The hottest stocks in the US market, combined with a double leverage buff, are simply a harvest feast, but recently things have not gone as hoped.With Trump's election, Bitcoin soared, and MicroStrategy (MSTR), known as the &#34;largest Bitcoin proxy&#34; in the US stock market, saw even more rapid growth. Since the US election, Bitcoin has risen nearly 40%, while MicroStrategy has surged 67%; since the beginning of the year, MicroStrategy's increase has reached 455%, nearly four times the increase of Bitcoin during the same period!<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b970b79a-5e94-4487-bd04-03482f782b94.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b970b79a-5e94-4487-bd04-03482f782b94.png"/>In such a booming market, the two leveraged ETFs for MicroStrategy launched to capitalize on the trend have been snapped up. One is the Defiance Daily Target 2x Long MSTR ETF (MSTX), which was launched in August and initially offered 1.75 times leverage, changing to two times leverage for MicroStrategy in October; the other is the T-Rex 2x Long MSTR Daily Target ETF (MSTU), launched in September.In less than half a year since their launch, the total assets of these two ETFs have rapidly expanded to about $5 billion.However, recently, these two ETFs have encountered problems. On November 25, when MicroStrategy's stock price fell by 1.9%, MSTU dropped by 6.2%, exceeding the twofold decline; on November 27, when MicroStrategy's stock price rose by 9.9%, MSTU only increased by 13.9%, failing to reach the 19.8% twofold target.This situation also occurred with MSTX, and there has been a chorus of complaints on social media about these two ETFs, with netizens lamenting: the math has failed.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8d725413-db76-4624-81d3-598b46d04815.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8d725413-db76-4624-81d3-598b46d04815.png"/>Not only did they fail to provide double upside potential, but the downside exceeded twofold, leaving investors feeling deceived, with some angrily declaring: this is completely a scam!<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/93c506ba-e670-4d5b-a81b-950c3e8b53fa.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/93c506ba-e670-4d5b-a81b-950c3e8b53fa.png"/>Bearing losses that exceed the downside risk without receiving the expected upside return is indeed hard to accept, so where exactly did the problem lie?Leveraged ETFs typically use swap contracts and other derivatives to achieve their daily performance doubling investment goals. However, the rapid growth of MSTX and MSTU in the short term has pushed major brokers to the limits of the swap contracts they can provide, forcing MSTX and MSTU to turn to options contracts to achieve their investment goals. The large bid-ask spreads in options trading and greater price volatility have led to larger tracking errors for the ETFsBut the fundamental reason is that the unprecedented growth of these high-leverage ETFs has exceeded the risk tolerance of some Wall Street institutions. First of all, Bitcoin itself is a highly volatile risk asset, and MicroStrategy's stock price has a high premium based on Bitcoin, while the leveraged ETF further adds high leverage and high growth...<h2>Under surging demand, swap contracts are running out...</h2>Single-stock ETFs are also a new phenomenon in the U.S. stock market, having only been approved for listing in 2022.In the past two years, there has been a booming demand for single-stock ETFs targeting high-volatility tech companies like Nvidia, Tesla, and Apple, with risk-seeking investors using these tools to leverage or short single stocks. So far, the performance of these ETFs has generally aligned with their promotions, achieving the goal of doubling or reversing daily performance.Single-stock ETFs do not hold stocks but only track a single stock, using derivative contracts to achieve leveraged or inverse exposure, with the most widely used being a financial contract known as total return swaps. By signing swap contracts linked directly to the performance of the underlying asset with specific institutions, these ETFs can accurately double the daily performance of the stock.However, the MicroStrategy leveraged ETF encountered a problem: under surging demand, swap contracts are running out...In October, as MicroStrategy's stock price began to soar and the scale of related single-stock ETFs rapidly expanded, Matt Tuttle, CEO of Tuttle Capital Management managing MSTU, received bad news: the main broker he partnered with had reached the limit of swap contract exposure it could provide for MSTU.Due to the volatility of MicroStrategy's stock price, currently only three brokers are willing to cooperate with MSTU. Tuttle told the media that he simply could not obtain the amount of swaps his fund needed, and by mid-November, when he needed $1.3 billion in exposure, the main broker could only offer him contracts worth $20 million to $50 million.In desperation, Tuttle turned to call options in an attempt to achieve performance goals. MSTU's competitor MSTX also faced similar issues, with Sylvia Jablonski, CEO of Defiance ETFs managing MSTX, stating that MSTX began using options shortly after its launch to help meet the required leverage.Compared to swap contracts, options are relatively less precise in achieving ETF investment goals. The reason is that the bid-ask spread for options is large, and price volatility is also greater, while large buyers like ETFs can themselves drive the market, leading to greater tracking errors for ETFs.