Bitcoin price surges above $42,000 as rate cut bets fuel cross-asset rally

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Bitcoin surged to its highest price in nearly 20 months while gold hit an all-time peak on Monday, as frenzied investor speculation that interest rates will fall next year rippled through assets across the globe.

The cryptocurrency soared to more than $42,000 on Monday, up 8.2 per cent on the previous day, also boosted by optimism that the toughest regulatory punishments for the industry have passed.

Gold rallied as much as 3 per cent to $2,135 per troy ounce on Monday, a new record, before slipping to $2,069 per troy ounce, according to LSEG data.

The moves follow a recent rush into stocks and bonds, fuelled by growing expectations that the Federal Reserve will soon cut borrowing costs despite chair Jay Powell’s assertion on Friday that it was “premature” to conclude that the central bank has won its battle with inflation.

“You look at bitcoin and gold and you see a very similar kind of evolution,” said Luca Paolini, chief strategist at Pictet Asset Management. “All the asset classes that tend to do well when the Fed cuts rates aggressively are doing well.”

Traders are now betting the first rate reduction could come as soon as March after a sharp decline in government and corporate borrowing costs as US bond markets enjoyed their biggest monthly rally in nearly four decades in November.

Lower yields on ultra-safe US Treasury debt have made other assets relatively more attractive to investors. The S&P 500 index closed at its highest level since March 2022 last week. Recent US economic data has been resilient even while inflation has fallen, further boosting risky assets like stocks.

Max Kettner, chief multi-asset strategist at HSBC, said markets were in the grip of an “everyone-is-happy-Goldilocks rally” across “virtually all asset classes”.

Traders said the momentum to buy bitcoin, whose value has climbed by more than a fifth in the past month, was also driven by growing interest among investors after the closure of two of the most high-profile criminal cases that had hung over the market for the last year.

Last month the US successfully prosecuted Sam Bankman-Fried, former chief executive of FTX, and Binance, the world’s largest crypto exchange. Bankman-Fried was convicted of fraud and Binance paid $4.3bn in penalties after pleading guilty to criminal charges related to money laundering and financial sanctions breaches.

But despite many traders’ fears, US authorities did not shut down Binance. Binance continues to face a separate lawsuit from the Securities and Exchange Commission for allegedly violating securities laws.

“The message from many institutional investors was that they needed two things before looking at the space again: closure on FTX and clarity around Binance,” said Henri Arslanian, co-founder of Nine Blocks Management, a crypto hedge fund manager based in Dubai.

Ethereum, the second most actively traded cryptocurrency, also rose 8.3 per cent to $2,260 on Monday, its highest level since May last year.

Investors are also hopeful the SEC will approve an exchange traded fund for bitcoin in coming weeks. The SEC has refused for a decade to approve spot bitcoin ETFs, stock market funds that invest directly in the cryptocurrency.

Some of Wall Street’s largest investors, including BlackRock and Franklin Templeton, have joined companies such as VanEck and WisdomTree in submitting filings with the SEC.

The market has long viewed spot bitcoin ETFs as a way to wrest control of digital assets from scandal-ridden crypto groups in favour of mainstream businesses such as BlackRock.

“ETF speculation is going to continue to drive behaviour in the crypto market this week as investors buy into the narrative of the transformative impact opening the market to institutional investors will have on the ecosystem,” said Simon Peters, market analyst at eToro.

While the SEC has embarked on a year-long crackdown on crypto — including enforcement actions against groups such as US-listed exchange Coinbase — pressure is growing on the regulator to approve a bitcoin spot ETF.

Crypto asset manager Grayscale scored a watershed legal victory this year when a federal appeals court ruled the SEC was wrong to reject its application to convert its flagship Grayscale Bitcoin Trust into an ETF.