Source: Aliaksandr Marko.

Bitcoin, the cryptocurrency with the largest market capitalization, has added more than 160 per cent in 2023, with smaller projects surging in response, as the crypto industry enjoys its latest bull run and readies for the next stage in its maturation as an asset class.

The first sign that crypto is evolving from the Wild West towards financial legitimacy is the systematic removal of bad actors. High-profile examples concern two recent criminal convictions: that of Sam Bankman-Fried, the founder of the FTX crypto exchange, who misused billions in customer funds, and that of Changpeng Zhao (aka CZ), a co-founder and former CEO of the Binance exchange, who violated U.S. anti-money laundering laws. Such a high level of regulatory involvement can be seen as a cleansing of the playing field, leaving a clearer path for innovators to propel crypto into more long-term use cases, which we’ll discuss later on.

The second sign that crypto might be around for good is the growing conviction that U.S. regulators are ready to approve a spot Bitcoin exchanged-traded fund (ETF), a vehicle popular among retail investors – with US$7.2 trillion in U.S. investor assets through September 2023 – and the potential to bring sustained upward price momentum. For comparison’s sake, Bitcoin’s market capitalization stands at US$846 billion as of 12:44 pm ET Thursday, while the entire crypto space stands at US$1.61 trillion.

The third sign that crypto might have overcome its reputation as a passing fad is the involvement of established financial brands such as BlackRock, Fidelity and Charles Schwab. The former is one of the SEC’s suitors for a spot Bitcoin ETF and the world’s largest asset manager at about US$9.5 trillion, while the latter pair recently backed a new institutional crypto exchange alongside Citadel Securities. The trust these brands have built up over generations, as well as their deep due diligence capabilities, cannot be overlooked as validation for retail investors to diversify into crypto.

Additional factors supporting crypto’s bull run

The rise in the price of Bitcoin can be tied to its upcoming halving, scheduled for May 2024, when the crypto miners that keep the network humming see their Bitcoin rewards cut in half. The event, which occurs every four years, is designed to cap the supply of Bitcoin at 21 million, and has led to numerous inflationary bull runs. In the year after the past three halvings, Bitcoin rose by 8,069 per cent (2012), 284 per cent (2016), and 559 per cent (2020).

The ongoing crypto bull run is also benefitting from a robust crypto business landscape, with numerous public companies levering crypto prices up through shareholders’ enthusiastic buying, in addition to their direct purchases of cryptocurrencies through platforms such as Robinhood and Wealthsimple. Notable stocks benefitting from the crypto bull run include:

  • Hut 8 Mining (TSX:HUT), a high-performance computing and Bitcoin mining company that has added 780 per cent year-over-year, primarily because of its merger with U.S. Bitcoin, a large eco-friendly crypto miner active across three states. HUT shares were up by 80 per cent before the merger bump.
  • Bitfarms (TSX:BITF), a Bitcoin miner that earns about 13 Bitcoins per day and operates in excess of 65,000 miners. The stock is up by approximately 340 per cent year-over-year.
  • Hive Digital Technologies (TSXV:HIVE), a Bitcoin miner and emerging data centre player looking to accommodate growing interest in AI and Web 3. HIVE shares are up by 108 per cent year-over-year.

Lastly, evidence of inflation finally beginning to recede in Canada, as well as the United States, supports investors’ appetite for risk, which serves to reinforce a floor under assets like stocks and crypto, ownership of which entails exposure to considerable downside volatility, while also offering the prospect of attractive long-term returns.

Why is cryptocurrency useful?

The enthusiasm behind the boom in crypto development stems from a desire to cut out middlemen from human interaction, specifically in finance, but also touching on software development, gaming and record-keeping, among many others.

Cryptocurrencies and the communities of users they bring together can function without a service provider profiting at their expense, or a government instituting monetary policy they have no say in, because the networks they run on, known as blockchains, are designed to be operated by their own participants.

The potential for these decentralized networks to lessen the power of overreaching governments, while increasing equality in biased industries – think of the 1.4 billion people who remain unbanked as of 2022, and how 34 per cent of the planet doesn’t have access to the internet – lies at the heart of crypto’s value proposition and mainstream appeal.

Will the crypto bull run continue?

Whether the crypto bull run continues over the long term, and investors are able to reap the kind of outsized returns the earliest crypto investors are currently sitting on, remains an open question with one potentially fatal obstacle in the way.

The most worrying thorn in crypto’s side is the SEC’s ongoing work on whether cryptocurrencies should be regulated as securities, which would subject them to regular financial reporting, and likely cause widespread price drops because very few crypto projects make money. This process is playing out in a court battle between the SEC and Ripple Labs, the outfit behind the XRP token.

While a prolonged delay to a U.S. spot Bitcoin ETF, a product that already exists in Europe, or a creep up in inflation, could create short-term pressure on crypto prices, it’s regulation that ultimately stands in the way of new highs, broad industry longevity, and crypto’s ability to outgrow its status as a speculative investment.

Until clear policies are in place to allow for sustainable development, investors would be best served by limiting their crypto allocations to funds they’re prepared to lose.

Click here to read about Stockhouse’s top 5 cryptocurrencies to buy in 2023.

Join the discussion: Find out what everybody’s saying about crypto stocks and the crypto bull run on the Coinbase, Hut 8, Bitfarms and Hive Digital Bullboards, and check out the rest of Stockhouse’s stock forums and message boards.

The material provided in this article is for information only and should not be treated as investment advice. For full disclaimer information, please click here.

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