<h2>MicroStrategy is different: Building a precarious tower on a precarious tower</h2>The fundamental reason behind the performance error is that MicroStrategy, as the underlying asset of the ETF, carries too much riskTuttle stated: “If the ETF's target is Procter &amp; Gamble, I can get as much swap contract exposure as I want, but MicroStrategy is different.”MicroStrategy was originally an obscure enterprise software manufacturer. In August 2020, shortly after the outbreak of the pandemic, MicroStrategy decided to start investing in Bitcoin to hedge against inflation, and since then it has become the world's most well-known &#34;Bitcoin proxy.&#34;Over the past four years, MicroStrategy has announced more than 40 Bitcoin purchases and has accumulated 402,100 Bitcoins, accounting for about 2% of the total circulating supply, making it the company with the most Bitcoin holdings among publicly traded companies in the U.S.Initially, MicroStrategy bought with cash flow, later leveraging funds through convertible notes and other instruments, and plans to explore other financing methods to purchase more Bitcoin.Last month, alongside its third-quarter report, MicroStrategy announced a &#34;21/21 plan,&#34; which aims to raise $42 billion over the next three years through $21 billion in equity and $21 billion in bonds to purchase more Bitcoin.These financing figures also reflect MicroStrategy's obsession with Bitcoin.It is reported that the financing scale's figures relate to the answer &#34;42&#34; calculated by the supercomputer in the sci-fi series &#34;The Hitchhiker's Guide to the Galaxy&#34; regarding life, the universe, and everything, which MicroStrategy's executive Phong Le referred to as a &#34;unique number with special characteristics.&#34; Phong Le also stated that 21 is a magical number in the Bitcoin world, as the maximum supply of Bitcoin will always be 21 million.When Bitcoin surged due to expectations of Trump's policies, MicroStrategy, which went &#34;all in&#34; on Bitcoin, also became a darling of the U.S. stock market, with its stock price soaring and market capitalization rapidly expanding, but concerns about risk are also accumulating.At the current price of over $100,000 per Bitcoin, the total value of the Bitcoins held by MicroStrategy is approximately $40.2 billion. Meanwhile, enthusiastic investors have pushed MicroStrategy's stock market value to nearly $80 billion, more than twice the value of its Bitcoin holdings.Such a high premium is still built on an asset like Bitcoin, which has experienced numerous instances of &#34;building high towers, only to have them collapse...&#34; with enormous volatility. Moreover, leveraged ETFs based on this foundation must bear an additional layer of risk inherent in complex derivative strategies.<h2>The Warning of &#34;Volmageddon&#34;</h2>There are warnings that in extreme cases, if MicroStrategy's stock price falls by 51% in a single day, these leveraged ETFs could face a complete collapse, repeating the &#34;Volmageddon&#34; event of 2018Before 2018, the VIX index of U.S. stocks remained at historically low levels, and market sentiment was very optimistic. However, in early February 2018, U.S. stocks plummeted, and the VIX surged from 17 to over 37 in a single day, an increase of more than 100%. In the following days, it even briefly surpassed 50.In this extreme market situation, many ETFs and funds that relied on low volatility strategies suffered devastating blows, among which two inverse short VIX ETFs—VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and ProShares Short VIX Short-Term Futures ETF (SVXY)—were hit the hardest, with their asset sizes shrinking from $3 billion to $150 million in just one day.XIV experienced a 96% drop in a single day, almost completely losing its value. Subsequently, its issuer, Credit Suisse, announced the liquidation of the ETF, resulting in investors holding this product nearly losing all their investments. Although SVXY was not liquidated, it also never recovered thereafter.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/109bfcbe-4d28-49b7-a5af-1a72d7e853c2.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/109bfcbe-4d28-49b7-a5af-1a72d7e853c2.png"/>The &#34;Volmageddon&#34; event can be seen as a typical case of the sudden reversal of excessive market optimism and serves as a profound warning about the risks of leveraged ETF products like MSTX and MSTU.This article is sourced from: Second Set of Housing Researchers, original title: &#34;The ETF that is 2x Long MSTR has recently encountered problems&#34;

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On the precarious building, another precarious building is built: First of all, Bitcoin itself is a highly volatile risk asset, and MicroStrategy's stock price has a premium of twice that of Bitcoin, while leveraged ETFs further add high leverage and high growth... This has already exceeded the risk tolerance of some Wall Street institutions

- MicroStrategy's leveraged ETFs, MSTX and MSTU, have faced significant tracking errors, failing to deliver expected returns amid high volatility.  
- The rapid growth of these ETFs has strained the availability of swap contracts, forcing managers to rely on options, which increases tracking discrepancies.  
- Concerns are rising about the sustainability of MicroStrategy's high valuation, especially given the risks associated with Bitcoin, reminiscent of the "Volmageddon" event in 2018.

The 2x leveraged ETF for MSTR has recently encountered issues