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

As November begins, analysts are busy dissecting the major market movements that occurred in October. While Bitcoin (BTC) remained unchanged with a 5.89% increase in October, Arcane Research’s senior analyst, Vetle Lunde mapped the direction the market could take in the coming months.

“Uptober,” a reference to Bitcoin’s historically strong performance in the month of October, is a common theme in many crypto Twitter threads and according to Lunde it seems to be happening. The data shows BTC and exchange tokens outperforming the large caps index through October 26.

Elon Musk’s takeover of Twitter helped propel the large caps index above Bitcoin with a staggering 20% ​​monthly gain. Dogecoin (DOGE) helped cement the large-cap momentum by producing a 144% gain over the past seven days.

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

The Bitcoin spot market in October was driven by increased volume and lower volatility, while benefiting from a brief squeeze that briefly revived the market. According to Lunde, the last week of October saw the highest volume of crypto liquidity since July 26, 2021.

While this activity helped push Bitcoin up 6%, Ether (ETH) and Binance Coin (BNB) saw greater gains of 18% and 19% respectively.

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

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

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

Comparing the volatility of a previous short squeeze to a recent short squeeze, Lunde said:

“The squeeze on July 26 saw a daily high-low difference of 15% as the markets quickly advanced, while the October 25 and October 26 moves saw daily high-lows of differences of 5% and 6%, respectively. In addition, the momentum stopped, indicating that traders should prepare for higher consolidation.”

While Bitcoin is attractively priced, the best approach in this market is dollar cost averaging in the short term rather than using leverage, according to Lunde. Bitcoin has experienced unusually low volatility and closely follows the US equities market so it will be important to track Q3 earnings reports.

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Feeding policy will continue to dictate the price of Bitcoin

Federal Reserve chairman Jerome Powell is scheduled to speak after the November 2 Federal Open Market Committee (FOMC) meeting about US monetary policy, inflation and future rate hikes.

According to Lunde there are two scenarios to watch out for:

“Scenario 1: Jerome Powell remains aggressive in the fight against inflation and prepares the market for further increases. This, in my opinion, is the most plausible scenario. In this environment, I expect that the correlations between BTC and other asset classes will remain elevated and now in the 4.5-month trading range to hold firm, with dampened activity, leading to a more sustainable favorable environment to the sats are stacked.”

“Scenario 2: Jerome Powell gives subtle pivot hints. In this scenario, I see the contiguous market environment softening. Last week, we saw what unusual structural market activity related in crypto caused correlations to decrease through a fairly short squeeze. Expectations of the pivot will lead to similar reactions and revival of the digital gold account in BTC.”

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

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What to expect in the long run

In the long run, Lunde predicts that Bitcoin and Digital Asset adoption will continue to be an emerging trend. Pointing to a Fidelity survey that shows increased interest from institutional markets in 2022, Lunde remains bullish on BTC at the current price.

Even if Bitcoin sees less on-chain transactions, more participation from a clearer regulatory framework is possible in the long term. A clearer framework may eventually emerge when US voters begin to consider crypto policy in voting.

The muted growth of Bitcoin, its correlation with equities and a sticky downtrend for nearly a year remains a threat, but many analysts are confident that the current price of Bitcoin is undervalued.