(Bloomberg) -- Bitcoin surged above $31,000 for the first time since July as a US federal appeals court made final a ruling that effectively clears the way for the issuance of an exchange-traded fund that invests directly in the cryptocurrency. 

The mandate puts into effect the court’s ruling in August, when it overturned the Securities and Exchange Commission’s rejection of Grayscale Investments LLC’s proposal to convert its trust into an ETF. Judge Neomi Rao had called the SEC’s decision “arbitrary and capricious” because the regulator failed to explain why it approved similar products. The SEC had argued that an ETF based on Bitcoin lacked adequate oversight to detect fraud. The move sends the matter back to the SEC. 

Monday’s increase of as much as 5% comes on the back of a 9.8% jump in the seven days through Sunday — the biggest weekly advance since June. Traders are betting on a possible ETF approval by as soon as the end of the year. 

In the past five years, weekly gains of at least that magnitude presaged a 10% average Bitcoin climb over the subsequent month, data compiled by Bloomberg show.

Asset managers BlackRock Inc. and Fidelity Investments are among the fund firms in the race to offer a spot Bitcoin ETF in the US. Some argue these funds will bring new inflows into the highest-profile cryptocurrency.

“The drums seem to be beating louder that a Bitcoin ETF will be approved by year-end, which would be supportive for the token in the medium term as it will likely bring more institutional players into the space,” said Tony Sycamore, a market analyst at IG Australia Pty.

Bitcoin is also “finding support from the shift in tone by Federal Reserve speakers,” Sycamore said, citing Fed comments hinting at reduced need for another interest-rate hike following a tightening in financial conditions.

Smaller tokens also rallied Monday, including a 4% increase in Ether to a high of $1,712. The sharp moves higher in so-called altcoins were most likely the result of traders moving to cover short positions, according to Noelle Acheson, author of the Crypto is Macro Now newsletter. 

“As Bitcoin moves gather steam, traders are concerned the rest of the market might follow, and so are moving to unwind positions [that were] taken on expectation of further market weakness,” she said in a message.

More than $100 million worth of trading positions in the derivatives market, mostly from traders who were shorting tokens, were liquidated in the past day, according to data from site Coinglass. That includes all positions from Bitcoin, Ether to smaller altcoins like Solana and Chainlink.   

Applications, Ruling

The SEC has so far resisted spot Bitcoin ETFs on risks such as fraud and manipulation in the underlying market. The applications from investment titans stoked speculation that the US agency will relent.

Bloomberg Intelligence analysts Elliott Stein and James Seyffart have said “approval of a spot Bitcoin ETF looks inevitable” and that a batch of funds is likely to be given the green light, though the exact timing remains uncertain.

The SEC has already allowed ETFs that hold Bitcoin and Ether futures. The agency overall has cracked down on crypto following last year’s market rout and blowups like the bankruptcy of the FTX exchange amid fraud allegations.

Bitcoin has rebounded 87% this year, outstripping the 44% gain in a gauge of the 100 largest tokens. It now accounts for almost 50% of the $1.2 trillion digital-asset market, a type of dominance it last had in 2021, CoinGecko figures show. The digital asset remains well below its 2021 record of nearly $69,000.

“Volatility in Bitcoin has the potential to escalate further,” said Caroline Bowler, chief executive officer at crypto platform BTC Markets Pty.

--With assistance from Sunil Jagtiani and Emily Nicolle.

©2023 Bloomberg L.P.