A research report provides reasons why the crypto market might be on the verge of a reversal.

Key points: 

• While bitcoin’s price is extremely attractive, the best way to enter this market is through short-term dollar cost averaging, rather than using leverage. 
• Some analysts believe that cryptocurrencies could decouple from the U.S. stock market.
• Bitcoin's lackluster growth, correlation with stocks, and nearly a year-long stubborn downtrend remain a threat, but many analysts believe Bitcoin's current price is undervalued.

As November begins, analysts are busy analyzing major market moves in October. While Bitcoin rose only 5.89% in October, it was relatively flat, but a senior analyst at Arcane Research Vetle Lunde outlined the direction the market is likely to take in the coming months.

"Uptober," a reference to Bitcoin's bullish historical performance in October, was a common theme in many threads on Crypto Twitter, and according to Lunde, it appears to be happening again. Data shows that as of October 26, BTC and exchange tokens have outperformed the large-cap index.

Elon Musk's takeover of Twitter helped the large-cap index outperform Bitcoin with a staggering 20% ​​monthly gain. Dogecoin has rallied 144% over the past seven days, helping to solidify the strength of large-cap stocks.

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

The Bitcoin spot market in October was boosted by higher volumes and lower volatility, while benefiting from a brief boost that briefly lifted the market. According to Lunde, the last week of October saw the largest volume of crypto short liquidations since July 26, 2021.

While this activity helped push Bitcoin up 6%, Ether and BNB saw more significant gains, up 18% and 19%, respectively.

7 Day Average Btc Usd Daily Volume With and Without Binance. Source Arcane Research

The bear squeeze contributed to the general uptick, but Lund concluded that the momentum did not result in a major change in BTC price. BTC spot volume is up 46% over the past seven days, and the 30-day VIX is at a two-year low. In addition, the 7-day VIX was 2.2%, compared to the annual average of 3%.

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

Lunde compared the volatility of past short squeezes to recent short squeezes, saying:

“The July 26 squeeze saw a daily high-low variation of 15% as markets hastily moved up, whereas the October 25 and October 26 moves saw daily high-low variations of 5% and 6%, respectively. Further, momentum has stopped, indicating that traders should brace for longer consolidation.”

While bitcoin’s price is extremely attractive, Lund said the best way to enter this market is through short-term dollar cost averaging, rather than using leverage. Bitcoin has experienced uniquely low volatility and closely follows the U.S. stock market, so it's important to keep an eye on the third-quarter earnings report.

Fed policy will continue to determine Bitcoin price

Federal Reserve Chairman Jerome Powell will discuss U.S. monetary policy, inflation and upcoming rate hikes after the Nov. 2 Federal Open Market Committee meeting.

According to Lunde, there are two situations to watch out for:

“Scenario 1: Jerome Powell remains astute in combating inflation and prepares the market for further hikes. This is, in my opinion, the most plausible scenario. 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 dampened activity, leading to a longer lasting opportune environment to stack sats.”

"Scenario 2: Jerome Powell provides subtle pivot hints. In this scenario, I see the correlated market environment softening. Last week, we saw how unique structural crypto-related market activity caused correlations to decline through a substantial short squeeze. Pivot anticipations will lead to similar reactions and revitalize BTC's digital gold narrative."

In the second scenario, some analysts believe that cryptocurrencies could decouple from the U.S. stock market. This reaction likely reflects the crypto market reaction that propelled Bitcoin above $20,000 in mid-2020.

What can you expect in the long run

In the long run, Lunde predicts that the adoption of Bitcoin and digital assets will continue to be an emerging trend. Lunde remains bullish on BTC at current prices, citing an increase in institutional interest in 2022, according to a Fidelity survey.

Even if Bitcoin sees fewer on-chain transactions, more participation is possible in the long run with a clearer regulatory framework. A clearer framework may eventually emerge as U.S. voters begin to consider cryptocurrency policy when they vote.

Bitcoin's lackluster growth, correlation with stocks, and nearly a year-long stubborn downtrend remain a threat, but many analysts believe Bitcoin's current price is undervalued.