Crypto posted strong gains in October. Why investors are optimistic about the rest of the year

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 month before, according to Coin Metrics. Ether did better, climbing 16.2% in October and recovering from its 14.6% loss for September. 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 got a slew of economic data this week and the Federal Reserve hiked interest rates by 0.75 percentage point for a fourth time on Wednesday afternoon. Midterm elections are next week. Still, investors say that while it may be too early to call a bottom, recovery is in sight. "It is possible that we test the lows of this year one more time, but for the most part, we're close to a bottom and I think a lot of more bad news is actually good news for crypto," said Steve McClurg, chief investment officer at Valkyrie. "There's the old adage, 'don't fight the Fed,' and the Fed is still progressing toward really tight monetary policy, but they're getting close to the end of the tightening cycle," he added. "It doesn't mean that they're pivoting and going the other way yet, but we're starting to see some cracks in the economy that will likely cause them to pivot sometime probably in the near future." McClurg also a highlighted a recent move of $940 million in bitcoin investors removed from exchanges, calling it a typically 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 develop for other market participants. Chris Kline, co-founder of Bitcoin IRA, pointed to late October news out of France and Costa Rica , both of which are reevaluating their tax treatment of cryptocurrencies. He also highlighted the U.K., which voted last week to recognize crypto as a regulated financial instrument. "These are the things that aren't rising to the top, but they're the qualitative elements that will catalyze a strong close for crypto this year," he said. "This has been a year of posturing and research. We're starting to see the chart now into 2023, which will be the year of action – and that's where you'll start seeing that price volatility come back." Bigger appetite for ether The case 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 that shift to ether's new, post-merge interest-yielding quality . The study, issued 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 merge, the Ethereum network is "poised for better economics." "Ethereum needs very little recovery in economic activity for the token economics " – like more gas fees and revenue, high token burn and its "deflationary" status – to turn favorable, Bernstein's digital assets 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 ether could be moving toward a deflationary future, as the crypto has exhibited periods of deflation amidst low network activity, analyst Joseph Ayoub said in a note Tuesday. He also noted that recent ether moves have been driven by derivatives markets, with ETH open interest having recently climbed to its highest level since April, when the cryptocurrency was trading at the $3,000 level. That makes it "one of the largest divergences between price and open interest over the last 3 years, an indication that further volatility is possible," Ayoub said. "We adjust open interest for ETH price, noting this is now trading much past all time high levels, and particularly almost twice as high as the 2021 November highs," he added. "This indicates a high amount of leverage in the derivatives market, which may be the tail wagging the 'spot-price' dog."