Cryptocurrency Integration Drives 358% Stock Surge, New Risks Emerge

In recent months, the landscape of the American financial market has been significantly disrupted by the integration of cryptocurrencies. This disruption is evident in four key trends: legislative recognition of stablecoins, the surge in new stablecoins, the IPO boom among cryptocurrency companies, and the strategic allocation of cryptocurrency assets by traditional stock companies. These trends have not only generated billions of dollars in profits for the industry but have also introduced new risks for investors and regulators.

In July, the first piece of legislation specifically addressing cryptocurrencies was signed into law by the President. This law provided a legal framework for stablecoins, which are blockchain-based tokens pegged one-to-one with fiat currencies like the US dollar. Stablecoins maintain their value through the holding of liquid assets such as cash and short-term US Treasury bonds, functioning similarly to money market funds. This legislative breakthrough has significantly enhanced the legitimacy of stablecoins, paving the way for their broader application.

Following this legislation, banks, fintech companies, and payment giants have begun exploring the potential of stablecoins to reduce transaction costs and enhance efficiency. In some emerging markets, dollar-pegged stablecoins are already being used to hedge against inflation and currency volatility. This trend could boost demand for US Treasury bonds, which are a primary reserve asset for stablecoins. However, the widespread adoption of stablecoins could also divert deposits from traditional banks, potentially impacting their lending capabilities.

As the stablecoin market expands, it is no longer dominated by a few major players like Tether's USDT and Circle's USDC. New entrants, including startups, banks, and fintech giants, are either launching their own stablecoins or integrating with existing ones. This increased acceptance is opening up new applications for stablecoins in areas such as merchant payments, cross-border financial management, and interbank settlements. However, the influx of new participants has also intensified competition, as seen in the recent bidding process by the emerging cryptocurrency exchange Hyperliquid, which could compress the profits of stablecoin issuers.

Moreover, the proliferation of stablecoins raises the risk of market volatility spilling over into the traditional financial system. The collapse of any single stablecoin could trigger a crisis of confidence, leading to a run on other stablecoins and ultimately causing a sell-off of US Treasuries, which are a cornerstone of global financial markets.

In parallel, the cryptocurrency industry is experiencing an IPO boom. Companies like Circle, Figure, Gemini, and Bullish have seen their stock prices surge on their first day of trading. This trend is driven by a more favorable regulatory environment, with the Securities and Exchange Commission (SEC) under the current administration being more open to cryptocurrency-related IPOs. The public market's enthusiasm for these companies has exceeded expectations, with Circle's stock price, for example, rising by 358% since its June IPO. However, this enthusiasm also means that the risks associated with the cryptocurrency industry are being transferred to stock exchanges. The valuations of these companies are often tied to the volatile trading volumes of cryptocurrencies, and investors seem to have forgotten the lessons from the collapse of the cryptocurrency exchange FTX less than three years ago.

This IPO wave is expected to continue, with companies like Kraken, OKX, BitGo, and Grayscale preparing to go public, with some expected to complete the process by the end of the year. Additionally, the cryptocurrency industry is pushing for the next big goal: tokenizing stocks and trading them on cryptocurrency exchanges. Companies like Robinhood, Kraken, and Galaxy Digital have already begun preliminary efforts to promote tokenized securities representing stocks in companies like Tesla and Nvidia to overseas users who may not have access to the US market.

Another surprising trend this summer has been the fusion of "MEME stocks" with speculative cryptocurrencies. Software manufacturer Strategy, formerly known as Microstrategy, pioneered this approach by purchasing 750 billion worth of Bitcoin, effectively transforming itself into a Bitcoin proxy in the stock market. This strategy is now being replicated by numerous small-cap companies. According to data from the cryptocurrency consulting firm Architect Partners, over 130 US-listed companies have announced plans to raise over 137 billion to purchase a variety of cryptocurrencies, including Ethereum, Solana, Dogecoin, and even the World Liberty token issued by the Trump family. However, this strategy has not yielded positive returns for secondary market investors. As the hype cools, the market capitalization of these companies has begun to decline relative to the value of their held cryptocurrencies, weakening their ability to continue raising funds to purchase more cryptocurrencies. Meanwhile, Nasdaq is tightening its scrutiny of such financing activities, in some cases requiring shareholder approval. The factors that once drove stock prices higher may now be starting to have the opposite effect.