Bitcoin rose above $40,000 for the first time in 2023 on Monday, supported by growing optimism over an early interest rate cut by the Federal Reserve, while focus also remained on the possible approval of a spot exchange-traded fund for the token.
The world’s largest cryptocurrency rose 2.7% to $40,521.0, extending gains after a three-week rally. The token hit $40,825.0 earlier in the day – its highest level since May 2022, before the failure of stablecoin Terra triggered a more than year-long rout in cryptocurrency markets.
Ethereum, the world’s No. 2 cryptocurrency, rose 1.9% to $2,210.49 – its highest level since May 2022.
A key point of support for bitcoin and crypto prices was weakness in the dollar, as growing expectations for an imminent Fed rate cut sparked a rally in risk assets.
Markets perceived recent comments from Fed Chair Jerome Powell to be decidedly less hawkish, as he pointed to an increased need for balance between keeping monetary conditions tight and still fostering a soft landing for the U.S. economy.
As a result, traders began pricing in a more than 90% chance that the Fed will keep rates on hold in December, and a more than 60% chance that it will cut rates as early as March 2024. The Fed is scheduled to meet on December 12 and 13.
But U.S. inflation remains well above the Fed’s 2% annual target, while the labor market also appears strong. Nonfarm payrolls data due this Friday should provide more clues on the latter.
The prospect of lower interest rates bodes well for bitcoin, as easy monetary policy and increased speculative trading drove the token to a record high of nearly $69,000 in 2021.
Since then, it has fallen dramatically as interest rates have risen, while the crypto industry has also been rocked by a series of high-profile bankruptcies and regulatory crackdowns. Most recently, Binance – the world’s largest crypto exchange – pleaded guilty to money laundering charges from the Department of Justice and now faces a fine of more than $4 billion.
ETF speculation also helps bitcoin
Still, bitcoin has more than doubled in value this year, with most of the gains coming in recent weeks as investors speculated about the possible approval of a U.S. ETF that directly tracks the price of the cryptocurrency.
Crypto advocates argue that the approval of such a product will draw large amounts of institutional capital into bitcoin. But as products like the Grayscale Bitcoin Trust (BTC) (OTC:GBTC) – which tracks the price of bitcoin futures – have seen investor interest wane over the past year, doubts have persisted about how much institutional capital a spot ETF could attract.
The Securities and Exchange Commission has given no indication that it intends to approve a spot ETF in the near future, although Grayscale won a key legal battle against the regulator to approve its application for a spot ETF.
