ARK's Aggressive Crypto Stock Buys: Are They a Risky Gamble?

ARK Invest, led by Cathie Wood, has been actively purchasing stocks in publicly listed crypto companies. In June, the fund bought a total of $77 million worth of shares in Coinbase, Circle, and Bullish. The purchases were made during Bitcoin's worst monthly performance in four years.

The logic behind buying these stocks is that they offer investors a compliant channel to gain exposure to the crypto industry cycle without directly holding Bitcoin. However, an analysis by CryptoSlate reveals that this approach comes with significant hidden costs.

The annualized 30-day realized volatility range for nine US-listed crypto companies is between 68% and 90%, nearly double Bitcoin's 37.6% volatility. Circle's 90-day volatility reaches 103.6%, while its drawdown from highs is 51.4%. The disparity in volatility and drawdowns suggests that crypto stocks are not a straightforward way to gain exposure to the crypto market.

A closer look at correlation data reveals that crypto company stocks have only a partial link to Bitcoin's price movements. Over the past 90 trading days, Circle, Robinhood, and Bullish had correlation coefficients with Bitcoin of 0.55-0.58, indicating that about one-third of their volatility stems from company-specific risks.

Only MSTR among these stocks qualifies as a Bitcoin substitute, with a Beta of 1.59 and a correlation of 0.85. It essentially holds Bitcoin with leverage. Coinbase has a year-to-date decline of -26.8% and a Beta of 1.26, making it the second most closely linked stock to Bitcoin within the sector.

The Strategy case study exposes the risks associated with buying shares in publicly listed crypto companies. The company's price-to-book multiple fell below 1 for the first time in June, indicating that the market values the entire company for less than the cash and Bitcoin it holds. This is a significant concern for investors who buy these stocks.