MSTY: A High-Risk, High-Reward Bet On Bitcoin

Summary The YieldMax MSTR Option Income Strategy ETF offers high-yield exposure to Strategy and Bitcoin via a synthetic long position and a covered call strategy. The ETF is best suited for investors with a bullish Bitcoin outlook and a very high-risk tolerance, given its leveraged and derivative-based structure. Bitcoin recently reached an all-time high just below $123k as pro-crypto regulation — the GENIUS Act — changed investor sentiment for the better. MSTY has delivered strong NAV returns since inception, but income distributions are volatile and upside is capped due to the covered call approach. While recent pro-crypto regulation and Bitcoin price surges are positives, MSTY is only appropriate for those willing to accept significant risk and potential underperformance if the crypto market corrects. The YieldMax MSTR Option Income Strategy ETF ( MSTY ) is a potentially attractive investment product for investors that have a favorable view on cryptocurrencies, especially Bitcoin ( BTC-USD ), and that want to monetize a synthetic long position in Bitcoin investor Strategy ( MSTR ). Strategy is the biggest corporate owner of Bitcoin in the world and with the cryptocurrency market recently receiving favorable stimulus from the GENIUS Act, the Bitcoin price has reached new all-time highs. A yield-oriented position in the YieldMax MSTR Option Income Strategy ETF could make sense for investors that understand the risks of an investment in MSTY and that have a very high tolerance when it comes to taking risk in their portfolios. Data by YCharts Previous Rating I have no previous coverage on the YieldMax MSTR Option Income Strategy ETF, but up-graded Strategy to hold in my last work in June: Bitcoin Recovery Creates Less Risk . At the time of my last coverage, Strategy owned more than 580,000 Bitcoins which was equal to about 3% of the outstanding Bitcoin supply. Further, cryptocurrencies made a big comeback lately on the back of favorable stablecoin regulation — the GENIUS Act — which creates the first regulatory framework for stablecoin issuers. This move has sparked optimism in the cryptocurrency market, causing Bitcoin to grapple with a price of ~$123,000 for the first time ever. Strong NAV Upside And High-Income Potential The YieldMax MSTR Option Income Strategy ETF is a way for investors to turn a favorable view on Strategy into a high-yielding income plan. Since Strategy is basically a Bitcoin investor (although it has a software business as well), the company has been a primary vehicle for investors to get Bitcoin exposure. Fundamentally, Strategy itself is a leveraged way to invest in Bitcoin as the company is issuing both equity and debt (mostly 0% convertible senior notes) in order to finance Bitcoin purchases. As a result, Strategy has out-performed Bitcoin by a massive margin in recent years. Data by YCharts This YieldMax MSTR Option Income Strategy ETF does not own shares of Strategy, however, but rather builds a synthetic long position through the use of derivatives. In addition to the synthetic position in Strategy, the YieldMax MSTR Option Income Strategy ETF sells covered calls in order to generate recurring dividend income for investors. The YieldMax MSTR Option Income Strategy ETF therefore allows investors to monetize a long position in Strategy through option income, but it is a high-yielding ETF that is likely only suitable to very high risk-takers. There are two sources of potential gains for investors that buy into MSTY: 1) A high annualized distribution yield that is currently standing at 132.5%, and 2) Potential NAV gains. The majority of the YieldMax MSTR Option Income Strategy ETF’s are going to come from distributions… which are made monthly. In the trailing-twelve-month period, the YieldMax MSTR Option Income Strategy ETF made $27.59 in cumulative distributions. The monthly distribution has fluctuated widely, however, so investors that depend on predictable income would likely not want to own this ultra-high-yield investment product. Data by YCharts Favorable stablecoin legislation recently catapulted the Bitcoin price to an all-time high just short of $123,000 and changed sentiment towards many other digital currencies as well. Stablecoins are a critical pillar of the cryptocurrency ecosystem, allowing investors to (relatively) safely park capital and move into and out of digital currencies easily and without high costs. The stablecoin market, which is a part of the broader cryptocurrency market, has boomed in recent years as well. I dove into more detail about the GENIUS Act legitimizing stablecoins and their impact on the cryptocurrency market in my work on Circle Internet Group ( CRCL ). CNBC Strong Net Asset Value Returns Driven By Bitcoin Price Recovery In terms of net asset value returns, the YieldMax MSTR Option Income Strategy ETF has achieved very respectable returns since inception: its net asset value has soared 336.6% since February 2024. While the ETF has a very limited return history so far, the YieldMax MSTR Option Income Strategy ETF has done quite well, due largely to a massive recovery in the underlying Bitcoin price in the last year. YieldMax Strong Bitcoin-Related Upside Potential The YieldMax MSTR Option Income Strategy ETF has an impressive total return since inception, but the ETF’s net asset value potential will be directly tied to the performance of the world’s biggest digital asset Bitcoin. If the Bitcoin price were to slump going forward, investors could see serious net asset value erosion for the YieldMax MSTR Option Income Strategy ETF. So far, shares of Strategy have out-performed the YieldMax MSTR Option Income Strategy ETF and will likely continue to do so (I will explain in the risk section why). Data by YCharts Risks With MSTY The YieldMax MSTR Option Income Strategy ETF sells covered calls, which can be risky if Strategy’s share price rises above the strike price of such calls (which means the option buyer will exercise the option and the option seller will have to sell shares at the lower strike price). This is the reason why high-yielding ETFs running covered call strategies may actually end up underperforming the underlying asset. In other words, the YieldMax MSTR Option Income Strategy ETF offers investors a high-yield of more than 130% that comes at the price of capped upside. Therefore, the YieldMax MSTR Option Income Strategy ETF would likely only be a good investment product for investors that want to translate a favorable Strategy/Bitcoin outlook into high current income today. Final Thoughts The YieldMax MSTR Option Income Strategy ETF is a potentially attractive investment for investors that have a positive long-term view on cryptocurrencies in general, especially in the context of recent efforts to provide a regulatory framework for stablecoin issuers. It is also chiefly aimed at investors that want to generate a high monthly distribution from a synthetic long position in Strategy. Further, the GENIUS Act is a milestone legislation package that legitimizes investments in digital assets and that could provide a boost to the development of the entire cryptocurrency ecosystem. The YieldMax MSTR Option Income Strategy ETF, however, is only a decent investment production for investors that understand the high risk of MSTY (especially with regards to its capped upside potential). Investors that like Strategy may want to own shares outright in order to fully participate in the Bitcoin investor’s upside.

Source: Seeking Alpha