On Wednesday (December 27), for cryptocurrency bulls, these related stocks soared and significantly outperformed Bitcoin as the price of Bitcoin soared in 2023.
U.S. cryptocurrency exchange Coinbase, enterprise software company MicroStrategy (MSTR) and Grayscale Bitcoin Trust, which are betting on Bitcoin, have all risen more than 350% over the same period, while Bitcoin mining stock Marathon Digital has soared 688%. Bitcoin has risen about 160% in 2023.
Not only have these stocks outperformed the major cryptocurrencies, they’ve also been among the biggest gainers in the entire U.S. market. The four bitcoin-related stocks are among the eight best-performing stocks among U.S.-listed companies with a market value of at least $5 billion, according to FactSet.
The cryptocurrency boom represents a major rebound from 2022, when cryptocurrency prices plummeted and related stocks fell with them. A year highlighted by hedge fund collapses, crypto lender closures and severe losses among miners came in November 2022, when cryptocurrency exchange FTX fell into bankruptcy, leading to the arrest of founder Sam Bankman-Fried on fraud charges.
Last month, a New York jury convicted Bankman-Fried of seven criminal counts, and the 31-year-old former billionaire could face life in prison. Weeks later, Zhao Changpeng, founder of cryptocurrency exchange Binance, pleaded guilty and resigned as the company's CEO as part of a $4.3 billion settlement with the Justice Department. He could face 18 months or more in prison.
By the time Bankman-Fried was convicted and Zhao Changpeng reached a plea agreement, the damage to the broader cryptocurrency market had largely been realized and investors were looking to the future. One of the biggest drivers of Bitcoin this year has been the easing of Federal Reserve rate hikes, which has created a more attractive case for risk assets.
The upcoming Bitcoin halving, which takes place every four years and is scheduled for May 2024, also boosted prices. During the halving, mining rewards are cut in half, limiting the supply of Bitcoin. A host of Bitcoin exchange-traded funds (ETFs) are also likely to appear in the new year.
“This just adds fuel to the fire,” said Michael Novogratz, CEO of Galaxy Digital. “The trading in crypto stocks is almost frenetic.”
As of Tuesday, Bitcoin had climbed to $42,683, a big win for investors who bought in at the beginning of the year, when the price was around $16,500. But the leading cryptocurrency is still 38% below its all-time high of nearly $69,000 reached in November 2021.
Among companies closely tied to bitcoin and valued at $5 billion or more, the best-performing stock this year is Marathon, a mining company that surged 125% in December through Tuesday’s close. On Wednesday, the stock jumped another 15%.
This time last year, Marathon was on the ropes. The company ended the quarter with a loss of nearly $400 million and sales of just $28.4 million, due to a collapse in the price of Bitcoin, a power outage at its Montana facility, and Marathon’s financial exposure to bankrupt miner Compute North.
“It was a very difficult time,” Marathon Chief Executive Fred Thiel said in an interview last week.
Bitcoin mining is an expensive operation because of the high energy costs of running supercomputers. The falling price of Bitcoin means that producers have drastically less money to sell the bitcoins they mine, even though they get little relief from their energy bills.
Thiel said the company was able to sell equity and was fortunate not to have any debt other than convertible notes.
Things have improved dramatically in 2023. Last month, Marathon reported a third-quarter net profit of $64.1 million, with revenue jumping to $97.8 million from the same period a year earlier. The company is currently in expansion mode, announcing last week that it would spend $178.6 million to purchase its first two wholly-owned Bitcoin mining farms, one in Texas and one in Nebraska.
The acquisition increases the size of Marathon’s mining portfolio by 56% to 910 megawatts of capacity.
“By vertically integrating, we can take away third-party margins, and we can run the site the way we want,” Thiel said. Much of the technology Marathon has been developing is focused on improving efficiency, “which people lose sight of at the high end” because high prices come with high margins, he said.
Thiel is trying to ensure the company is on good financial footing the next time bitcoin prices fall. That means reducing production costs and creating more ways to sell energy back to the grid. He is also optimistic that through energy harvesting — turning methane gas into saleable electricity — Marathon will eventually have a more diversified revenue stream.
