Easy come, easy go. The torrid rally in some of the frothiest areas of the markets has come to an emphatic end, with the crypto complex being the last domino to come crashing down this morning.
High growth stocks—including many tech companies, SPACs and initial public offerings—had already peaked in February, on their way to massive drawdowns over the following three months.
Now cryptocurrencies—which had been surprisingly resilient up until recently—have finally buckled too.
Bitcoin was last trading down by 18% after having fallen as low as $30,000, a drop of 31%. At the same time, ether was down 25% after tanking to as low as $1,900, an eye-popping decline of 44%.
Deep In The Red
All of these once high-flying areas of the market are now deep in the red versus their all-time highs. Prices for the Toronto-listed Purpose Bitcoin ETF (BTCC) and Purpose Ethereum ETF (ETHH) have been cut in half from their highs in just a matter of days (ether hit an all-time high last week).
Likewise, the ARK Innovation ETF (ARKK) dropped 36.5% from its high on Feb. 12 to its low on May 13.
For months, ARKK, along with its sister funds, like the ARK Genomic Revolution ETF (ARKG) and the ARK Next Generation Internet ETF (ARKW), moved in only one direction: up. From the start of 2020 to its high point this February, ARKK moved higher relentlessly, more than tripling in the period.
The latest correction in these funds has made it painfully clear that with the opportunity for great reward comes great risk as well.
YTD Returns For ARKK
The ARK suite is just one group of former high-flying stock funds to take a beating over the past few months. SPAC ETFs are another. One of the more controversial areas of the market, SPACs exploded onto the scene in 2020, helping take companies like Draft Kings, Nikola, Opendoor and Joby Aviation public.
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Many of these companies came to market with unproven business models, and in some cases, without any revenues to show. SPACs reached a full-blown mania in early 2021, when, in under three months, these investment vehicles raised more money than they did in all of the previous year ($83.3 billion).
Some regulatory hurdles put in place by the SEC slowed the pace of new SPAC issuances dramatically, and partly contributed to the precipitous slide in the value of many of these investments. The Defiance Next Gen SPAC Derived ETF (SPAK), which holds a combination of pre- and post-merger SPACs, is down 31.5% from its Feb. 16 highs.
The SPAC and New Issue ETF (SPCX), which only holds pre-merger SPACs, is down 11.9% in that same time frame, with many of its holdings now trading below the value of the cash on their balance sheets.
IPO Cool Down
Related to the pullback in SPACs and tech stocks is the more muted performance of IPOs. Investing in IPOs had seemingly been a “can’t lose” situation for a long time leading up to February, but that all changed once the correction in valuations began in earnest that month.
Everything from Airbnb to DoorDash to Snowflake is well off its highs of the year, which has in turn pulled down the ETFs that invest in IPOs and direct listings. The Renaissance IPO ETF (IPO) and the First Trust U.S. Equity Opportunities ETF (FPX) are down 24.9% and 16%, respectively, from their February highs.
Entering this month, most of the frothy parts of the market had buckled and traded to levels well below their highs, but not cryptocurrencies. Bitcoin hit its high of $63,000 in April, but was still around $60,000 in early May; while ether spiked to a new record high as recently as last week, sextupling from where it traded at the start of the year, from $739 to $4,140.
Today, those highs seem distant, and the bears have emerged to make their case.
YTD Returns For ARKK, SPAK, IPO, GBTC
With many formerly hot stocks and ETFs well off their highs, there has emerged a debate with regard to whether this is the start of something bigger or just a much-needed correction on the heels of an overextended rally.
For now, investors seem to be betting on the latter. The ARK suite of ETFs has taken in $15.3 billion of fresh cash this year, including $820 million since ARKK’s peak in February.
The flows data for the other funds mentioned in this story aren’t as telling, with no noticeable trends one way or the other.
As for crypto, most investors in that space certainly haven’t changed their tune with regard to where they see prices heading long term (with the notable exception of perhaps Elon Musk).
A 30%+ drop in these assets has been dramatic and perhaps even a little scary for the investors in them, but at least so far, it’s done little to change the bullish narratives that surround tech, blockchain and other disruptive themes.