Why Market Volatility Often Precedes Bitcoin Rally

The analysis showed that Bitcoin fell by an average of about 56% during the intervening years, while moving closely with the decline of US stocks.

US midterm election periods have historically been associated with increased volatility in financial markets, with the S&P 500 experiencing an average decline of around 16%, according to a new report published by Binance Research.

It stated that midterm years typically produce the weakest performance of the four-year US presidential term as political uncertainty surrounding the election affects investor sentiment. In seven of the past ten medium-term periods, stock markets have recorded corrections of more than 10% as political risk has influenced market behavior.

Political uncertainty shakes the markets

Digital assets showed a similar pattern during these periods. According to the analysis, Bitcoin has historically moved in close correlation with stocks over the medium term. Since 2014, which the report considers the first meaningful period due to previous liquidity constraints in the crypto markets, BTC has recorded an average decline of about 56% during the three completed periods during the mid-term election years.

Despite this historical weakness over the years, research has shown that there is a consistent pattern of strong market activity once the political uncertainty is removed. Data presented in the report show that the 12 months following a US midterm election have produced positive returns for the S&P 500 on all occasions since 1939. During this period, the index gained an average of about 19% in the year after the vote.

Bitcoin has also recorded gains in each of the three years since the midterm, with the cryptocurrency averaging around 54% gains over those periods. The findings show that markets often recover after election results become clear and investors gain more visibility into the political and economic landscape.

The report describes the pattern as a recurring cycle in which election-year volatility is followed by a stronger period for risk assets after uncertainty fades and capital returns to the market.

The analysis comes as global markets are already facing significant volatility stemming from geopolitical tensions and macroeconomic concerns. Escalating developments in the Middle East, including the standoff over the Strait of Hormuz, have fueled fears of supply shocks in global energy markets, contributing to a sharp rise in oil prices.

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At the same time, all eyes are on upcoming US inflation indicators, including the Consumer Price Index and data on personal consumption expenditures, which may influence expectations about future monetary policy decisions.

Binance Research said the current market conditions are also being shaped by high leverage among investors and negative gamma positions among market makers in the stock and cryptocurrency markets. These factors can increase price movements when markets react to geopolitical or macroeconomic developments.

While near-term risks remain, periods of heightened political and macro uncertainty are often followed by stronger performance after major sources of uncertainty are resolved.