After weeks of low volatility, cryptocurrencies such as Bitcoin (BTC) are likely to see sharp swings in price in the short to medium term, according to an analyst.
The current state of cryptocurrency markets could lead to “explosive volatility” due to excessive leverage and recent low volatility, Arcane Research analyst suggested, See Lunde.
Lunde pointed to the “leverage bonanza”, or the leverage that has gone parabolic in the crypto derivatives market, while Bitcoin has continued to hover around $19,000 in recent weeks.
In the trading world, leverage refers to the use of borrowed funds to trade for higher profits through contracts such as perpetual swaps. According to Arcane, notional open interest (OI) in Bitcoin perpetual contracts approached 500,000 BTC on Oct. 11, marking parabolic growth in leverage amid low Bitcoin volatility.
Although he forecast possible spikes in volatility in the short to medium term, Lunde avoided predicting exact market movements, stating:
“I view current open interest as being well above any level that can be assessed as sustainable, the opacity of market signals restricts me from having any directional views on reducing such leverage.”
The analyst also noted that the current market could benefit sophisticated traders who are familiar with the straddle strategy, which consists of simultaneously buying a put option and a call option with the same price and the same expiration date.
In the medium term, Lunde noted the growing OI trend in crypto derivatives that could lead to a “very volatile” breakout. As previously reported, Bitcoin futures OI hit an all-time high, reaching 660,000 BTC on Oct. 12.
Lunde also mentioned some powerful medium-term triggers for the largest cryptocurrency, including potential BTC purchases by Michael Saylor’s MicroStrategy in November. “If the usual MicroStrategy release is repeated, expect small rallies and brief selling as MicroStrategy bids and then announces its purchases for the remainder of Q4 2022,” the analyst wrote.
Regardless of the trend that occurs in the short and medium term, the Arcane Research analyst remains bullish on Bitcoin in the long term. Lunde expressed confidence that the coming year will bring “idiosyncratic regulatory clarity related to cryptocurrencies” in the United States, as well as a more stable interest rate and inflation regime.
He also predicted further growth for cryptocurrencies as large financial institutions such as BlackRock, Citadel and Nasdaq have recently entered the sector. He stated:
“I’m sure the show will go on, with new highs to be reached in the not too distant future.”
As we told you before, some important financial institutions, such as JPMorgan, establish a theoretical long-term target for Bitcoin at $150,000.
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