Crypto Markets Will Soon See ‘Explosive Volatility’: Arcane Research

After weeks of reduced volatility, cryptocurrencies such as Bitcoin (BTC) are likely to see sharp price changes in the short to medium term, according to an analyst.

The current situation in cryptocurrency markets could potentially generate “explosive volatility” due to massive leverage and recent low volatility, suggested Arcane Research analyst Vetle Lunde.

Lunde pointed to the “leverage bonanza,” or leverage going parabolic in the crypto derivatives market, while Bitcoin has continued to hover around $19,000 in recent weeks.

In crypto trading, leverage refers to using borrowed funds to make trades to earn bigger through contracts like perpetual swaps. According to Arcane, theoretical open interest (OI) in Bitcoin perpetual contracts approached 500,000 BTC as of October 11, marking parabolic growth in influence amid Bitcoin’s flattening volatility.

While predicting potential outbreaks of volatility in the short to medium term, Lunde avoided predicting exact market movements, saying:

“I see the current open interest as well above any level that can be considered sustainable, opacity from market signals limits me from having any directional view on the unwinding of said leverage.”

The analyst also stressed that the current market could benefit sophisticated traders who are familiar with the straddle strategy, which involves buying both a put option and a call option with the same price and expiration date.

In the medium term, Lunde pointed to the increasing 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 reaching 660,000 BTC on October 12.

Lunde also mentioned a few potent mid-term triggers for crypto, including potential BTC purchases by Michael Saylor’s MicroStrategy in November. “If the usual MicroStrategy rejection repeats, expect small rallies and brief hardcore selling as MicroStrategy bids and then announces the purchases for the remainder of Q4 2022,” the analyst wrote.

Related: Bitcoin Analysts and Traders Say BTC’s Low Volatility Is ‘Calm Before the Storm’

Regardless of the trend coming in the short to medium term, the Arcane Research analyst remains bullish on Bitcoin over the longer term. Lunde expressed confidence that the next year will bring “idiosyncratic crypto-related regulatory clarity” in the US as well as a more stable interest rate and inflation regime.

He also predicted more crypto growth as major financial institutions such as BlackRock, Citadel and Nasdaq have moved into the industry recently. He stated:

“I’m sure the show will go on and new heights will be met in the not too distant future.”

As previously reported, some major financial institutions such as JPMorgan set a long-term theoretical target for Bitcoin at $150,000.