How cryptocurrency is shaking up financial markets and what’s next
In the last four months, cryptocurrency has become a key part of traditional finance. Digital assets are now a key part of banks and stock markets, generating billions in profits. However, this rapid evolution is complex, with new risks for investors and regulators.
The pace of change has been breathtaking, making it difficult for many to keep up. To help you navigate this landscape, we’ve analysed the major trends fueling this crypto boom. We’ll also highlight what to watch as the year progresses: Will stablecoins solidify their role or face challenges? Will more crypto trading go to traditional stock markets, or will stocks go to crypto exchanges? And can this impressive growth continue?
A significant factor behind these developments has been a shift in the regulatory environment, moving towards a more structured approach and paving the way for the first dedicated cryptocurrency legislation. This shift has led to explosive growth in crypto products, trading mechanisms, and investment strategies, affecting the stock market, banking, and fintech sectors. Let’s break down the specifics.
Stablecoin legislation: A game changer?
What’s happening: Last July was a turning point for stablecoins when important new laws were introduced. For those unfamiliar with the term, stablecoins are essentially the crypto world’s answer to cash – digital tokens on a blockchain designed to maintain a stable value, typically pegged 1:1 to the US dollar. They are stable because they are backed by easy-to-sell assets like cash and short-term US government bonds. This makes them the easiest way to connect the traditional financial system and the growing crypto economy. While they are similar to money market funds, they usually don’t offer interest. Today, most crypto traders use them for on-chain storage, collateral, or quick international payments.
Why it matters: This new law will make stablecoins more popular. This newfound popularity has made it interesting to banks, fintech innovators, and payment giants, who are all looking into how stablecoins could make transactions faster and cheaper than traditional wire transfers. It’s especially useful in developing markets, where people and businesses are already using stablecoins linked to the dollar to deal with inflation, deal with unstable local currencies and receive important money sent from other countries.
But this isn’t a story that has only one side to it. The increased demand for US Treasuries that back stablecoins is a notable effect. But widespread stablecoin use could also mean that investors will move their money away from traditional banks. This might mean that banks have less money to lend, which could have a negative effect on the wider economy.
What’s next: The regulatory journey is far from over. In the next few months, there will be a lot of discussions as the people who make the rules work out the details of how stablecoins will be regulated. Big companies in the crypto and traditional financial worlds are both pushing hard to have their views heard. A major sticking point? We want to know if crypto platforms can make money for people who have stablecoins. Banking groups are against this, saying it will threaten their business. But people who support crypto argue that it is important for competition. Another important cryptocurrency bill, called the “Clarity Act”, is going to Congress. If it is passed, it will create a new set of rules for digital assets. This could have a big effect on the rules for stablecoins.
The stablecoin floodgates have opened
What’s happening: For a long time, the stablecoin world was largely a duopoly, dominated by Tether’s USDT (boasting a staggering $171 billion in circulation) and Circle’s USDC (valued at $74 billion). But those days are quickly fading. We’re witnessing an explosion of new stablecoins, with countless more in the pipeline. Startups, traditional banks, and fintech behemoths are all jumping into the fray, either minting their own dollar-backed stablecoins or integrating existing ones into their offerings.
Take Stripe, for example. Stripe is a company that helps other businesses to make and receive payments. It is launching a new blockchain called “Tempo” that is designed for stablecoin transactions, such as payroll and international payments. Big financial companies like BNY and Morgan Stanley are now offering clever asset management services to support stablecoins, while JPMorgan is leading the way with “deposit tokens” – digital representations of customer bank deposits on the blockchain.
Traditionally, crypto exchanges have been the main stablecoin issuers, meaning they have a lot of power in the market. Things are changing. A recent and well-known bidding process by the very successful startup exchange Hyperliquid, which allowed users to vote for their preferred stablecoin issuers, caused a stir in the industry. This kind of competition could mean that everyone tries to offer the cheapest stablecoin, which might mean that the profit margins for the companies offering stablecoins get smaller.
Why It matters: The broader acceptance of stablecoins means they’re becoming increasingly viable for everyday payments to merchants, efficient cash management for global corporations, and streamlined interbank settlements. Even smaller lenders, such as Cross River Bank, are now exploring the direct acceptance of stablecoins from their fintech partners.
However, this rapid proliferation isn’t without its dangers. A surge in stablecoins also heightens the risk of crypto market volatility spilling into traditional finance. Should a major stablecoin face a significant collapse, it could trigger a crisis of confidence, leading investors to flee other stablecoins. This “flight to safety” could, in turn, spark a sell-off of the underlying US Treasuries that underpin these assets and, by extension, the US economy itself.
