The Benefits of Being the Only Bitcoin Game in Town

ARKW has ramped higher alongside bitcoin, as rival ETF offerings remain in limbo

Oct 17, 2017 at 11:56 AM
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It was major headline news in September when JPMorgan Chase (JPM) CEO Jamie Dimon described bitcoin (BTC=) as "a fraud," with the cryptocurrency tumbling over 900 points (roughly 22% of its value) over the course of the following two trading days. In scathing commentary delivered at an investing conference, Dimon called bitcoin "stupid," and added, "It's worse than tulip bulbs... Someone is going to get killed." (Diligent students of investing will recognize this as a reference to the infamous Dutch "tulip mania" that featured so prominently in Charles Mackay's classic contrarian tome, Extraordinary Popular Delusions and the Madness of Crowds.)

Almost exactly a month after his "fraud" accusations, Dimon was conspicuously close-mouthed on the topic during his company's Oct. 12 third-quarter earnings call. "I'm not going to talk about bitcoin anymore," said the executive, admitting later that he had since been "reminded" of his bank's own business interests in the digital currency space, and in particular the realm of "blockchain technology."

Despite his apparent "chastening" on the topic, the JPMorgan CEO ultimately kept his vow of silence on bitcoin for only about 24 hours. By Friday, Dimon had blurted, "If you're stupid enough to buy it, you'll pay the price for it one day," to yet another investing conference audience.

And bitcoin has even higher-profile critics to consider. Around the same time that Dimon was getting roundly slagged in online cryptocurrency forums for his remarks, Chinese officials dealt a blow to BTC= by rolling out what The Wall Street Journal described as "a comprehensive ban" on bitcoin trading markets. Russia, too, has been openly critical; last week, President Vladimir Putin warned of the "serious risks" involved with cryptocurrencies, observing that they could be used for criminal means.

Amidst all this, BTC= itself scoped out new record highs, peaking Friday above $5,800 as major U.S. exchange Coinbase rolled out a program to allow traders to make instant bitcoin purchases of up to $25,000 through domestic bank accounts, effectively eliminating the prior three- to five-day waiting period for transactions to process via ACH. The shift is widely viewed as a positive for the cryptocurrency, as market liquidity (and legitimacy) will be enhanced while investor risk is (theoretically) decreased.

For those looking to trade bitcoin derivatives, though, the market remains a virtual Sahara. Big-time issuers like VanEck, ProShares, and more have drawn up plans for bitcoin-based exchange-traded funds (ETFs) -- but those offerings remain on ice, because the bitcoin futures on which the products would be based don't yet exist. Another proposed offering, the Winklevoss Bitcoin Trust ETF (COIN) -- yes, those Winklevosses -- was shot down by the SEC due to regulatory concerns with the relatively freewheeling bitcoin market.

So, given the record-setting breakout in BTC= itself, along with the near-complete lack of competing bitcoin-based investment vehicles, it should come as no surprise that the ARK Web x.0 ETF (ARKW) -- which boasts the "over the counter"-traded Bitcoin Investment Trust (GBTC) as its No. 2 holding -- explored its own record highs on Friday. ARKW topped out at $41.92 in the session, and by week's end was up roughly 66% for the year-to-date period.

Trading volume has absolutely exploded in ARKW this year, with monthly totals of fewer than 200,000 shares during the first quarter of 2017 giving way to totals in excess of 1 million during each of June, August, and September. And remarkably, per, the fund has not experienced a single day of outflows on its way to garnering net inflows of $65.14 million in 2017.

The next couple of weeks should be interesting ones for ARKW. Along with GBTC, the fund has Amazon (AMZN) as its top holding -- and the rumor mill suggests Amazon could announce a decision to accept direct bitcoin payments in its upcoming earnings report, which would give the cryptocurrency a massive boost in terms of PR (and, again, legitimacy). While this speculation is, as yet, completely unconfirmed, it would certainly fit with AMZN's 2017 trend of nonstop industry disruption, and it's hard to imagine this wouldn't be welcomed with open arms by bitcoin bulls.

That said, with increased legitimacy comes increased regulation -- and, presumably, increased competition in the derivatives market. If heavyweight issuers get clearance to jump into the bitcoin ETF game with products tied more closely and directly to the currency's movements, that's almost certain to take some wind out of ARKW's sails. (And in the meantime, for those attempting to detect a potentially burgeoning bitcoin bubble, we'd suggest there might be no clearer contrarian alarm bell for BTC= going forward than a bullish endorsement from Jamie Dimon.)

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Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 15.

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