Bitcoin is pushing toward the $40,000 level it hasn’t seen since May 2022’s blowup of supposed “stablecoin” TerraUSD. A number of factors are driving the Bitcoin price higher, including potential progress toward Securities and Exchange Commission (SEC) approval of a Bitcoin exchange-traded fund. But the most likely cause of its surge is the upcoming Federal Reserve rate cuts that markets are betting will happen by May or March.
CoinDesk reports that Bitcoin’s price climbed 2.1% in the 24 hours to early Friday morning, to around $38,411. Coinbase Global (COIN), which runs a crypto trading platform, rose 4.3% in early Friday stock market action as it continued to move higher following a Nov. 24 breakout.
CNBC revealed late Thursday that the SEC had held meetings with Grayscale, BlackRock (BLK) and Nasdaq (NDAQ) over their applications to launch a Bitcoin ETF. Such a fund would allow investors to bet on Bitcoin’s price without having to directly purchase and store the cryptocurrency, and would open the door to a much wider investing audience.
The Fed’s primary inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed both overall and core inflation running at a 2.5% annual rate over the six-month period through October.
With inflation now falling rapidly, the current federal funds rate of 5.25% to 5.5% makes U.S. monetary policy the most restrictive it’s been in 25 years, according to New York Fed President John Williams. Growing signs of an economic slowdown suggest that’s unsustainable. As of Friday morning, markets are pricing in the likelihood of five quarter-point rate cuts by the end of 2024, according to CME Group’s FedWatch tool.
The lower interest-rate outlook is reversing some of the U.S. dollar’s appreciation versus global currencies, as the U.S. dollar index has fallen 3% against other advanced-economy currencies since the Fed’s Nov. 1 meeting. This eases inflation and borrowing constraints globally, especially for emerging market economies.
Cryptocurrency trader Arthur Hayes’ new blog post also contributed to bullish Bitcoin sentiment. He wrote that the softening dollar will let China “engage in a massive round of stimulus” with less worry that the yuan will weaken versus the dollar.
“Given that the dollar is the world’s largest funding currency, if the price of credit falls, all fixed supply assets like Bitcoin and gold will rise in dollar fiat price terms,” Hayes wrote.
Bitcoin’s revival has largely tracked that of the Nasdaq, which has surged 39% from its Dec. 28 bear-market closing low. The Bitcoin price, which got as high as $68,990 in November 2021, settled around $16,000 late last year, before taking off at the start of 2023. However, Bitcoin’s explosive 40% move since mid-October has come as the Nasdaq has risen only around 5%.
Close watchers of Bitcoin point out a few other factors contributing to its recent strength. A Forbes article highlighted a 3.4% increase in stablecoins, the first monthly increase since TerraUSD collapsed in May 2022. That collapse led to a nearly 40% plunge in stablecoin market capitalization. The change in the trend may be significant because cryptocurrency traders use stablecoins to buy cryptocurrency using leverage.
A further short-term driver could be a $1 billion drop in Bitcoin stored at exchanges, which could indicate confidence in holding Bitcoin for the long term. Grayscale also successfully sued the SEC over its decision to block the company’s proposed Bitcoin ETF, and speculation is building that the SEC will approve it this time.
