Rise in bitcoin fueled the stock market’s largest gains of 2023

Rise in bitcoin fueled the stock market's largest gains of 2023
Rise in bitcoin fueled the stock market's largest gains of 2023

While bitcoin increased by a little over 150% in 2023, Marathon Digital, Coinbase, MicroStrategy, and the Grayscale Bitcoin Trust all saw increases of over 300%.

The stock market proved to be the most profitable wager for cryptocurrency bulls in 2023.

Although bitcoin experienced a year-over-year increase of over 150%, the closely related companies Coinbase, MicroStrategy, and the Grayscale Bitcoin Trust saw significant gains of over 300% in value. Marathon Digital, a bitcoin miner, increased by 688%.

These equities have not only beaten the main cryptocurrency, but they have also been among the top gainers in the entire US market. The four equities linked to bitcoin were among the top eight performers among publicly traded U.S. companies with a market value of at least $5 billion, as reported by FactSet.

The surge in cryptocurrencies is a significant recovery from the collapse of coin values in 2022, which also caused a decline in associated stocks. A year marked by the failure of cryptocurrency lenders, the collapse of hedge funds, and devastating losses at miners was capped in November 2022 by the fall of the cryptocurrency exchange FTX, which resulted in the founder Sam Bankman-Fried’s arrest on fraud charges.

A New York jury last month found Bankman-Fried guilty on seven felony counts, potentially resulting in a life sentence for the former billionaire. A few weeks later, as part of a $4.3 billion settlement with the Department of Justice, Changpeng Zhao, the creator of the cryptocurrency exchange Binance, stood down as CEO and entered into a guilty plea. He might receive a term of at least eighteen months in prison.

Investors were focusing on the future at the time of Bankman-convicted Fried’s and Zhao’s plea agreement, as the damage to the larger cryptocurrency market had mostly been realized. The Federal Reserve’s decision to scale down its interest rate hikes made riskier assets seem more appealing, which was one of the main factors driving the price of bitcoin this year.

The impending bitcoin halving, which is set for May 2024 and occurs every four years, also supported prices. The mining incentive is divided in half during the halving process, which caps the amount of bitcoin available.

The possibility of a burst of bitcoin exchange-traded funds emerging in the new year spurred more buying.

Galaxy Digital CEO Michael Novogratz stated, “It’s just more fuel for a fire.” “Trading in crypto stocks is akin to a frenzy.”

As of Tuesday, the price of bitcoin has risen to $42,683, providing investors who bought at the beginning of the year when it was only worth $16,500 with a huge profit. However, the top cryptocurrency is still 38% behind its November 2021 record high of about $69,000.

The best-performing stock this year among bitcoin-related companies valued at $5 billion or more was Marathon, a mining company that barely surpassed that market cap threshold last week after seeing a 125% increase in December as of Tuesday’s close. The shares increased by another 15% on Wednesday.

By this time last year, Marathon was barely surviving. The company was experiencing a quarter that ended with a nearly $400 million loss on sales of only $28.4 million due to declining bitcoin prices, a power outage at its Montana facility, and Marathon’s financial involvement with Compute North, a bankrupt miner.

Marathon CEO Fred Thiel stated, “It was pretty dire times.”

Because running the supercomputers requires a lot of energy, mining bitcoin is a costly business. Even though producers’ energy bills don’t get much better, a decline in bitcoin prices results in a significant drop in the money they make from selling the coins they mine.

According to Thiel, the business was in a good situation because it could sell its shares and just had a convertible note as debt.

In 2023, things will have drastically improved. Marathon announced last month that its third-quarter net income was $64.1 million, with revenue up $97.8 million over the same period last year. The business is currently growing, and it just revealed that it has paid $178.6 million to acquire its first two completely owned bitcoin mining facilities, one in Nebraska and the other in Texas.

With the acquisitions, Marathon’s mining portfolio grew by 56% to a capacity of 910 megawatts.

“We can run the site the way we want to run it, and we take out the third party’s profit margin by vertically integrating,” Thiel stated. He claimed that a large portion of the technology Marathon has been creating is geared toward boosting efficiency, “which in an up market people will ignore” because high margins come with high pricing.

When bitcoin prices decline in the future, Thiel wants to make sure the business is stable financially. Reducing production costs and developing new avenues for energy sales back to the grid are necessary to achieve this. He also believes that Marathon will soon have far more varied revenue streams thanks to energy harvesting, which is the process of taking methane gas and turning it into usable electricity.

