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Blockstream CEO Adam Back has reacted to a new Exchange Traded Fund (ETF) designated to short the shares of MicroStrategy Incorporated. Adam Back described the Defiance 2X Short MSTR ETF product as a "terrible" one that might not yield the desired result.
Adam Back thesis
Known as a major advocate of Bitcoin (BTC), Adam Back has come to realize the key correlation between the digital currency and MicroStrategy. Recall that MicroStrategy is considered the second-largest corporate holder of Bitcoin, with over 210,000 BTC in its portfolio.
In Adam Back’s view, even if the sponsors of the ETF believe the MicroStrategy Premium was too high, the 2x auto-rebalancing projected to naked short MSTR is a highly Bitcoin-correlated asset. This, he believes, will not play out well for an asset that is trading in a highly volatile trading environment.
Adam Back painted a scenario in which the MSTR premium is compressed and the Bitcoin price doubles. In this case, he believes the ETF will be 2x short and the price will overwhelm the NAV correction, leading to accounts getting REKT.
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
In all, Adam Back believes the odds are stacked against the success of the proposed ETF as auto-rebalancing volatile underlying assets leads to capital erosion that is never good for portfolios.
Is MicroStrategy overvalued?
Since MicroStrategy started buying Bitcoin, its outlook and price valuation have grown remarkably. Many investors believe the firm, whose stock is worth $1,631 with a market capitalization of $24.42 billion, is overvalued.
With MicroStrategy bagging more than double gains in its Bitcoin bet, many investors are now embracing MSTR as another alternative to gain exposure to BTC. The company’s risky bets on Bitcoin have drawn criticisms, hence the short ETF being launched against it.
Overall, the company’s Chairman Michael Saylor has reaffirmed his commitments to Bitcoin, acknowledging the company’s long-term play in that regard.