Signs of cooling emerge in the red-hot stock trading of cryptocurrency

By: Yueqi Yang

Translation: Block unicorn

Stocks of companies like Michael Saylor's Strategy, which primarily hold cryptocurrencies such as bitcoin, are showing signs of strain in the stock market. These stocks have become a very popular way for investors to speculate on bitcoin and, more recently, some even more exotic cryptocurrencies.

Valuations of Strategy and other firms—including bitcoin holder Semler Scientific and Solana holder Upexi—have declined, with companies holding more speculative tokens seeing sharp drops, some even falling below the value of their crypto holdings. The structure of these companies, along with the use of leverage by some, means sell-offs could accelerate rapidly.

"There are signs the market is a bit tired," said Steve Kurz, head of global asset management at Galaxy Digital. "I don't think it's lost momentum. There will be differentiation going forward, with winner-take-all dynamics across different verticals."

More than 160 such stocks globally, including Strategy, are now known as crypto inventory stocks, allowing investors exposure to cryptocurrencies without directly purchasing tokens. In this regard, they resemble cryptocurrency exchange-traded funds (ETFs), which have gained popularity since their launch in the U.S. in early 2024.

Although Strategy has been buying bitcoin for years, surging crypto prices have triggered a wave of new launches. According to data from crypto advisory firm Architect Partners, U.S. public companies have announced plans so far this year to raise over $91 billion to buy bitcoin and other cryptocurrencies.

This far exceeds the $38 billion U.S. companies raised through initial public offerings this year, according to Dealogic. Meanwhile, fundraising in private equity and private credit has slowed.

"These digital asset vehicles have overshadowed everything else," said Cosmo Jiang, general partner at crypto fund Pantera, which has invested hundreds of millions of dollars into more than 10 crypto inventory stocks this year. "It's almost the only thing people talk about."

Large investors continue to pour money into these vehicles. Hedge fund Citadel, founded by Ken Griffin, is among the firms actively considering investments in select crypto inventory stocks, according to people familiar with the matter. Billionaire investor Stanley Druckenmiller and Cathie Wood’s Ark Invest recently invested in Ethereum-focused inventory stock BitMine, filings and announcements show.

A representative for Citadel declined to comment.

Signs of slowdown are evident when looking at Strategy’s stock (formerly MicroStrategy). A pioneer in the crypto inventory space, Strategy now holds $73 billion worth of bitcoin. In May, its shares traded at two times the value of its bitcoin holdings. Now, it trades at 1.75 times that value.

Strategy’s imitators have also broadly declined over the past two weeks, wiping out premiums or pushing share prices below the value of their crypto holdings, according to data from Blockworks.

The decline in stock premiums is due to reduced summer trading volumes and an increasing number of such products, said Josh Salisbury, vice president at ParaFi.

Hyperion DeFi (formerly Eyenovia, a biopharma stock) began purchasing Hyperliquid tokens in June. Hyperliquid is the namesake token of one of the fastest-growing cryptocurrency exchanges. Hyperion currently has a market cap of $30.5 million, despite holding nearly $60 million worth of Hyperliquid tokens based on current prices. Since rebranding as HYPD and changing its ticker on July 2, Hyperion’s share price has dropped 62%.

When these companies trade at premiums above their assets, raising capital is easy—but the opposite occurs when they trade at discounts. This makes it difficult to raise funds to buy more crypto. In such cases, declines in the value of underlying tokens like Hyperliquid could further depress company share prices.

Companies holding popular tokens like bitcoin have significantly outperformed those holding smaller ones. According to data compiled by Architect Partners, crypto inventory stocks holding bitcoin, ether, or Solana tokens have delivered a median return of 92.8% since their respective announcements.

In contrast, the group of crypto inventory stocks investing in less popular tokens posted a median return of negative 24%.

Market weakness could reduce profits for crypto asset managers like Pantera, Hivemind, ParaFi, and Galaxy Digital. These firms invest privately in companies planning to buy crypto before public announcements. Such deals almost always generate gains, as stocks typically rise after announcements.

The rise of crypto inventory stocks increases the link between traditional markets and crypto, potentially adding volatility to equities. "As this integration deepens, traditional stock investors will face more risks than they’ve seen before," said Matt Zhang, founder of Hivemind. "They may not yet be accustomed to certain tokens dropping 15% in a day—a common occurrence in crypto."

Nic Carter, founding partner at crypto venture firm Castle Island Ventures, said the firm has avoided investing in crypto inventory stocks. "We see reputational risk in businesses that are essentially zero-sum, where returns primarily come from leverage or retail shareholders buying in at unfavorable prices."