Among the company’s goals by 2028, Thiel said, is to bring bitcoin mining down to 50% of revenue.

“Multiple revenue streams”

Aside from the mining industry, Coinbase has been the best-performing cryptocurrency stock in the United States this year, rising 386% as of Tuesday’s closing. 3.7% was the Wednesday increase.

Coinbase has long been a well-liked option to purchase and trade cryptocurrencies in its native market because it is the only significant publicly traded cryptocurrency exchange in the United States. However, a report from research firm Kaiko in late November stated that Coinbase gained market share during non-U.S. trading hours due to the difficulties at Binance, the biggest exchange in the world.

The development amounted to “a vindication of the long-term strategy that we’ve taken to focus on compliance and make sure we were building a trusted company,” Coinbase CEO Brian Armstrong stated shortly after Zhao’s plea agreement.

When the market was booming in 2021 and ordinary people were buying all kinds of digital currencies, including gimmicks like Dogecoin, Coinbase’s revenue and stock price were still far lower than they were. However, after implementing severe cost-cutting measures beginning last year and continuing until early 2023, the company has stabilized.

In addition to bitcoin, Coinbase provides investors with some additional options. Only 37% of Coinbase’s transaction income in the third quarter came from bitcoin; the remaining 46% came from other crypto assets, ethereum, and 18% from bitcoin. Furthermore, because of rising interest rates, the total revenue from interest and stablecoins (obtained through USDC reserves) more than doubled to $212 million in the most recent quarter.

Less than half of Coinbase’s net revenue now comes from transaction revenue, down from 96% during the company’s 2021 public market launch.

Armstrong stated last week, “We made a big effort around the time we went public to start diversifying our revenue.” We now have a variety of revenue streams, some of which increase in an environment with high interest rates and some of which increase in an environment with low interest rates. This indicates that revenue has begun to stabilize.

The other best-performing cryptocurrency stocks are significantly more linked to bitcoin.

This year, the Grayscale Bitcoin Trust has increased by 330%. The first publicly listed bitcoin fund in the United States, GBTC, entered the over-the-counter market in 2015 and provided investors with a means of passively owning bitcoin. GBTC’s closed-end nature has historically presented investors with difficulties because it is less liquid than an ETF.

GBTC’s market cap was around half the amount of bitcoin it controlled towards the end of last year, during the worst of the cryptocurrency crisis, when its discount to net asset value was close to 50%. That discount had shrunk to 5.6% as of December 22, the lowest level since early 2021. As of right now, the fund has roughly $26.6 billion.

Apart from the current bitcoin rally, GBTC is also benefiting from the possibility that it will receive regulatory approval to become an ETF the following year. This would enable it to trade on a conventional stock exchange and obtain liquidity measures that would better align its market value with its NAV.

Barry Silbert, the CEO of parent company Digital Currency Group, is leaving the board and stepping down as chairman of Grayscale Investments, effective January 1, according to a regulatory filing made by Grayscale on Tuesday. There was no explanation given for his departure. DCG’s chief financial officer, Mark Shifke, will take over as chairman in his place.

Large investors show up.

In addition to holding formal discussions with other asset managers regarding the launch of bitcoin ETFs, the Securities and Exchange Commission met with Grayscale in November.

The commencement of such sessions followed an August ruling by an appeals court in favor of Grayscale in a dispute against the regulator, which had objected to the company’s initiatives on the grounds that investors would not receive enough protection. Some big money managers have started to establish their own funds, including Invesco, Fidelity Investments, and BlackRock.

The “hopeful approval” for ETFs, according to Grayscale CEO Michael Sonnenshein, will attract new players, particularly investment advisors who manage almost $30 trillion in the United States but are subject to buying limitations.

According to Sonnenshein, “my team’s court victory unlocked a lot of optimism among investors about GBTC and the prospects for it to uplist as a spot bitcoin ETF.” “As the year draws to a close, I know the investment community is focusing a lot on that.”

Since there isn’t yet an accessible ETF, a lot of investors have flocked to MicroStrategy to purchase bitcoin.

