Is High-Risk Tech Drop Warning for Crypto?
The high-risk tech has been falling since early February, and that seems a warning sign for crypto investors, given its historical correlation with Bitcoin. Should crypto investors be worried this time?
High-Risk Tech Drops
The high-risk tech, as proxied by the ARK Innovation ETF, has been falling since February 2 and is now at January levels, surrendering about half of its year-date gain. The ARK Innovation ETF invests in “disruptive innovation” companies believed to be the future of the economy. In fact, it represents promising, but relatively new technology companies with unproven business models, making the ETF a good proxy of the high-risk tech.
ARK Innovation ETF
That seems a warning sign for crypto investors because historically the ARK Innovation ETF has been strongly correlated with Bitcoin. The current setup looks eerily similar to April-May 2022, when Bitcoin later almost halved in two months (May and June 2022) due to the TerraUSD collapse.
Bitcoin (blue) and ARK Innovation ETF (orange), indexed at 100 as of January 1, 2022
Innovation Assets Are Different
A year ago, a downtrend was very broad, decimating virtually all innovation assets. In the first 3 quarters of the last year, there was almost no differentiation between innovation assets, as the market focused on the big macro trend of higher real rates and ignored the fundamentals of specific assets. The ARK Innovation ETF was down more than others, but others plunged too.
Innovation asset performance ceased to be uniform in the fourth quarter of 2022, and dispersion between them continued rising this year. For example, Netflix stock rallied on company-specific news in the fourth quarter of 2022 despite the weak performance of other innovation assets. Recently Uber stock advanced to the highest level since February 2022, reflecting strong quarterly results. After years of negative cash flows, Uber turns into a cash-generative business this year, and investors like it. Bitcoin too made an impressive recovery this year. The ARK Innovation ETF started to look like an exception.
Uber (green), Netflix (blue), and ARK Innovation ETF (orange), indexed at 100 as of January 1, 2022
The differentiation between innovation assets is particularly notable in ride-hailing. Uber, the largest company in this sector, has almost recovered from its 2022 drop, while Lyft, the second-largest ride-hailing company in the US, remains near an all-time low.
Uber (green) and Lyft (red), indexed at 100 as of January 1, 2022
What’s Wrong with the ARK?
It looks like the ARK Innovation ETF has been on the wrong side of this differentiation between innovation assets. Despite a few winners (like Shopify and DraftKings), most of its positions remained depressed on the 1-year horizon.
10 largest positions of the ARK Innovation ETF
| Ranking | Company | Weight | Year-to-date gain (loss) | 1 year gain (loss) |
|---|---|---|---|---|
| 1 | Tesla, Inc. | 10.1% | 39% | -40% |
| 2 | Zoom Video Communications, Inc. Class A | 7.48% | -7% | -35% |
| 3 | Roku, Inc. Class A | 7.26% | 37% | -42% |
| 4 | Coinbase Global, Inc. Class A | 6.62% | 64% | -44% |
| 5 | Shopify, Inc. Class A | 5.96% | 85% | 71% |
| 6 | Exact Sciences Corporation | 5.66% | 38% | 25% |
| 7 | Block, Inc. Class A | 5.66% | -6% | -39% |
| 8 | DraftKings, Inc. Class A | 4.98% | 112% | 84% |
| 9 | UiPath, Inc. Class A | 4.74% | 6% | -22% |
| 10 | Teladoc Health, Inc. | 4.49% | 10% | -22% |
Zoom Video Communications, the second-largest position of the ETF, was particularly disappointing, recently dropping to a new all-time low. Zoom stock is now worth about the same as on the first trading day after its IPO in April 2019.
Zoom Video Communications (USD)
Roku, the third-largest position of the ETF, has been on the wrong side of streaming just like Lyft in ride-hailing. Roku, a maker of hardware digital media players designed for streaming video, failed to keep up with Netflix since August 2022.
Netflix (blue) and Roku (red), indexed at 100 as of January 1, 2022
All in all, I think that this time weak performance of the ARK Innovation ETF reflects the poor stock-picking decisions of its managers rather than a broad market headwind against innovation assets. The primary mistake seems to be avoiding established market leaders like Netflix and Uber in favor of riskier companies with no competitive advantages.
Conclusion
Formally, the current setup looks eerily similar to April-May 2022, when Bitcoin later almost halved in two months (May and June 2022) due to the TerraUSD collapse. However, this time weak performance of the high-risk tech, proxied by the ARK Innovation ETF, reflects poor stock-picking decisions of the ETF management rather than a broad market headwind against innovation assets.
Starting from the fourth quarter of 2022, the market increasingly distinguishes between innovation assets, rewarding successful projects, and shunning less competitive companies. I hope that, unlike the ARK Innovation ETF, Bitcoin will be on the right side of this differentiation.
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