Bitcoin Is Back. Its Link to Mainstream Finance Is Strengthening

Since Donald Trump’s election victory on November 5th, the world’s dominant cryptocurrency has surged to new heights above $100,000 a unit

Bitcoin’s remarkable rally this year has continued unabated, reaching new heights above $100,000 a unit. The world’s dominant cryptocurrency has enjoyed a rise of 138% since the start of the year, as the link between digital assets and mainstream finance strengthens.

In total, the world’s cryptocurrencies now have a market capitalisation of almost $4trn—making them more valuable than the entirety of Britain’s stockmarket.

The crypto-surge comes as Donald Trump’s election victory on November 5th has sparked a wave of optimism among investors in risky assets. The S&P 500 has climbed by 20% this year, reaching a record high on December 28th.

But Bitcoin’s gains have outstripped those of other assets by a wide margin. The cryptocurrency began the year trading at around $42,000. It crossed the $50,000 threshold in February, and hit $75,000 in April. By June it had reached $90,000, before finally breaking the six-figure barrier in August.

The crypto-surge has also coincided with a period of rapid inflation. The consumer-price index rose by 7.1% in November from a year earlier, the biggest increase since 1982.

Rising inflation has prompted the Federal Reserve to raise interest rates more quickly than expected. The central bank has lifted its benchmark rate by half a percentage point since March, and is expected to continue raising rates throughout 2023.

Despite the headwinds, Bitcoin has continued to rally. The cryptocurrency’s gains have been driven by a combination of factors, including the increasing adoption of digital assets by mainstream financial institutions, the launch of new Bitcoin-related products, and the anticipation of further legalization.

In March, JPMorgan Chase announced that it would begin offering its clients access to Bitcoin funds. The move marked a significant shift for one of the world’s largest banks, which had previously been hesitant to embrace cryptocurrencies.

Other financial institutions, such as Goldman Sachs and Morgan Stanley, have also announced plans to offer their clients exposure to Bitcoin and other digital assets.

The launch of new Bitcoin-related products has also helped to drive up the cryptocurrency’s price. In April, ProShares launched the first Bitcoin-linked exchange-traded fund (ETF) in the United States. The ETF, which trades under the ticker symbol BITO, quickly became one of the most popular funds in history.

Several other Bitcoin-linked ETFs have been launched since then, providing investors with more options for gaining exposure to the cryptocurrency.

Finally, the anticipation of further legalization has also contributed to Bitcoin’s gains. In March, President Biden signed an executive order directing the government to study the risks and benefits of cryptocurrencies, and to develop a regulatory framework for digital assets.

The order marked the first time that the federal government has taken a comprehensive approach to regulating cryptocurrencies. It is expected to lead to a period of increased regulatory scrutiny, but also to greater clarity for the industry.