The stock market's biggest gains in 2023 were driven by Bitcoin's rally.

• In 2023, Marathon Digital, Coinbase, MicroStrategy, and the Grayscale Bitcoin Trust experienced gains of more than 300%, while bitcoin itself rose by approximately 150%.
• They were among the best-performing stocks in the U.S. market during the year.
• In an interview last week, Marathon CEO Fred Thiel stated that the market's decline in 2022 was quite grim.

In 2023, the most profitable investments for crypto bulls were in the stock market.

Bitcoin miner shares soared 688%, while shares of and rose more than 300% in value, outperforming the overall market by 150%.

The four bitcoin-tied stocks were among the eight best-performing publicly traded U.S. businesses with a market value of at least $5 billion, according to FactSet.

The crypto market experienced a significant rebound in 2023, following a downturn in 2022 that saw coin prices plummet and related equities suffer. This year was marked by several high-profile events, including the collapse of hedge funds, failures of crypto lenders, and crippling losses at miners. The year culminated in November 2022 with the bankruptcy of crypto exchange FTX and the arrest of founder Sam Bankman-Fried on fraud charges.

In New York, a jury convicted Bankman-Fried on seven criminal counts, potentially leading to a life sentence for the 31-year-old former billionaire. Meanwhile, Changpeng Zhao, founder of Binance, pleaded guilty and resigned as CEO in a $4.3 billion settlement with the Department of Justice. He now faces a possible prison sentence of 18 months or more.

The easing of the Federal Reserve's interest rate hikes in 2021 contributed to the growth of bitcoin as investors saw it as a more attractive investment option.

The upcoming bitcoin halving in May 2024 helped boost prices by capping the supply of bitcoin, as the reward for mining is cut in half during the halving process.

The potential for a flurry of bitcoin exchange-traded funds in the new year sparked additional buying.

"Crypto stocks are trading almost like a mania," said Galaxy Digital CEO Michael Novogratz in an interview on CNBC's "Squawk Box" last week, adding that it's just more fuel for a fire.

As of Tuesday, Bitcoin has reached $42,683, representing a significant gain for early investors who purchased it at $16,500 in January. However, the cryptocurrency is still 38% below its all-time high of $69,000, which occurred in November 2021.

Marathon, a mining firm, has been the best-performing stock among companies linked to bitcoin and valued at $5 billion or more this year. The company's market cap increased by 125% in December, and its shares surged another 15% on Wednesday.

Last year, Marathon was on the brink of collapse due to a quarterly loss of $399.6 million on sales of $28.4 million. This was caused by falling bitcoin prices, a power outage in Montana, and Marathon's financial ties to bankrupt miner Compute North.

In an interview last week, Fred Thiel, CEO of Marathon, stated that the situation was extremely unfavorable.

The high energy costs of operating supercomputers make Bitcoin mining an expensive operation. When bitcoin prices drop, the money producers who mine Bitcoin experience a sharp reduction in their revenue, despite a slight decrease in their energy bills.

Thiel stated that the company successfully sold equity and did not have any debt other than a convertible note.

In 2023, the picture has brightened dramatically. Last month, Marathon reported third-quarter net income of $64.1 million, with revenue jumping from a year earlier to $97.8 million. Now, the company is in expansion mode and has recently announced the purchase of its first two fully owned bitcoin mining sites — one in Texas and one in Nebraska — for $178.6 million.

The expansion of Marathon's mining portfolio resulted in a 56% increase in capacity, reaching 910 megawatts.

Vertically integrating allows us to eliminate the profit margin for third parties, enabling us to run the site as we see fit, Thiel stated. The technology that Marathon has been developing is primarily aimed at improving efficiency, which may be disregarded in an up market because high prices often result in high margins.

Thiel is focused on ensuring the financial stability of the company during future downturns in bitcoin prices. To achieve this, he is reducing production costs and exploring new ways to sell energy back to the grid. Additionally, Thiel is optimistic that energy harvesting will enable Marathon to generate more diverse revenue streams in the future.

According to Thiel, one of the company's objectives by 2028 is to reduce bitcoin mining revenue to 50%.

‘Multiple sources of revenue’

In the U.S., Coinbase is the top-performing crypto stock this year, with a 386% increase as of Tuesday's close. On Wednesday, it rose by 7.7%.

Coinbase, the only major publicly traded crypto exchange in the U.S., has gained market share during non-U.S. trading hours due to the struggles at Binance, the largest exchange in the world, according to a report from research firm Kaiko in late November.

After Zhao's plea deal, Coinbase CEO Brian Armstrong stated to CNBC that the news supported their long-term strategy of prioritizing compliance and establishing a trustworthy company.

Despite the decline in revenue and stock price of Coinbase from its peak during the crypto trading boom in 2021, the company has stabilized after implementing drastic cost-cutting measures from late 2021 to early 2023.

Coinbase offers investors a range of cryptocurrencies beyond bitcoin, with ethereum and other assets accounting for 18% and 46% of transaction revenue in the third quarter, respectively. Furthermore, the platform's interest income and stablecoin revenue increased by more than double in the latest quarter to $212 million due to higher interest rates.

Coinbase's net revenue is now mostly generated from sources other than transaction revenue, a decrease from the 96% it accounted for during its public market debut in 2021.

Armstrong stated in a CNBC interview last week that we put in a significant effort to diversify our revenue streams around the time we went public. As a result, we now have various sources of revenue, some of which are affected by high and low interest rates. This has made our revenue more predictable.

Bitcoin's top competitors in the crypto market are closely linked to it.

The Grayscale Bitcoin Trust has experienced a 330% increase in value this year. GBTC was the first publicly traded bitcoin fund in the U.S. when it hit the over-the-counter market in 2015, providing investors with a passive way to own bitcoin. However, GBTC is a closed-end fund, which makes it less liquid than an ETF, posing a challenge for investors in the past.

