Oct 23 (Reuters) - Bitcoin soared 10% to 1-1/2 year highs on Monday, and crypto-linked stocks followed it higher as speculation about the possibility of a bitcoin exchange-traded fund drove enthusiasm about the sector and prompted short-sellers to quit positions.

The world's biggest cryptocurrency was last at $32,833 after trading as high as $34,283. Crypto-related shares such as exchange Coinbase Global (COIN.O), miner Marathon Digital (MARA.O) bitcoin holder MicroStrategy (MSTR.O) rose sharply and were making further gains in after-hours U.S. trade.

Smaller rival ether also surged 6%, hitting a two-month high and breaking above its 200-day moving average.

Anticipation of a bitcoin exchange-traded fund (ETF) has grown after reports this month, including from Reuters, that the U.S. Securities and Exchange Commission won't appeal a ruling it was wrong to reject an application from Grayscale Investments.

The prospect of a spot bitcoin ETF is seen driving broader flows into the cryptocurrency, as it would allow a wider set of investors to buy exposure without directly trading it.

"The market is doing its best to front-run the approval of a physical BTC ETF, with consensus being that it will happen some time in the next three months, if not sooner," said Matthew Dibb, CIO at crypto asset manager Astronaut Capital.

BlackRock (BLK.N), VanEck, WisdomTree (WT.N), Fidelity, Bitwise and Invesco (IVZ.N) all have pending bitcoin ETF applications. Blackrock's iShares ETF is on a list of ETFs on the website of clearing house DTCC, driving the most recent round of speculation that its approval is imminent.

It was not clear when or why the ETF was on the list. DTCC and BlackRock did not immediately respond to requests for comment by phone and email. Last week BlackRock denied an erroneous report that the ETF was approved and sources close to the SEC confirmed the application was still pending.

The SEC did not immediately respond to a request for comment emailed after business hours on Monday.

Dibb also pointed to data on cyrptocurrency derivatives analytics platform Coinglass, which showed heavy liquidation of bitcoin short positions in the past 24 hours.

The move also comes as concern ripples through the broader markets about the risk of Israel's war with the Islamist group Hamas becoming a wider regional conflict.

"We have seen recent geopolitical tensions drive demand for scarce assets, including both physical gold and bitcoin, which many investors view as digital gold," said Zach Pandl, managing director of research at Grayscale Investments, a crypto asset manager.

(This story has been corrected to fix the milestone to 1-1/2 year instead of 2-1/2 year in the headline and paragraph 1)

Reporting by Hannah Lang in Washington, Kanjyik Ghosh in Bengaluru, Tom Westbrook in Singapore and Brigid Riley in Tokyo; Editing by Krishna Chandra Eluri, Jonathan Oatis & Shri Navaratnam

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