Bitcoin topped US$40,000 as the largest digital asset extended a 2023 rebound on expectations of interest-rate reductions and greater demand from the exchange-traded funds (ETF) sector.

The token added as much as 2.9% to reach US$40,867, and was just shy of that mark as of 10.33am on Monday in Singapore, taking its 2023 jump to 146%. Bitcoin was last at such levels in April 2022, before the TerraUSD stablecoin collapse that contributed to a US$2 trillion rout in digital assets.

Investors are increasingly convinced that the Federal Reserve (Fed) is done with rate hikes as inflation cools, turning the focus to the likely extent of cuts next year. The changed backdrop has fuelled a rally across global markets.

The crypto industry is also awaiting the outcome of applications from the likes of BlackRock Inc to start the first US spot bitcoin ETFs. Bloomberg Intelligence expects a batch of these products to win Securities and Exchange Commission approval by January.

Weathering crackdown

“Bitcoin continues to be supported by optimism around SEC approval for an ETF and Fed rate cuts in 2024,” Tony Sycamore, a market analyst at IG Australia Pty Ltd, wrote in a note. Technical chart patterns pointed to US$42,330 as the next level to watch for, he added.

Bitcoin’s revival from the 2022 crypto crash has weathered a US crackdown that put Sam Bankman-Fried behind bars for fraud at FTX, and handed top crypto exchange Binance and its founder Changpeng Zhao rap sheets and big fines. 

Optimists argue the drive to curb dubious practices and the prospective ETFs signal a maturing crypto industry and the potential for a wider investor base.

Recent enforcement actions “have instilled confidence among investors”, said Su Yen Chia, a co-founder of the Asia Crypto Alliance. Bitcoin “is aping momentum in traditional finance with Fed rate-hike expectations fading”, she added.

Lingering risks

A reset in rate bets or unexpected snarls for the ETFs could yet derail bitcoin, while some technical indicators suggest the virtual currency’s rally is stretched.

For instance, bitcoin’s weekly relative strength index (RSI), a momentum gauge, closed above 75 for the past two weeks. Readings above 70 are viewed as signalling “overbought” conditions. At the same time, bitcoin in the past decade rose an average 15% over the subsequent month after printing a weekly RSI of more than 75, according to data compiled by Bloomberg.

In the short term, “‘long’ trader positioning implies that further price appreciation may be harder to come by”, crypto fund provider Grayscale Investments LLC’s research team wrote in a Dec 1 note. Still, the financial and economic backdrop is set to stay positive for digital assets, the team added.

Bitcoin’s jump in 2023 has outstripped assets such as global stocks and gold. In the derivatives market, open interest recently advanced to landmark levels at the CME Group for bitcoin futures, and at the Deribit platform for options on the most high-profile crypto coin.

Bitcoin halving

One prop for sentiment is the so-called bitcoin halving due next year, which will cut in half the amount of tokens that bitcoin miners receive as reward for their work. The quadrennial event is part of the process of capping bitcoin supply at 21 million tokens. The coin hit records after each of the last three halvings. 

Bitcoin and smaller tokens such as Ether and BNB are still some way below the all-time highs achieved during the pandemic-era crypto bull run. The largest token peaked at almost US$69,000 in November 2021.

The lift in digital-asset prices at the start of the week filtered across crypto-linked stocks in Asia. Japan’s Monex Group and Woori Technology Investment Co in South Korea were among the beneficiaries.

In the US, digital-asset exchange Coinbase Global Inc and software firm MicroStrategy Inc - the largest publicly-traded corporate holder of bitcoin - are both up more than 270% year-to-date. MicroStrategy last month bought US$593 million more of the token, taking its pile to roughly US$6.5 billion. 

  - Bloomberg