Thiel said one of the company's goals is to reduce bitcoin mining to 50% of revenue by 2028.
“Multiple Streams of Income”
Outside of the mining sector, the best performing cryptocurrency stock in the U.S. this year is Coinbase, which has surged 386% as of Tuesday’s close. It was up 7.7% on Wednesday.
As the only major publicly traded cryptocurrency exchange in the U.S., Coinbase has long been a popular way to buy and trade cryptocurrencies in its domestic market. But as Binance, the world’s largest exchange, struggles, Coinbase’s market share during non-U.S. trading hours has risen, according to a report from research firm Kaiko in late November.
Shortly after Zhao Changpeng reached a plea agreement, Coinbase CEO Brian Armstrong said the news “validates our long-term strategy of focusing on compliance and ensuring we are building a company that can be trusted.”
Coinbase’s revenue and stock price remain well below levels seen during the heyday of cryptocurrency trading in 2021, when retail investors piled into the market for a variety of digital currencies, including gimmicks like Dogecoin. But the business has stabilized after deep cost-cutting measures that began last year and continued through early 2023.
Coinbase also offers investors some diversity beyond Bitcoin. In the third quarter, Bitcoin accounted for only 37% of Coinbase's trading revenue, while Ethereum accounted for 18% and other crypto assets accounted for 46%. In addition, interest income and stablecoin income (earned through USDC reserves) more than doubled to $212 million in the most recent quarter due to rising interest rates.
Trading revenue now accounts for less than half of Coinbase’s net revenue, down from 96% at the time of the company’s 2021 public market debut.
“We made a big effort when we went public to start diversifying our revenue,” Armstrong said in an interview last week. “Now we have multiple revenue streams, some that go up in a high-rate environment, some that go up in a low-rate environment. That means the revenue starts to become a lot more predictable.”
The other top-performing stocks in the cryptocurrency space are more closely tied to Bitcoin.
Grayscale Bitcoin Trust has risen 330% this year. GBTC entered the over-the-counter market in 2015 and became the first publicly traded Bitcoin fund in the United States, providing investors with a way to passively hold Bitcoin. The challenge for investors in the past is that GBTC is a closed-end fund, which makes it less liquid than ETFs.
Late last year, during crypto’s darkest days, GBTC traded at a discount of nearly 50% to its net asset value, meaning its market value was about half the value of the Bitcoin it owned. As of Dec. 22, that discount had narrowed to 5.6%, the lowest since early 2021. The fund now owns about $26.6 billion worth of Bitcoin, with a market value of $24.7 billion.
In addition to bitcoin’s gains this year, GBTC has been boosted by the prospect of receiving regulatory approval to convert into an ETF next year, a move that would allow it to be traded through traditional stock exchanges and gain a measure of liquidity that would bring its market value more in line with its net asset value.
Grayscale said in a regulatory filing on Tuesday that Barry Silbert, CEO of parent Digital Currency Group, will resign as chairman of Grayscale Investments and leave the board of directors, effective Jan. 1. No reason for his departure was provided. DCG finance chief Mark Shifke will replace him as chairman.
Since there has been no available ETF to date, many investors have flocked to MicroStrategy as a way to buy Bitcoin.
Founded in 1989, MicroStrategy is a business intelligence software company that derives most of its value from the 174,530 bitcoins it held as of the end of November, currently worth $7.4 billion. The stock has risen 327% this year, giving the company a market value of $8.3 billion. Its software and services business had sales of about $130 million in the third quarter.
The company said in a regulatory filing on Wednesday that it bought an additional 14,620 bitcoins for $615.7 million between Nov. 30 and Dec. 26, bringing its total to 189,150 bitcoins. The stock rose 11%.
MicroStrategy announced plans to invest in Bitcoin in mid-2020, revealing in an earnings call that it would invest $250 million in "one or more alternative assets" over the next 12 months, which could include digital currencies such as Bitcoin. At the time, the company's market value was approximately $1.1 billion.
In the third quarter of 2020, MicroStrategy acquired 38,250 bitcoins with a total value of US$425 million.
