Crypto showed strong gains in October. Why investors are optimistic about the rest of the year
by Arthur · November 2, 2022
Things are looking up for crypto after bitcoin and ether finally climbed enough to post gains for October. Bitcoin rose 3.8% for the month, after falling 2.8% the previous month, according to Coin Metrics. Ether fared better, climbing 16.2% in October, recovering from September’s 14.6% loss. Prices were unusually flat for most of the month, but several investors have interpreted that as stability and resilience. Cryptocurrencies have two big market weeks to get through. Investors received a flurry of economic data this week, with the Federal Reserve raising interest rates by 0.75 percentage points for the fourth time on Wednesday afternoon. There are midterm elections next week. Still, investors say that while it may be too early to call a bottom, recovery is in sight. “It’s possible we’ll test the year’s lows one more time, but for the most part we’re near a bottom, and I think a lot more bad news is actually good news for crypto,” said Steve McClurg. investment manager at Valkyrie. “It’s the old saying, ‘don’t fight the Fed,’ and the Fed is still moving toward really tight monetary policy, but they’re nearing the end of the tightening cycle,” he added. “That doesn’t mean they’re swinging and going the other way yet, but we’re starting to see some cracks in the economy that will probably cause them to swing sometime, probably in the near future.” McClurg also highlighted a recent move of $940 million in bitcoin investors removed from exchanges, calling it a typical bullish signal and an indicator that people are saving their bitcoin rather than selling it. While the central bank continues to dominate investors’ attention, the case for bitcoin continues to evolve for other market players. Chris Kline, co-founder of Bitcoin IRA, pointed to news in late October from France and Costa Rica, both of which are reconsidering their tax treatment of cryptocurrencies. He also highlighted the UK, which last week voted to recognize crypto as a regulated financial instrument. “These are the things that don’t rise to the top, but they are the qualitative elements that will catalyze a strong finish for crypto this year,” he said. “This has been a year of attitude and research. We’re starting to see the chart now going into 2023, which will be the year of action – and that’s where you’ll start to see price volatility come back.” Greater appetite for ether. The rationale for investing in ether is also growing. While bitcoin and ether continue to dominate crypto portfolios, investors have reduced their weighting in bitcoin in favor of ether and multi-asset products, according to a new study from CoinShares. James Butterfill, who leads the research team there, attributed this shift to the ether’s new, post-merger interest-bearing quality. The study, released Oct. 27, focused on fund managers with more than $330 billion in assets under management. Earlier this week, Bernstein said that a month and a half after the merger, the Ethereum network is “ready for better economics.” “Ethereum needs very little recovery in economic activity for the token economy” — such as more gas fees and revenues, high token burn and its “deflationary” status — to turn favorable, Bernstein digital asset analyst Gautam Chhugani said in a note. In crypto terms, a deflationary asset is one whose supply is decreasing rather than increasing. Citi’s analysts agree that ether could be moving toward a deflationary future, as the crypto has shown periods of deflation amid low network activity, analyst Joseph Ayoub said in a note on Tuesday. He also noted that recent ether movements have been driven by derivatives markets, with ETH open interest recently climbing to its highest level since April, when the cryptocurrency traded at the $3,000 level. That makes it “one of the largest price-to-open spreads in the past 3 years, an indication that further volatility is possible,” Ayoub said. “We are adjusting open interest in the ETH price, noting that this is now trading well above all-time highs, and notably almost double the November 2021 highs,” he added. “This indicates a high amount of leverage in the derivatives market, which may be the tail wagging the ‘spot price’ dog.”
