Ballooning leverage and reduced volatility on crypto markets create a situation where explosive volatility is very possible in the short-to-medium term.
After weeks of reduced volatility, cryptocurrencies like Bitcoin (BTC) are likely to see sharp price changes in the short to medium term, according to one analyst.
The current situation in cryptocurrency markets could potentially generate “explosive volatility” due to massive leverage and recent low volatility, Arcane Research analyst Vetle Lunde suggested.
Lunde pointed to “leverage bonanza,” or leverage going parabolic in the crypto derivatives market, while Bitcoin has continued to hover around $19,000 over the past few weeks.
In crypto trading, leverage refers to using borrowed funds to make trades in order to profit bigger through contracts like perpetual swaps. According to Arcane, notional open interest (OI) in Bitcoin perpetual contracts was nearing 500,000 BTC as of Oct. 11, which marked parabolic growth in leverage amid Bitcoin’s flattening volatility.
While forecasting potential bursts of volatility in the short or medium term, Lunde avoided predicting exact market moves, stating:
“I view the current open interest as well blown above any levels that may be assessed as sustainable, opaqueness from market signals restricts me from having any directional view on the winddown of said leverage.”
The analyst also stressed that the current market could benefit sophisticated traders that are familiar with straddle strategy, which involves simultaneously buying both a put option and a call option with the same price and the same expiration date.
In the medium term, Lunde pointed to the growing trend in OI in crypto derivatives which could lead to a “very volatile” breakout. As previously reported, Bitcoin futures OI hit an all-time high, with BTC-denominated futures OI hitting 660,000 BTC on Oct. 12.
Lunde also mentioned a few potent triggers in the medium term for crypto, including potential BTC purchases by Michael Saylor’s MicroStrategy in November. “If the usual MicroStrategy riddance repeats, expect small rallies and brief hardcore sell-offs as MicroStrategy bids and then announces its purchases for the remainder of Q4 2022,” the analyst wrote.
No matter what trend is coming in the short-to-medium term, the Arcane Research analyst is still bullish on Bitcoin over a longer period of time. Lunde expressed confidence that the next year will bring “idiosyncratic crypto-related regulatory clarity” in the United States as well as a more stable interest rate and inflation regime.
He also predicted more crypto growth as major financial institutions like BlackRock, Citadel, and Nasdaq have been moving into the industry recently. He stated:
“I am certain that the show will go on, and new highs will be met in a not too far distant future.”
As previously reported, some major financial institutions like JPMorgan set a long-term theoretical target for Bitcoin at $150,000.