Research report outlines why the crypto market might be on the verge of a reversal

As November begins, analysts are busy dissecting the big market moves that took place in October. While Bitcoin (BTC) remained relatively unchanged with only 5.89% growth in October, Arcane Research senior analyst Vetle Lunde outlined the direction the market could take in the next few months.

“Up to and including,” a reference to Bitcoin’s bullish historical performance in the month of October, has been a common theme across many threads on crypto Twitter and according to Lunde, that appears to have happened. Data shows that BTC and exchange tokens outperformed the large-cap index through October 26.

Elon Musk’s Twitter takeover helped push the large-cap index above Bitcoin with an astonishing 20% ​​monthly gain. Dogecoin (DOGE) helped cement the large-cap strength by delivering a 144% gain in the past seven days.

Weighted index performance for October 2022 performance. Source: Arcane Research

October’s Bitcoin spot market was driven by increased volume and lower volatility, while benefiting from a short squeeze that briefly reinvigorated the market. According to Lunde, the last week of October saw the largest short liquidation volume in crypto since July 26, 2021.

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While this activity helped push Bitcoin up 6%, Ether (ETH) and Binance Coin (BNB) posted more substantial gains at 18% and 19% respectively.

7-day average BTC USD daily volume with and without Binance. Source: Arcane Research

The short push helped provide an overall boost, but Lunde concluded that the momentum did not create a material change in BTC price. BTC spot volume is up 46% in the past seven days and the 30-day volatility index is at a 2-year low. Furthermore, the 7-day volatility index stands at 2.2%, while the annual average is 3%.

30-day and 7-day volatility for BTC. Source: Arcane Research

When comparing volatility from a previous short squeeze to the recent short squeeze, Lunde said:

“The July 26 pinch saw a daily high-low variation of 15% as markets moved up in a hurry, while the October 25 and October 26 moves saw daily high-low variations of 5% and 6%, respectively. Furthermore, momentum stopped, indicating traders should brace for longer consolidation.”

While Bitcoin is attractively priced, the best approach to this market is to dollar cost average in the short term rather than leverage, according to Lunde. Bitcoin has experienced uniquely low volatility and tracks the US stock market closely, so tracking Q3 earnings reports is important.

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Fed policy will continue to dictate Bitcoin price

Federal Reserve Chairman Jerome Powell will address the Federal Open Market Committee (FOMC) on November 2 to address US monetary policy, inflation and the upcoming rate hike.

According to Lunde, there are two scenarios to look at:

“Scenario 1: Jerome Powell remains astute in combating inflation and prepares the market for further rises. This is the most plausible scenario in my opinion. In this environment, I expect correlations between BTC and other asset classes to remain elevated and the now 4.5 month long trading range to hold firm, with muted activity, leading to a longer lasting favorable environment for stacking sats.”

“Scenario 2: Jerome Powell provides subtle pivot hints. In this scenario, I see the correlated market environment softening. Last week, we saw unique structural crypto-related market activity cause correlations to decline through significant short pressure. Pivot expectations will lead to similar reactions and revive BTC’s digital gold narrative.”

Under the second scenario, some analysts believe crypto could begin to decouple from US stocks. This reaction may mirror the crypto market’s response in mid-2020 that pushed the Bitcoin price above $20,000.

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What to expect in the long run

In the longer term, Lunde predicts that the adoption of Bitcoin and digital assets will continue to be an emerging trend. Citing a Fidelity survey that showed an increase in interest from institutional markets in 2022, Lunde remains bullish on BTC at the current price.

Although Bitcoin sees fewer transactions on the chain, greater participation from a clearer regulatory framework is possible in the long term. A clearer framework may eventually emerge if the American electorate begins to consider crypto policy when they vote.

Bitcoin’s muted growth, its correlation with stocks and a sticky downtrend for nearly a year remain a threat, but many analysts are confident that Bitcoin’s current price is undervalued.