Ark’s Cathie Wood Blames Crypto Crash on ‘ESG Movement’

Elon Musk and the “ESG movement” are responsible for the recent drop in cryptocurrency prices, an influential fund manager told CoinDesk’s Consensus 2021 conference today.

Cathie Wood, the founder of Ark Investment Management, said bitcoin – which has lost up to 50% of its value in the last few weeks – has come under pressure from institutional investors concerned about its environmental profile.

“It was precipitated by the ESG [environmental, social and governance] movement and this notion, which was exacerbated by Elon Musk, that there are some real environmental problems with the mining of bitcoin. A lot of institutional buying went on pause,” she told Nathaniel Whittemore in a pre-recorded interview broadcast Thursday.

Musk, who had buoyed markets by saying Tesla would buy bitcoin for its treasury and accept it as payment for its cars, reversed course on the latter, sending prices downwards.

“Elon probably got a few calls from institutions,” Wood said. “I noticed that BlackRock is [Tesla]’s number three shareholder and Larry Fink is the CEO. He is focused on ESG and especially on climate change. I'm sure BlackRock registered some complaints and perhaps there are some very large holders in Europe who are extremely sensitive to this.”

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Wood, a storied innovation investor, remains confident in the future of Bitcoin, which she described as the first rules-based “global monetary system in the world.” Recently, speaking to Bloomberg, she forecast the cryptocurrency will go to $500,000.

In her Consensus appearance Thursday, she predicted central banks will begin buying crypto assets for their balance sheets and that Musk will prove positive for bitcoin in the long term, improving its environmental profile.

“He has encouraged a lot more conversation, a lot more analytical thinking. And I do believe he's going to become a part of the process,” she said.

Deflationary environment

Prominent figures like Lawrence Summers and Ray Dalio have recently warned that government and central bank spending could push up inflation this year. But Wood, who is known for bucking conventional wisdom, said deflation is more likely. She predicted a “significant” fall in commodity prices and that technology like artificial intelligence and blockchain will serve to hold down business costs.

“As time goes on here, we are thinking that the much higher probability is deflation. I know most people think that's crazy, given what's going on. But we have seen a crack in some commodity prices already,” she said.

That, in turn, could lead some policymakers in emerging markets, or even the eurozone, to adopt hard money, including bitcoin.

“In emerging markets, if commodity prices come down, a lot of them are linked to commodity prices [and] their currencies will come under pressure,” she said. “I wouldn't be surprised if some of these emerging market central banks start accumulating bitcoin … because they know their currencies are going down, and that they will be under attack as reserves go down.”

In his own appearance at Consensus this week, Dalio said bitcoin could become a victim of its own success: that governments will try to ban it as it becomes a competitive threat. But Wood said governments have learned that innovation is key to long-term growth and that technology, be it cryptocurrency and the internet before it, can’t really be stopped.

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“They're all trying to say, ‘Let's have a better regulatory footprint here so that we attract more innovation.’ And I think that is going to happen with, or already is happening with, cryptocurrencies,” she said.

Wood said she was “very happy” to see Gary Gensler, who is known to be open-minded toward cryptocurrency, installed as the new head of the Securities and Exchange Commission, alongside Valerie A. Szczepanik, who leads the body’s Strategic Hub for Innovation and Financial Technology.

Wood said bitcoin has proved itself as a store of value and a way to protect against wealth confiscation. She said it had the potential to be a settlement network following the introduction of layer 2 solutions like the Lightning Network. But Ark is increasingly focused on ethereum, having invested in Grayscale's Ethereum Trust and hired an Ethereum miner to its fintech analysis team. (Grayscale is a unit of Digital Currency Group, the parent company of CoinDesk.)

“We're intrigued by stablecoins and [decentralized finance], of course, and [non-fungible tokens]. And we're also very interested that developers are migrating very, very quickly [to Ethereum]. I always say to our analysts, ‘Follow the developers, let's see what they're doing.’ Because that's a very loud signal,” Wood told Whittemore.

As for Musk, Wood said he would help bitcoin miners to "green" their operations. “This auditing of what miners, certainly in North America, are willing to do around how much of their electricity usage is generated by renewables is going to bring that topic into stark relief. It will encourage an acceleration in the adoption of renewables beyond which otherwise would have taken the place.”

As described in a recent Square-Ark white paper, mining and renewables can grow in tandem, with bitcoin acting as a “battery” to soak up excess electricity produced from intermittent sources like solar and wind, Wood said. In effect, mining can help fund renewables and make solar more attractive to innovation investors including Ark.

Previously the firm didn’t see the potential to make big returns from solar and wind, but now that might change. “I'm actually quite excited about it,” she said.