In the depths of the crypto market last year, GBTC's discount to its net asset value reached 50%, meaning its market cap was roughly half the value of the bitcoin it held. As of December 22, the discount had narrowed to 5.6%, the lowest since early 2021. Currently, GBTC owns approximately $26.6 billion worth of bitcoin and has a market cap of $24.7 billion.

The prospects of GBTC receiving regulatory clearance to convert to an ETF next year are boosting its market value by providing liquidity measures and allowing it to trade through a traditional stock exchange, aligning its market value with its NAV.

Grayscale announced on Tuesday that Barry Silbert, CEO of Digital Currency Group, is stepping down as chairman of Grayscale Investments and leaving the board, effective January 1st. No reason for his departure was given. Mark Shifke, DCG's finance chief, will succeed him as chairman.

Big investors join the party

The Securities and Exchange Commission has been in talks with Grayscale and other asset managers regarding the issuance of bitcoin ETFs.

After an appeals court ruled in favor of Grayscale in a lawsuit against the regulator in August, those meetings began. Additionally, other large money managers, including BlackRock, Fidelity Investments, and Invesco, have taken steps to create their own funds.

Michael Sonnenshein, CEO of Grayscale, stated on CNBC's "Squawk Box" that the potential approval of ETFs would attract new investors, particularly investment advisors who manage $30 trillion in the US and are restricted in their purchases.

"Our court victory led to increased optimism among investors about GBTC's potential to uplist as a spot bitcoin ETF, and as we enter the new year, the investment community is focusing on this," Sonnenshein stated.

Due to the lack of an accessible ETF for bitcoin, many investors have turned to MicroStrategy as an alternative means of investment.

Since its inception in 1989 as a business intelligence software company, MicroStrategy has derived the majority of its value from the 174,530 bitcoins it owned as of November, currently worth $7.4 billion. The stock's 327% increase this year has increased the company's market cap to $8.3 billion. In the third quarter, the company's software and services business generated approximately $130 million in sales.

On Wednesday, the company disclosed in a regulatory filing that it bought an additional 14,620 bitcoins from November 30 to December 26 for $615.7 million, increasing its total to 189,150 bitcoins. As a result, the stock price rose by 11%.

In mid-2020, MicroStrategy revealed its plan to invest in bitcoin by committing $250 million over the next 12 months to "one or more alternative assets," which could include digital currencies like bitcoin. At the time, the company's market cap was approximately $1.1 billion.

In Q3 2020, MicroStrategy purchased 38,250 bitcoins for $425 million.

In the October 2020 earnings call, Phong Le, who was promoted from CFO to CEO, stated that MicroStrategy's investment in bitcoin helped the company "tap into the passion of the broader crypto market." He added that the investment has had a "notable and unexpected benefit" in elevating the company's profile.

MicroStrategy has become a well-known proxy for bitcoin, with co-founder and ex-CEO Michael Saylor being a prominent evangelist for cryptocurrency, even co-authoring a book on the subject last year titled "What is Money?"

"Institutions can rely on bitcoin's continued growth in 2024, and a strategy centered around it is generally safe. Education, institutional adoption, the spot ETF news, and monetary policy loosening are all positive factors for bitcoin," Saylor stated in a CNBC interview on Dec. 18.

Saylor is optimistic about the mark-to-market accounting rule set to take effect in 2025, which will change how companies record crypto assets. Unlike intangible assets that must be marked down if their value drops below the purchase price, crypto will be classified in a separate category and companies will mark it up or down based on its trading value.

Saylor claims that the new measure motivates corporations holding billions of dollars in cash reserves to invest in bitcoin.

The bitcoin bulls have had a great year, but the bears have suffered equally.

According to S3 Partners, short sellers have lost a combined $6.3 billion on their positions against Coinbase, MicroStrategy, and Marathon in the first three quarters of the year.

Despite the high short interest ratios of Marathon, MicroStrategy, and Coinbase, the average among U.S. stocks is only 5%, according to S3.

Dimon vs. the evangelists

But risk remains for the bitcoin believers.

New investors are entering a historically volatile market, while enthusiasts like Saylor are placing long-term bets on Bitcoin as a hedge against inflation and a store of value.

In 2022, when Bitcoin dropped by more than 60%, Coinbase, GBTC, and MicroStrategy each experienced a decline of at least 74%. Additionally, Marathon lost 90% of its value, and some of its peers went bankrupt.

Despite a more stable environment in 2023, crypto continues to face opposition from high-profile detractors such as CEO Jamie Dimon, who recently told the Senate Banking Committee that the primary use case for crypto is criminal activities, drug trafficking, money laundering, and tax avoidance.

He stated that if he were the government, he would shut it down.

The likelihood of bitcoin becoming a mainstream currency is decreasing as more institutional money is being invested in it as a financial instrument. In December, BTIG analysts raised their price target for MicroStrategy from $560 to $690, citing positive sentiment and the upcoming bitcoin halving.

The approval of a spot BTC ETF is expected to provide regulatory clarity around bitcoin, enabling large institutional investors, such as insurance companies, to invest in bitcoin with greater comfort.

Novogratz of Galaxy Digital asserts that "we're still in bull market phase" due to the inherent scarcity of bitcoin supply. He predicts that bitcoin will surpass its record high next year and states that among respected investors, there are 50 who disagree with him, including Jamie Dimon.

Crypto traders have been generating a lot of momentum, but Novogratz warns that a correction could occur in the near future.

He admitted to feeling a bit anxious because the sensation was so pleasurable.

— CNBC’s MacKenzie Sigalos contributed to this report

According to a research firm, the crypto market is predicted to experience a further rally.