Stablecoin frenzy fuels steep stock gains that make funds wary
[HONG KONG] Some investors are growing wary over the global stablecoin craze that has driven massive gains in shares of companies linked to the still-emerging technology.
Short bets continue to climb on Circle Internet Group, even as its stock has surged about 500 per cent since its New York debut just three weeks ago. In South Korea, global and local funds dumped shares of Kakaopay as they tripled over the past month.
Such cautious trades buck the rabid retail frenzy seen as governments in the US and elsewhere move towards legitimising stablecoins, which are cryptocurrencies pegged to other assets such as the US dollar. Vocal backing from US President Donald Trump has helped drive the boom despite the wariness of regulators and the financial industry.
'This is reminiscent of the indiscriminate buying of metaverse-related stocks by retail investors in 2020 and 2021,' said SeokKeun Ha, chief investment officer at Eugene Asset Management in Seoul. 'This is essentially a bet on government policy,' and is driven more by sentiment than any real fundamentals.
Stablecoins are gaining momentum as regulatory frameworks develop. The Senate passed stablecoin legislation this month, though it has yet to clear the House. Hong Kong's legislature approved a stablecoin bill in May, while South Korea's new President Lee Jae Myung has pledged to allow the issuance of such tokens by local companies.
In addition to the progress of the Trump-backed Genius Act through Congress, the stellar listing of Circle has been another key event. The company's USDC is the second-largest stablecoin by market share behind Tether, which is operated by an unlisted company based in El Salvador.
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Circle's market cap has expanded to top US$40 billion, already larger than more than half the companies in the S&P 500 Index. The rapid ascent has some traders wagering on a decline, with short interest rising steadily to more than 25 per cent of the free float, according to data from S&P Global.
Seoul-listed shares of Kakaopay are beating all peers in the FTSE Global Fintech & Blockchain Index this year, nearly doubling the gain in Robinhood Markets. While retail investors have piled into the stock, domestic and foreign institutions have been sellers on a net basis.
'Although we recognise the long-term optionality, the opportunity remains at an early stage, with limited visibility on timing and end-user adoption,' Citigroup analysts John Yu and Alicia Yap wrote in a recent note. They rate Kakaopay a sell, 'viewing valuations as stretched'.
Stablecoin-related stock boosts are spreading through global markets, boosting Kakaopay parent Kakao and its rival Naver. Circle peers such as Coinbase Global have climbed in the US. In Hong Kong, small-cap brokerages including Guotai Junan International Holdings and China Everbright have surged on the theme.
Risks remain, however, despite high-profile backing from global leaders such as Trump and Lee. The Bank of Korea has warned that stablecoin adoption could hamper effective monetary policy. The Bank for International Settlements says stablecoins have an 'unclear' future.
While many still see potential for the technology as a means to stabilise transactions and store value in the crypto realm, there are big questions as to whether related stocks have run ahead of themselves. Kakaopay shares dropped 10 per cent on Friday (Jun 27) following a brief suspension as regulators flagged the need for caution on the steep rally.
'Stablecoins are a very important issue, although it's a risky play,' said Cha So-Yoon, an equity investment manager at Taurus Asset Management in Seoul. 'It's actually too early to say whether the stocks are at the right levels or to gauge their valuations, but one way or the other, the stablecoin will be issued and the issuer will be raking in billions while sitting back.' BLOOMBERG
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