In a recent Commentary- MicroStrategy Is A Leveraged ETF In Disguise – we discussed the company’s business model, which revolves almost entirely around highly speculative bitcoin and leverage. To wit:
So, what is MicroStrategy? It’s a leveraged Bitcoin fund disguised as a non-profit technology company.
Regarding leverage and speculation, we also recently discussed the surging use of options, particularly those with short time frames.
Options employ significant leverage.
Thus, record options volume, especially in calls with short periods until expiration, is another sign that speculation is rising.
In addition to the two examples of growing leverage and market speculation, we see surging volume in leveraged single-stock ETFs.
An example of such an ETF is Granite Shares NVDL. The ETF offers a 2x leveraged holding of Nvidia shares. If Nvidia falls by 3%, the ETF will decline by 6%. Conversely, if Nvidia rises by 5%, the ETF will climb 10%. Accordingly, leveraged single-stock ETFs can be incredibly speculative. Furthermore, the massive surge in volume in such ETFs, as we share below, further confirms speculative behaviors are growing.
Leverage and speculation can drive markets higher than most investors forecast. However, in the process, they create a divergence between fundamentals and valuations, thus exposing the markets to risk.
Increased leverage and speculation are not reasons to sell immediately, but they indicate that markets are getting frothy, warranting our close attention.
