Bitcoin Rally Benefiting ETFs

Bitcoin prices have now rallied upward of 70 percent in the past 90 days—50 percent in the past month alone—thanks to a pickup in demand led by China. These gains are starting to show up in a pair of ETFs that offer some exposure to the crypto-currency.

The ARK Web x.0 ETF (ARKW | D-30) first allocated to bitcoins through publicly traded shares of Grayscale’s Bitcoin Investment Trust (OTCQX: GBTC) in September. That allocation, which started out as less than 1 percent of the portfolio, today is at 1.6 percent thanks largely to the ongoing rally in bitcoins. Similarly, the ARK Innovation ETF (ARKK | D-32) now has bitcoins representing about 1.4 percent of the portfolio, according to data provided by Ark Invest.

The rise in bitcoin prices seems to be largely a result of China’s tightening capital controls, which are leading Chinese investors to use bitcoins as a way to move money out of the country, according to blogger ZeroHedge.

Other factors playing a role in the recent rally could include the fact that Europe has deemed bitcoin a currency, exempting it from the VAT tax, or Australia’s recent announcement that it is considering using bitcoin for clearing and settling securities, Cathie Wood, CEO and CIO of Ark, told ETF.com.

“To summarize, our timing was good,” Wood said of the inclusion of bitcoins in its funds—a first for the ETF market. “With only a $7 billion market cap, any one of these events could have moved bitcoin but, together, they have attracted tremendous attention.”

In the past month alone, ARKW and ARKK have each gained around 6 percent, both outperforming the S&P 500.

Chart courtesy of StockCharts.com

Volume in bitcoin trading has also been picking up, which has helped prices. Both Coinbase, which is the largest U.S. bitcoin exchange, and BTCC, the largest China exchange, have seen 4X average volume as of late, Chris Burniske, analyst at Ark, said.

Why that’s been the case, no one knows for sure, he says, but it’s clear that Chinese demand for bitcoins has had something to do with it.

Watch Out For Bubbles

If the recent action has been positive for ARKW and ARKK, Ark is still cautious about increasing its allocation to bitcoins. Without some consolidation, the recent rally could have the makings of a bubble.

“The sizes of the positions that we allocated to the portfolios took into consideration the relative liquidity of the security we invested in [GBTC],” Burniske said.

“We are extremely bullish on Bitcoin (the platform), and bitcoin (the currency) long term, and believe it adds diversity to the portfolios due to its lack of correlation with traditional securities,” he added. “However, we are cognizant of liquidity concerns and the importance of managing risk-adjusted returns.”

ARKW, an actively managed global Internet equity ETF launched roughly one year ago, has some $13 million in assets under management. ARKK, an actively managed fund that targets companies poised to benefit from disruptive innovation in industrial innovation, genomics or Web x.0, has $8.4 million.

Contact Cinthia Murphy at [email protected].