Phong Le, who was promoted from CFO to CEO last year, said in an October 2020 earnings call that MicroStrategy's investment in Bitcoin allowed it to "tap into the enthusiasm of the broader cryptocurrency market," adding, "We have seen significant growth and our investment in Bitcoin has had the unexpected benefit of enhancing the company's profile."
Since then, MicroStrategy has been known as a Bitcoin broker. Co-founder and former CEO Michael Saylor is one of the main evangelists for cryptocurrency and even co-authored a book on the subject last year titled (What is Bitcoin?)
“One thing we can count on is that Bitcoin will move forward in 2024, and strategies built around Bitcoin are generally pretty safe for institutions to use,” Saylor said in an interview Dec. 18. “Education makes a difference. Institutional adoption makes a difference. The spot ETF news is good news. Easing monetary policy is good news.”
Big investors join the party
The SEC met with Grayscale in November and has been in formal contact with other asset managers about issuing a Bitcoin ETF.
The meetings come after an appeals court in August sided with Grayscale in a lawsuit against regulators, which opposed the company’s efforts over concerns that investors lacked adequate protections. Other large money managers, such as BlackRock, Fidelity Investments and Invesco, have taken steps to create their own funds.
Grayscale Chief Executive Michael Sonnenshein said last week that the “hopeful approval” of an ETF would bring in new players, most notably investment advisers, who manage about $30 trillion in the U.S. but are restricted on what assets they can buy.
“When my team had its victory in court, I think it definitely fueled investor optimism about GBTC and its prospects for listing as a spot bitcoin ETF,” Sonnenshein said. “As we head into the new year, I know the investment community is paying close attention to this.”
Saylor is also optimistic about mark-to-market accounting rules that will take effect in 2025 (although companies can choose to adopt them earlier) and will change the way companies record crypto assets. Rather than being classified as intangible assets, which must be discounted if the value is less than the purchase price, cryptocurrencies will fall into a separate category that companies will mark up or down depending on where they are traded.
Saylor said the new measure provides an incentive for companies with billions of dollars in cash on their balance sheets to put some of that money into Bitcoin.
It’s been a great year for Bitcoin bulls, but equally painful for bears.
Short sellers, or investors who bet on falling stock prices, lost a combined $6.3 billion on positions in Coinbase, MicroStrategy and Marathon, according to data provided last week by S3 Partners, which said cryptocurrency shorts spent $2.19 billion buying shares to reduce their exposure in the first three quarters of the year.
There is still a great deal of skepticism. More than 23% of Marathon's available shares are sold short, while MicroStrategy's short interest-to-float ratio is about 21% and Coinbase's ratio is 14%. The average gain for U.S. stocks is 5%, according to S3 data.
Bitcoin believers still face risks
While enthusiasts like Saylor are betting on the asset’s long-term appreciation as a hedge against inflation and a store of value, new investors are entering a historically volatile market.
When Bitcoin fell more than 60% in 2022, Coinbase, GBTC, and MicroStrategy all fell at least 74%. Marathon lost 90% of its value, and some of its peers went out of business.
Even if the environment is more stable in 2023, cryptocurrencies still face high-profile critics such as JPMorgan Chase.
Chief Executive Jamie Dimon told the Senate Banking Committee earlier this month that “its only real use is for criminals, drug dealers, money laundering, tax avoidance.”
“If I were the government, I would shut it down,” he said.
But as more institutional money flows into Bitcoin as an investment vehicle, that prospect looks less likely than ever. In mid-December, BTIG analysts raised MicroStrategy’s price target from $560 to $690, citing improved sentiment and the upcoming Bitcoin halving.
“Our expectation is that the approval of a spot Bitcoin ETF will increase regulatory clarity around Bitcoin, which should make large institutional investors such as insurance companies more comfortable investing in Bitcoin,” the analysts wrote.
Galaxy Digital’s Novogratz said that “generally speaking, we are still in a bull market,” noting the continued inherent scarcity of Bitcoin’s supply. Novogratz expects Bitcoin to break new all-time highs next year, and said that among respected investors, “I can give you 50 Bitcoins from Jamie Dimon on the other side of the table.”
Novogratz warned that in the short term, because there is so much momentum among cryptocurrency traders, the tide could turn and cause a pullback.
“I was a little nervous because it felt so good,” he said.