What’s next: The established giants, Tether and Circle, are now under immense pressure from a new wave of competitors looking to carve out their own market share. Tether, for its part, is already responding by launching a new US token specifically designed to comply with the latest stablecoin legislation. The intricate details of these new stablecoin rules, alongside the evolving terms of cooperation between platforms and issuers, will ultimately determine whether this segment remains a highly profitable frontier or transitions into a commoditized business where only the biggest players can truly thrive.
Crypto goes public: the IPO frenzy
What’s happening: The past few months have seen a remarkable parade of cryptocurrency companies making their debut on public stock markets, often to spectacular gains. High-profile names like stablecoin issuer Circle, blockchain lender Figure, and crypto platforms Gemini and Bullish have all witnessed significant surges on their initial listing days. This wave of successful public offerings is, in part, attributed to a noticeable shift within the US Securities and Exchange Commission (SEC), which appears to have adopted a more accommodating stance towards crypto companies seeking IPOs, effectively giving them the green light.
Why It matters: The sheer enthusiasm from public markets for these crypto ventures has taken even seasoned industry insiders by surprise. Circle, for example, saw its stock price skyrocket an astonishing 358% above its IPO price back in June. Even smaller, less profitable exchanges, like Gemini, experienced initial stock price bumps, though it’s worth noting that Gemini’s stock has since dipped below its initial public offering price.
A crucial point here is that many of these newly public companies fundamentally hinge their success on volatile cryptocurrency trading volumes. This effectively transfers some of the inherent industry risk directly onto traditional stock exchanges and their investors. It’s a sobering thought, particularly when considering that the catastrophic collapse of crypto exchange FTX, less than three years ago, seems to have faded from many investors’ memories.
What’s next: There are many crypto firms looking to go public. We can expect more major players to prepare for their own public debuts, including crypto exchanges Kraken and OKX, custodian BitGo, and asset manager Grayscale, with some potentially launching as early as this year.
But the ambition doesn’t stop there. While these IPOs bring crypto companies to stock exchanges, the crypto industry’s next big goal is to bring traditional stocks onto crypto exchanges. The plan is to turn stocks into crypto tokens using blockchain technology. This will allow people to invest in well-known companies like Tesla, Nvidia, and Circle. Companies like Robinhood, Kraken and Galaxy Digital are promoting the idea of tokenised stocks, especially to people using crypto in other countries who might find it hard to buy stocks in the US.
When stocks catch the crypto bug: a dizzying hybrid
What’s happening: Perhaps one of the most intriguing – and at times, bewildering – trends is the convergence of “meme stocks” with speculative cryptocurrencies. This unusual fusion really kicked off with Strategy (formerly Microstrategy), a publicly traded software company that made headlines by scooping up an astounding $75 billion worth of Bitcoin. In doing so, it effectively transformed itself into a direct proxy for crypto performance within the traditional stock market.
This strategy has since spread like wildfire, particularly among smaller-cap stocks. These companies are now actively vying to become investment vehicles for a dizzying array of tokens, from established giants like Ethereum and Solana to more speculative assets such as Dogecoin and others. According to insights from crypto advisory firm Architect Partners, over 130 US-listed companies have, this year alone, announced intentions to raise more than $137 billion specifically for cryptocurrency purchases.
Why It matters: This trend translates into a surge of new, crypto-related stock issuances, often structured through intricate private financing deals. A common pattern sees these stocks experiencing an initial, dramatic surge upon trading, creating opportunities for early crypto token holders to offload them at inflated prices to eager stock market investors.
However, this isn’t necessarily a boon for the average investor. Architect Partners’ analysis of 35 such stocks revealed a concerning average return of -2.9% since their crypto purchase plans were announced. Even more starkly, on their very first trading day post-announcement, these stocks typically plunged by an average of 20.6%. It’s a stark reminder that chasing quick gains can lead to significant losses.
What’s next: Many of these “crypto stocks,” Strategy being a prime example, currently boast market capitalizations that wildly outstrip the actual value of the cryptocurrencies they hold. This disparity largely stems from investors enthusiastically chasing the “meme coin” craze. This strong investor demand has allowed these companies to efficiently raise capital and, in turn, acquire even more cryptocurrencies.
But cracks might be starting to show. The ratio of these companies’ market capitalization to their crypto holdings is beginning to shrink. Should this trend continue, it could make it increasingly difficult for them to raise fresh capital, potentially forcing them to halt their cryptocurrency acquisitions. In essence, the very factors that propelled these stock prices upward could soon begin to reverse. Meanwhile, Nasdaq is reportedly stepping up its scrutiny of these unique issuances, in some cases even requiring shareholder approval, signaling a growing caution in the market.
