Tesla-Bitcoin-Ark positions have entered a dangerous tailspin scenario
Head of Equity Strategy
Summary: Shares in Tesla are under pressure these days as Bitcoin is experiencing a steep sell-off. This in turn is causing selling pressure in Ark Innovation ETF and overall this risk cluster Tesla-Bitcoin-Ark is reinforcing the intertwined dynamics both on the upside and now certainly on the downside. In today's equity update we revisit this new risk source in equity markets and how it is impacting the wider equity market.
Two weeks ago we wrote a note about the risk cluster in Tesla-Bitcoin-Ark and how these trades were getting highly correlated driven by the investor preferences and lately reinforced by Tesla’s $1.5bn position in Bitcoin. Our note was a follow up note to our initial warning of this risk cluster on 22 January. Following our recent warning on Tesla-Bitcoin-Ark we updated our ‘bubble stocks’ theme basket consisting of 40 stocks globally with every aggressive valuations and negative earnings expectations saying that this segment of the market also have a large overlap with Ark Invest positions. In fact, the risk-off in technology stocks yesterday hit our ‘bubble stocks’ basket hard being down 5.9% falling aggressively in tandem with other speculative equity segments such as E-commerce, NextGen Medicine, and Green Transformation stocks.
The sell-off was exceptionally brutal in Tesla shares down 8.6% yesterday and down another 5% in pre-market. This decline in Tesla shares came as Bitcoin had 16.5% trading range to the lows yesterday driven likely by a combination of Elon Musk’s comments over the weekend that both Bitcoin and Ethereum “do seem high” and Janet Yellen’s, US Secretary of the Treasury, comments about the inefficiencies about Bitcoin and other cryptocurrencies. Bitcoin recovered most of the losses yesterday but is down again 15% today adding to volatility and exposing the massively increased earnings volatility for Tesla due to Musk’s decision to add Bitcoins to Tesla’s balance sheet. For Ark Invest the game has turned as the investment firm has benefitted for years of consistent inflow into its funds and especially the past year with asset under management almost increasing 20 times from $3bn to $60bn. Ark’s most famous and biggest fund, the Ark Disruptive Innovation ETF, was down 5.8% yesterday and is down another 4% in pre-market. These declines could accelerate outflows which then creates a selling pressure in the underlying shares which then intensifies the risk-off dynamics and then it becomes a negative feedback loop.
Another interesting observation is the rolling correlation between Bitcoin/Ethereum and Ark Disruptive Innovation ETF which is quite high despite no direct link between the two instruments indicating vaguely that they do respond to the same risk drivers and thus might be owned by the same investors.
The risk-off in Tesla-Bitcoin-Ark positions have delayed our upcoming note on cost of capital and how rising interest rates impact various parts of the equity market. Our analysis is under way and expect to publish it tomorrow.
The 5-year chart below is for regulatory purposes.