Bitcoin Rally to $42K Fueled by 'Panic Buying,' Pushes Crypto Market Cap Over $1.5T

• Bitcoin hit a fresh yearly high of $42,000, pushing the market capitalization of all cryptocurrencies over $1.5 trillion for the first since May 2022.
• Bets on lower interest rates, spot bitcoin ETF anticipation and "panic buying" helped the rally, analysts said.

Bitcoin [BTC] hit a fresh 19-month high above $42,000 Monday, fueled by some "panic buying" as expectations for lower interest rates, looming spot bitcoin ETF decisions and flows into digital asset funds supported rising crypto prices.

The largest crypto asset by market capitalization moved quickly over the weekend after it cleared significant resistance at $38,000, a level that capped prices for the most part of November.

BTC late Monday afternoon was holding right around $42,000, up 5.8% over the past 24 hours.

Smaller tokens lagged behind, with ether [ETH], BNB and ADA gaining 2%-3% during the day, while XRP traded flat. The CoinDesk Market Index [CMI] – which tracks the performance of some 200 cryptos – was up 4.2%.

Bitcoin's rise pushed the total crypto market value to over $1.5 trillion for the first time since May 2022, when Terra's collapse marked the beginning of the crypto winter, TradingView data shows.

Why bitcoin rallied

Bitcoin's rise is still dominated by anticipation for a spot bitcoin exchange-traded fund (ETF) in the U.S., with market observers overwhelmingly expecting an approval by the U.S. Securities and Exchange Commission (SEC) in early January.

See more: Bitcoin Spot ETFs Could See Inflows of $14.4B in First Year, Galaxy Says

Crypto investment services provider Matrixport noted in a Monday report the elevated levels of bitcoin perpetual futures premium versus the spot price, suggesting that traders rushed into BTC driven by fear of missing out – or FOMO – of the rally.

"Traders do not have enough upside leverage, this is the conclusion from the elevated premium that perpetual futures are trading at," the report said. Perpetual futures traded at around 5-10% premium versus the spot price for most of the year, which widened to 10-15%, with sometimes hitting 20-30%, the report explained.

"This shows panic buying from traders who are closing out shorts or increasing leveraged longs," Matrixport analysts said.

Investors show no sign of stopping throwing money into crypto funds, according to the lastest fund flows report from asset manager CoinShares. Last week saw another $172 million of net inflows, bringing the inflow winning streak to 10 weeks and $1.7 billion.

🟢 Record inflows! Last 10 weeks now total U$1.76bn inflows, the highest on record since October 2021’s futures-based ETF launch in the US.

Week 49 inflows: U$176 million

– #Bitcoin –
🟢 $BTC: U$133m inflows
🟢 Short Bitcoin: US$3.6m inflows
🔎 Trading volumes in ETPs remain… pic.twitter.com/Elon1F2pHl

— CoinShares (@CoinSharesCo) December 4, 2023

The macroeconomic environment also supports bitcoin's price rise. "Dovish talk from some Fed officials, a weakening dollar, and relatively sturdy domestic data helped propel markets over the weekend," Alex Thorn, head of research at digital asset investment firm Galaxy, said in an email.

Market participants increasingly bet on the Federal Reserve cutting interest rates next year, putting an 86% probability of lower Fed funds rate by May, according to the CME FedWatch Tool.

Reasons for caution ahead

While bitcoin's outlook looks bright, there are some possible short-term headwinds looming, analysts said.

"The reason for concern is that even though selling pressure was being exhausted in the futures markets, there was a lack of follow-through from spot markets," Bitfinex analysts said in a Monday report.

"The reason could be multifold, including short-term investors still anticipating lower prices being caught off-guard and now waiting for confirmation before entering long positions or simply interest from smaller market participants being driven towards higher returns on altcoins," the report added.

Another reason for caution is that some 85% of bitcoin addresses are sitting in profits, Galaxy's Thorn noted, so "further moves higher could see profit taking."

"Despite the run, bitcoin remains very constructive," Thorn said with overhangs reducing (bad actors exiting, bankruptcies resolving), catalysts on the horizon (spot ETFs, halving), holders remaining firm, a constructive macro environment, and institutional engagement still mostly on the sidelines."

"BTC is up more than 150% year-to-date, and it is one of the world’s best-performing assets on a risk-adjusted basis," he said.