Crypto's hot stock trading is showing signs of cooling

Written by: Yueqi Yang

Compiled by: Block unicorn

Cracks are emerging in the stock markets of companies like Michael Saylor's Strategy, which primarily holds cryptocurrencies like Bitcoin. These stocks became a very popular way for investors to speculate on Bitcoin and, more recently, some of the more exotic cryptocurrencies.

Strategy, as well as other companies, including Bitcoin holder Semler Scientific and Solana holder Upexi, have seen their valuations decline, while companies with more speculative tokens have seen significant declines, with some even falling below the value of their cryptocurrency holdings. The structure of these companies, as well as the leverage used by some of them, means that the sell-off can accelerate quickly.

Steve Kurtz, head of global asset management at Galaxy Digital, said: "There are some signs of fatigue in the market. I don't think it has lost momentum. There will be differentiation in the future, and there will be a winner-takes-all situation in different verticals."

More than 160 such stocks worldwide, such as Strategy, are now known as crypto treasury stocks, allowing investors to gain exposure to cryptocurrencies without directly purchasing the token. In this regard, they resemble cryptocurrency exchange-traded funds (ETFs) that have become popular since their launch in the United States in early 2024.

Although Strategy has been buying Bitcoin for years, the soaring cryptocurrency price has sparked a boom in new products. According to crypto consulting firm Architect Partners, publicly traded U.S. companies have announced plans to raise more than $91 billion to purchase Bitcoin and other cryptocurrencies so far this year.

According to Dealogic, this far exceeds the $38 billion raised by U.S. companies through initial public offerings this year. At the same time, fundraising activity in private equity and private credit has slowed this year.

Cosmo Jiang, general partner of crypto fund Pantera, said: "These digital asset instruments have stolen the limelight from all other areas. That's pretty much the only thing people talk about." This year, Pantera has invested hundreds of millions of dollars in more than 10 crypto treasury stocks.

Large investors are still pouring money into these instruments. Citadel, a hedge fund founded by Ken Griffin, is one of the companies actively considering investing in select crypto treasury stocks, according to people familiar with the matter. Billionaire investors Stanley Druckenmiller and Kathy Wood's Ark Invest recently invested in Ethereum treasury stock BitMine, as evidenced by a filing and announcement.

Representatives for Citadel declined to comment.

Signs of slowdown are evident when looking at Strategy's (formerly MicroStrategy) stock. As a pioneer in the cryptocurrency inventory market, Strategy now holds $73 billion worth of Bitcoin. In May, its shares traded at 2 times the value of its Bitcoin holdings. It is now trading at 1.75 times its Bitcoin holdings.

According to Blockworks, Strategy's copycats have also generally declined over the past two weeks, erasing premiums or lowering the value of their cryptocurrency holdings in some cases.

ParaFi Vice President Josh Salisbury said the stock premium has decreased due to lower trading volume over the summer and an increase in the number of products.

Hyperion DeFi, formerly Eyenovia's biopharmaceutical stock, began buying hyperliquid tokens in June. Hyperliquid is the token of the same name from one of the fastest-growing cryptocurrency exchanges. Hyperion currently has a market cap of $30.5 million, although its HyperLiquid token holdings are worth nearly $60 million based on the current token price. Since changing its name to HYPD on July 2 and changing its ticker symbol, Hyperion's stock price has fallen by 62%.

Raising capital is easy when these companies trade at a premium over their assets – but the opposite is true when they trade at a discount. This makes it difficult for them to raise funds to buy more cryptocurrencies. In this case, a decrease in the value of the underlying token like Hyperliquid could further depress the company's stock price.

Companies holding popular tokens like Bitcoin have fared better than smaller ones. According to Architect Partners, cryptocurrency treasury stocks holding Bitcoin, Ethereum, or Solana tokens have a median return of 92.8% since their respective announcements.

In contrast, the crypto treasury group invested in less popular tokens had a median return of negative 24%.

Market weakness could reduce gains for crypto asset managers like Pantera, Hivemind, ParaFi, and Galaxy Digital. These companies invest in companies that plan to buy cryptocurrencies through private placements before the stock announces its plans. These trades almost always yield gains, as stocks typically rise after announcements.

The rise of crypto treasury stocks has increased the connection between traditional markets and cryptocurrencies, potentially adding volatility to stocks. Matt Zhang, founder of Hivemind, said: "As this consolidation deepens, traditional equity investors will face more risks than they have seen before. They may not be used to certain tokens falling 15% in a day, which happens a lot in the crypto space."

Nic Carter, a founding partner at crypto venture capital firm Castle Island Ventures, said the company has been avoiding investing in crypto treasury stocks. "We believe that there is a certain reputational risk in companies that are inherently zero-sum games, and the returns of such companies mainly come from leveraging or retail shareholders buying at unfavorable prices."