The Reasons Behind the Rise of Bitcoin

The world's largest cryptocurrency, Bitcoin, saw a rise in price on Monday, breaking past $42,000 and reaching a new high not seen in 20 months. The upward momentum of the Bitcoin price was driven by expectations of a rate cut by the US and traders betting that the US regulatory agency will soon approve a Spot Bitcoin exchange-traded fund (ETF) for trading.

Meanwhile, the price of gold also reached a new all-time high, but its rally did not seem to hold up as well as Bitcoin.

1. This year, the trends for both gold and Bitcoin have often been synchronous, such as after the regional bank crisis in the United States in March and the outbreak of conflict between Israel and Palestine in October.

Behind the drop in gold prices after breaking through and the continued rise of Bitcoin is actually the victory of Bitcoin as a risk asset. Since Bitcoin is a risk asset rather than a safe-haven asset like gold, expectations of interest rate cuts by the Federal Reserve typically increase investors' interest in risk assets. For gold, the US non-farm payroll report released on Friday is critical. If the report is weaker than expected, it may further pressure the US dollar and drive up gold prices; conversely, gold prices may perform poorly.

2. Another factor supporting market optimism is the upcoming Bitcoin halving next year. The so-called Bitcoin halving refers to a rule established in the Bitcoin protocol, in which the mining reward in the Bitcoin network is halved approximately every four years.

Specifically, the mining reward for Bitcoin will be reduced from a certain amount of Bitcoin to a new quantity. The quadrennial halving is part of the process of limiting the Bitcoin supply to 21 million coins. This process aims to control the growth rate of Bitcoin supply, and as the number of newly issued Bitcoins decreases, the supply pressure gradually decreases, which has an impact on the scarcity and value of Bitcoin.Looking back in history, Bitcoin halving has had a significant impact on the price of Bitcoin.

In the first half of 2012, the price of Bitcoin rose from around $11 to over $1,000 within a year. The second halving in 2016 also had a similar impact, with the price of Bitcoin rising from around $650 to nearly $20,000 in less than two years. During the third halving in May 2020, the price of Bitcoin rose from around $8,500 to over $60,000 in less than a year.

3. The rise of Bitcoin is also driven by the optimistic sentiment that the US Securities and Exchange Commission (SEC) may soon approve ETFs for direct investment in cryptocurrencies. According to key public documents and the deadline for soliciting public opinions from the SEC, investors believe that the SEC will approve several Bitcoin ETFs as early as January, which will open up the Bitcoin market to millions of investors. Bitcoin ETFs allow previously cautious investors to access cryptocurrencies through a rigorously regulated stock market. Initial demand is expected to reach $3 billion in the first few days of trading, with billions more in demand to follow.

However, it should be noted that this expectation of Bitcoin is still just a rumor, and if it does not materialize in the future, there could be a significant pullback.