Investing.com-- Bitcoin climbed to almost $42,000 a dollar on Monday, aided by growing optimism over a possible interest rate cut by the Federal Reserve next year and the potential upcoming approval of a spot exchange-traded fund for the token.
By 05:54 ET (10:54 GMT), the world’s biggest cryptocurrency had risen 6.2% to $41,984.7, extending gains after a three-week rally. Bitcoin had hit $40,825.0 earlier in the day -- its highest level since May 2022. The increase marks an acceleration in an ongoing rebound in the digital asset following an over year-long slump triggered by the failure of the TerraUSD stablecoin network.
Ethereum, the world's second-biggest cryptocurrency, had also jumped by 4.5% to $2,264.8. Crypto exchange Coinbase (NASDAQ:COIN) surged by more than 8% in premarket U.S. trading. Digital coin miners Marathon Digital (NASDAQ:MARA) and Riot Platforms (NASDAQ:RIOT) soared by over 10%.
Expectations that the Federal Reserve may reduce interest rates earlier than anticipated next year have been a key point of support for crypto prices, fueling a drop in the dollar and boosting the appeal of risk assets.
Some market participants interpreted closely-watched comments from Fed Chair Jerome Powell last week as decidedly less hawkish. Although Powell argued that officials could unveil further rate hikes to corral inflation, he noted that policy was already in "restrictive territory."
Traders have begun to price in a more than 95% chance that the U.S. central bank will keep rates on hold in December, and an over 50% chance it will cut rates by as soon as March 2024, according to Investing.com's Fed Rate Monitor Tool. The Fed is set to meet on Dec. 12 and 13.
But the pace of U.S. price growth remains well above the Fed’s 2% annual target, while the labor market also appears strong. Nonfarm payrolls data due this Friday is expected to provide more cues on the latter.
Recent history suggests that the prospect of lower interest rates could bode well for Bitcoin. In 2021, an era of easy monetary policy and increased speculative trading helped lift the token to a record high of nearly $69,000.
It then fell drastically as borrowing costs rose and the crypto industry was wracked with a series of bankruptcies and regulatory crackdowns. High-profile scandals have also rocked the sector, with one of the more notable cases involving Binance -- the world’s largest crypto exchange. The group pleaded guilty to Department of Justice allegations of money laundering in November, and now faces an over $4 billion fine. Former Chief Executive Changpeng Zhao pleaded guilty to criminal charges as well and resigned.
ETF speculation bolsters Bitcoin
Yet Bitcoin has more than doubled in value this year, with most of the gains coming in recent weeks as investors eyed a possible green light by U.S. regulators for a batch of ETFs that directly tracks the price of the cryptocurrency.
Several top asset managers, including BlackRock (NYSE:BLK) and Invesco, have already filed applications with the U.S. Securities and Exchange Commission (SEC). Analysts at Alliance Bernstein said in a note to clients that should these be approved, they "expect a strong marketing blitzkrieg, that would elevate BItcoin as a recognised household asset, just like people are aware of gold."
But given that products like the Grayscale Bitcoin Trust (BTC) (OTC:GBTC), which tracks the price of Bitcoin futures, saw waning investor interest over the past year, doubts have persisted over just how much institutional capital a spot ETF could draw in.
The SEC has given no indication that it intends to approve a spot ETF in the near-term, although Grayscale has won a crucial legal battle against the regulator to approve its application for a spot ETF.
Ambar Warrick contributed to this report.