Cathie Wood has become something of an investing phenomenon over the past year. The founder and CEO of ARK Investment Management made a name for herself in 2020 when her five flagship exchange-traded funds (ETFs) crushed the returns of the broader market, each notching gains of more than 100%, by focusing on emerging technologies and disruptive high-growth stocks.
Wood made headlines again last week when she invested in Coinbase Global (NASDAQ:COIN) on the day it went public. ARK hasn’t stopped there, buying more Coinbase stock each day since its direct listing. ARK Invest now owns almost 1.9 million Coinbase shares — worth roughly $580 million at Thursday’s prices — in three of the firm’s ETFs: ARK Fintech Innovation, ARK Innovation, and ARK Next Generation Internet.
Let’s look at three reasons Wood was so quick to add Coinbase shares to ARK Invest’s coffers.
1. A breakout year for Coinbase
The ongoing boom in cryptocurrency has attracted the attention of novice and experienced investors alike. Coinbase Global is the leading cryptocurrency exchange in the U.S., allowing enthusiasts to buy and sell a wide range of popular digital currencies. The company makes the majority of its revenue from the transaction fees it charges for each sale.
The platform has more than 56 million individual users, 7,000 institutions, and 115,000 partners in over 100 countries. Its growing user base gives the company an unmatched ecosystem that has something for everyone, from the beginning cryptocurrency enthusiast to the more experienced buyer.
2020 was a breakout year for Coinbase, so it isn’t surprising that it caught Wood’s attention. Coinbase reported that revenue grew 139% year over year to $1.14 billion. At the same time, profits turned positive with net income of $322 million, pivoting from a loss of $30 million in 2019. As a result, the company’s adjusted EBITDA surged more than 2,000% to $527 million.
Preliminary results show that growth accelerated during the first quarter of this year. Revenue surged to $1.8 billion, a ninefold increase from $191 million in the prior-year quarter. For context, revenue tripled compared to the fourth quarter, while exceeding Coinbase’s revenue for all of last year. While the final numbers haven’t been released, net income is expected to be in a range of $730 million to $800 million, soaring nearly 2,300% year over year, at the midpoint of its range.
Given the eye-catching results, Coinbase would have certainly been on Wood’s radar.
2. A longtime believer in cryptocurrency
Wood has long been a proponent of digital assets, buying Bitcoin back in 2015 — before it entered the zeitgeist. She was particularly intrigued by the potential for blockchain, the digital ledger technology that underpins cryptocurrency. Wood has even gone so far as to say that Bitcoin’s price could eventually top $500,000 — nine times its current price, which is around $55,000 at this writing.
A quick look at ARK’s funds shows that Wood continues to bet big on the potential for cryptocurrency and blockchain. ARK Next Generation Internet holds more than 5% of its $6.9 billion in funds under management in Grayscale Bitcoin Trust — the first publicly traded security investing solely in Bitcoin.
That’s not all. Square is the No. 1, 2, or 3 holding of three ARK funds and was among the first to offer users more widespread cryptocurrency accessibility. The point-of-sale and digital payments provider first tested buying and selling Bitcoin on its platform in late 2017, before expanding access to all users in early 2018. Rival PayPal Holdings also debuted a service late last year that enables users to buy, hold, and sell cryptocurrency. The digital payments pioneer is another significant holding in two of ARK’s funds.
3. Cryptocurrency is still in its infancy
While it may seem like cryptocurrency is finally entering the mainstream, it’s actually still early days for the digital payment method. Hester Peirce, a commissioner with the Securities and Exchange Commission, says cryptocurrency is still in its infancy, but interest is growing.
“We’re seeing more interest coming from institutional quarters than we have in the past,” Peirce said during a live-stream financial conference. “As people are more comfortable working in a virtual world in every industry now, I think people are likely to turn more interest to the crypto space. And as people are looking to diversify their portfolios, I think people are also likely to look more to the crypto space.”
A recent study of 30,000 Americans found that roughly 57% say they understand cryptocurrency, about 14% say they are currently invested in crypto and another 15% are planning to invest, according to a nationwide poll conducted by Piplsay Research.
Meanwhile, 43% of respondents said they either didn’t understand or hadn’t even heard of cryptocurrencies. This shows that cryptocurrency has a long way to go before it reaches maturity, with plenty of growth potential.
A bit of context
It’s important to put Wood’s purchase of Coinbase Global into context. After buying more than a million shares and spending hundreds of millions of dollars, Coinbase only amounts to a little more than 1% of funds under management for each of the three ARK funds that hold the stock.
By adding Coinbase into the mix, however, Wood is increasing her bet on the overall potential for cryptocurrency, without putting too many eggs in one basket.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.