ARK Invest Dumps Coinbase Holdings: What Lies Ahead for the Market

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It is a rather tricky moment for Coinbase. First, it was the news about an alleged case of insider trading. Just after that, the SEC starts investigating it.

And, as if that wasn't enough, Yahoo! Finance reports Cathie Wood's Ark Invest decides to sell 1.4M shares of the company at a loss. Could this be the beginning of a bigger problem for the centralized exchange?

What is ARK Invest?

ARK Invest is a famous investment management firm created in 2014 by Catherine Wood. What makes their investment funds unique is how they heavily stake in disruptive innovation.

ARK always seeks to identify leading innovative companies. These companies ranged from artificial intelligence, DNA sequencing, energy, biotech, and blockchain. 

Another thing that made ARK Invest special was its transparency. They publish all their reports online to generate feedback from the whole community.

ARK Invest is confident that these companies will change the world. For this reason, ARK Invest designs thematic ETFs, of which they have nine in total. They range from innovation to genomic revolution and fintech.

ARK became particularly successful after the COVID crash. Its Innovation ETF went from $37 in March to $157 at its February 2021 top.

Since then, the funds have gone downhill, reflecting the greater pullback of the markets. The company's latest report indicates much more pain could be coming.

Why is the SEC going after Coinbase? 

Coinbase is the most recognized crypto exchange in the U.S. and is currently in trouble. The U.S. Securities and Exchange Commission set its eye on the famed exchange on allegations of improper securities listings and insider trading within the company. 

After new listings, the SEC asked whether they offered digital assets that should've been registered as securities. The SEC believes nine of the last 25 listed tokens represent a security. The investigation comes on the heels of a lawsuit filed by Coinbase users, claiming the company failed to warn them of potential risks in crypto investing.  

But the investigation has little to do with the alleged insider trading scheme. The latter case came to light a week ago, and the recent research predates the case. That is, the SEC has been working on the probe for months. 

Coinbase executives remain calm. Or at least that's what Paul Grewal, Coinbase's chief legal officer, wants to show. Grewal stated on Twitter that he is confident in its rigorous due diligence process. This process helps the exchange keep securities off its platform. He also noted that the SEC has already reviewed that process time and time again. 

$COIN takes a hit and ARK keeps going down

 

After the accusations made headlines, some shareholders decided to dump their Coinbase stock amid the fear generated by the probe. Cathie Wood's ARK Invest was one of them. 

Wood, who is not without controversy, sold 1.4M shares held by the fund. ARK was the third largest shareholder of Coinbase and sold these shares, which came out of three of its ETFs. The total sale was valued at about $75M. 

Something to note: ARK's average buy price was $255. Selling at $57 represents realizing a 77% loss. They invested around $357M to buy those 1.4M shares, which means ARK officially lost at least $282M after this sale. 

This recent drop represents a significant blow to Coinbase, which has already lost 76% of its value this year. ARK has also lost all the magic it had attracted during the pandemic. Its Innovation ETF has lost more than half its value and may fall further. 

Will Coinbase and ARK recover any time soon?

We could have sensed this probe was coming. On July 23th, Coinbase asked the SEC to clarify which digital assets should be treated as securities. Once we knew something about this request, we should have expected something to come that way.

Ultimately, we will have to wait a while to learn more about this litigation. It is not entirely clear that the SEC can apply the Howey test to cryptocurrencies. After all, cryptocurrencies are a new type of asset. Coinbase's desire to understand what securities are is nothing more than logical. 

Coinbase has many things in its favor. First, the investigation into alleged insider trading is against a former product manager, not Coinbase. In turn, the company says they have always cooperated with the SEC. They even decided to shut down Lend's proposal to avoid trouble with the Commission. 

Finally, the complaint filed by the SEC is on nine tokens that could be securities. The investigation is not against Coinbase as a company but listed assets. Although if they were deemed to be securities, the company would suffer consequences.

And as for ARK, this sale does not represent that the fund no longer believes in Coinbase. In fact, the investment fund still holds around 4.6M Coinbase shares. The sale only accounted for 0.68% of the funds managed by ARK.

The truth is that both Coinbase and ARK fall into the category of risky assets. As long as there is fear of recession and the market continues to fall, both companies will lose value. If Coinbase can manage to weather the storm, there is no reason to think they will not see the light of day.

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