD & CEO of 9Point Capital, told Benzinga.
“While the ETFs aim to double the daily return, they also double the potential loss. With the inherent volatility of Bitcoin, the doubling can lead to wild fluctuations in value.”
A key concern highlighted by experts is the impact of daily rebalancing, a mechanism inherent in leveraged ETFs.
“They're designed for short-term strategies, not long-term holding, as daily rebalancing can erode returns over time, especially in volatile markets,” says Thangapandi, CEO and Founder of Koinpark.
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This daily rebalancing can lead to a phenomenon known as “value decay,” where the ETF’s long-term performance deviates significantly from the expected multiple of the underlying asset’s cumulative return, explains Srinivas L.
Sathvik Vishwanath, Co-founder and CEO of Unocoin, reinforces this point, stating, “Leveraged plays on BTC, or in this case, BTC-exposed companies like Strategy, are inherently high-risk.” These are best suited for “experienced traders rather than long-term investors.”