MicroStrategy, which was initially founded in 1989 as a provider of business intelligence software, now derives the majority of its value from the 174,530 bitcoins it possessed as of the end of November, which are currently valued at $7.4 billion. This year, the stock has increased by 327%, bringing the company’s market value to $8.3 billion. In the third quarter, its software and services division brought in over $130 million in revenue.

The business reported in a regulatory filing on Wednesday that it had added 14,620 bitcoins between November 30 and December 26 for a total of $615.7 million, increasing its total to 189,150. Stock increased by 11%.

In mid-2020, MicroStrategy declared during an earnings call that it would allocate $250 million to “one or more alternative assets,” perhaps including digital currencies such as bitcoin, over the course of the following year. The company had a market capitalization of roughly $1.1 billion at the time.

MicroStrategy paid $425 million for 38,250 bitcoins in the third quarter of 2020.

During the October 2020 earnings call, Phong Le—who was promoted from CFO to CEO last year—stated that MicroStrategy was able to “tap into the passion of the broader crypto market” thanks to its bitcoin investment and that “we’ve seen a notable and unexpected benefit from our investment in bitcoin in elevating the profile of the company.”

MicroStrategy has gained notoriety as a bitcoin proxy ever since. One of the main proponents of cryptocurrencies is co-founder and former CEO Michael Saylor, who co-wrote the book “What is Money?” last year.

Saylor stated that “the one thing that we can count on is that bitcoin goes forward in the year 2024, and a strategy built around bitcoin is generally a pretty safe one for institutions.”” Education has an impact. Adoption within institutions has an impact. This is fantastic news about the spot ETF. The monetary policy’s loosening is welcome news.

Saylor is also upbeat about a mark-to-market accounting rule that would alter how businesses record cryptocurrency holdings and is scheduled to take effect in 2025 (though businesses may choose to implement it sooner). Cryptocurrency will be in a different category, and corporations will mark it up or down depending on where it’s trading, rather than being categorized as intangible assets that must be marked down if the value decreases below the purchase price.

According to Saylor, the new law encourages businesses with cash on hand totaling billions of dollars to invest a portion of that sum in bitcoin.

For those who have invested in bitcoin, this has been a profitable year, but it has also been extremely painful.

According to the data released, investors who took a punt on a decline in stock prices and were short sellers have lost a total of $6.3 billion on their holdings against Coinbase, MicroStrategy, and Marathon. According to the company, cryptocurrency shorts purchased the stocks for $2.19 billion in the first three quarters of the year in order to lower their exposure.

There’s still a good deal of mistrust. Whereas MicroStrategy’s short interest-to-float ratio is roughly 21% and Coinbase’s is 14%, over 23% of Marathon’s trading shares are sold short. S3 reports that the average for U.S. stocks is 5%.

However, there is still risk for bitcoin believers.

New investors are entering a historically turbulent market, while enthusiasts like Saylor are wagering on the asset’s long-term appreciation as a store of value and a hedge against inflation.

When bitcoin declined by over 60% in 2022, MicroStrategy, GBTC, and Coinbase all saw at least 74% declines. 90% of Marathon’s worth was gone, and some of its competitors went out of business.

Despite the prospect of a more stable climate in 2023, prominent opponents of cryptocurrency remain, such as Jamie Dimon, CEO of JPMorgan Chase, who stated before the Senate Banking Committee earlier this month that “the only true use case for it is criminals, drug traffickers, money laundering, and tax avoidance.”

“It should be shut down if I were the government,” he declared.

However, with more institutional money pouring into bitcoin as an investment vehicle, that possibility appears to be dwindling. Citing positive sentiment and the impending bitcoin halving, BTIG analysts raised their price objective for MicroStrategy to $690 from $560 in mid-December.

The analysts stated that they anticipated more regulatory certainty surrounding bitcoin with the introduction of a spot BTC ETF. This should make large institutional investors, such as insurance firms, feel more comfortable investing in bitcoin.

Novogratz of Galaxy Digital states that “generally we’re still in the bull market phase” and highlights the intrinsic and ongoing scarcity of bitcoin. In addition to predicting that bitcoin will surpass its all-time high the next year, Novogratz asserts that, among reputable investors, “I can give you 50 of them on the other side of the table from Jamie Dimon.”

With so much momentum coming from cryptocurrency traders, Novogratz warns that things could flip around and lead to a correction in the near future.

“It feels so good that I’m a little nervous about it,” he admitted.

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