After a brutal stretch, a remarkable thing is happening: Cryptocurrencies are surging

After a tumultuous period, cryptocurrencies are experiencing a huge recovery.

Cryptocurrencies had been shaken since the collapse of several major companies in 2022, including FTX, which had become one of its largest and most recognized players.

Its failure deepened the so-called "crypto winter" that sent bitcoin to around $16,500, a sharp drop from its all-time high of around $68,000 on November 8, 2021.

But something notable has happened since FTX CEO and founder Sam Bankman-Fried was convicted in November: bitcoin and other cryptocurrencies have seen an impressive comeback. Bitcoin, for example, has risen to over $43,000.

"There has been tumult," says Helen Gugel, a partner at the law firm Ropes & Gray. "But I think there are also reasons for optimism."

Here's a look at the turbulent period for cryptocurrencies and why things seem to be going better.

Eliminating bad actors

It was a blockbuster trial and ended badly for Bankman-Fried.

He was found guilty of all seven charges he faced, marking a stunning fall from grace for someone once heralded as the “golden boy of cryptocurrencies.” Bankman-Fried now faces the prospect of spending the rest of his life in prison.

Then, just weeks later, Attorney General Merrick Garland announced a major plea deal with another crypto giant as part of a continuing crackdown on the sector by regulators and law enforcement.

Under the settlement, Binance agreed to pay $4.3 billion in fines, while its founder Changpeng Zhao, widely known as CZ, relinquished his CEO title and pleaded guilty to violating anti-money laundering laws. He also agreed to pay a $50 million fine.

Bankman-Fried's conviction and regulators' promise to continue cracking down on an industry they see as rife with fraud could have been seen as a negative spotlight for an entire industry.

Instead, many cryptocurrency advocates saw this moment as a good thing: a moment when trust in cryptocurrencies could return now that prominent bad actors had been eliminated.

Cryptocurrencies surged shortly after Bankman-Fried's conviction, and survivors of the crypto winter also benefited: Shares of Coinbase, another major cryptocurrency exchange that is under regulatory scrutiny, are up more than 400% this year.

Convert Bitcoin into a conventional investment

There is another fundamental reason behind the comeback of cryptocurrencies.

This year, several prominent financial firms, including BlackRock and Fidelity, have asked the Securities and Exchange Commission to approve a spot bitcoin ETF.

Exchange-traded funds have gained popularity among everyday investors. They are funds that track the performance of a particular index or asset.

An S&P 500 ETF, for example, simply tracks the gains and losses of the S&P 500. These funds are intended to reduce fees, since investors generally do not pay fees to fund managers.

A spot bitcoin ETF would track the price of the cryptocurrency and allow investors to hold it in their portfolios through an investment fund.

After several delays, the SEC could make a decision on whether or not to authorize a spot bitcoin ETF in January. But it is far from guaranteed that the regulator will approve it. The SEC has rejected previous requests, arguing that the cryptocurrency market is too susceptible to manipulation.

But an investment firm called Grayscale Investments sued the SEC, and a court agreed that the regulator was wrong to reject its request.

This has raised optimism that the SEC will approve it this time, which could be a game-changer and help solidify the legitimacy of the digital currency.

"It would potentially open the door to a lot of people who say, 'Look, I don't believe this whole cryptocurrency story, but bitcoin sounds interesting,'" says Kevin Werbach, a professor at Wharton.

But regulators are still wary of cryptocurrencies

Cryptocurrencies may be recovering, but regulators are by no means embracing them.

The SEC has filed lawsuits against some of the biggest names in the cryptocurrency world, including Coinbase and Kraken. And notably, the SEC was not part of that major deal with Binance. The market regulator has filed 13 charges against the cryptocurrency company and CZ, alleging that they misled investors, and those lawsuits will continue to move forward.

SEC Chairman Gary Gensler has long been wary of cryptocurrencies, comparing them to the “Wild West,” and there is no indication he has changed his mind.

In the coming year, Wharton's Werbach expects to see more enforcement actions related to cryptocurrencies.

"It takes time to build these cases, especially the larger ones against these big players that are nominally not based in the United States," he says.

Tensions between regulators and crypto companies have continued to rise due to the lack of clear rules regarding digital currencies. Gensler has made it clear that he believes most of them are securities and therefore fall under the purview of his agency.

Ultimately, Congress could decide how to regulate cryptocurrencies and whether they should be treated like stocks, bonds, commodities, or something else entirely, as crypto advocates want.

But with the 2024 election year, there is little prospect of significant regulations being adopted in the coming year.

So, cryptocurrencies may be making a comeback, but the fight against the industry by regulators and law enforcement appears to be far from over.