Bitcoin is on the cusp of a bull market that could run into the end of the year, even with this week's meltdown: Kraken

• Bitcoin appears to "be back in a bull market" despite this week's sell-off, according to a Kraken report Tuesday.
• Futures open interest and other measures of activity have picked up but are well below the highs of April.
• Weekly fund flows, Google searches and Reddit data suggest there's scope for interest to pick up.
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Bitcoin has skidded to its lowest in around a month this week, after El Salvador's adoption of the cryptocurrency as legal tender unleashed a tidal wave of forced selling, but trading exchange Kraken said there's another bull run in the making.

In a research report on Tuesday, Kraken noted that investor interest has picked up over the summer, but is well below the peaks seen earlier this year, while interest from the retail community also has scope to improve.

Bitcoin plummeted by as much as 20% over Monday and Tuesday this week, briefly falling below $43,000 at one point for the first time in around a month, after El Salvador made the coin legal tender, prompting a "buy the rumor, sell the news" effort to take profit among traders that snowballed into mass liquidation across various exchanges.

But this does not change the optimistic outlook, according to Pete Humiston, manager at Kraken Intelligence.

"??While these moves look dramatic, they can be a sign of a healthy market. Because many market participants use derivatives to speculate on price, market leverage can get to a point where it needs to self-correct and reset. This results in a sudden jump in market volatility, much like the one we saw yesterday," Humiston told Insider.

Bitcoin lost roughly 50% in value over the early part of the summer, but rallied steadily throughout July and August. "Signs suggest overall market interest has yet to return to the levels seen in April/May, when BTC and altcoins were setting new all-time highs," the report said.

Open interest for bitcoin futures rose $10 billion in August to reach $33.2 billion, but it has "not yet returned to the market in the size we saw in April," the report said, suggesting there was room for derivatives investors to come back into the market.

The report noted that there is room for an upswing in buying from institutional investors. For example, bitcoin-backed products logged eight straight weeks of outflows from crypto funds until last week, when they saw their first inflows, according to data from CoinShares.

"Assuming the market remains in an uptrend, we could see a resurgence in institutional demand that could fuel the market to all-time highs," the report said.

Retail investors have also shown less appetite for bitcoin lately. There has been a reduction in the numbers of Google searches and subreddit subscriptions, which has left overall interest below where it was in the second quarter, when bitcoin and ethereum's ether hit record highs, the Kraken report said.

"All things considered, one could argue that while we've seen the market post generous returns, interest has yet to return to 'mania' like levels, and interest in the market is starting to pick up again. That said we ought to brace for a surge in demand as we head into the year-end," the report said.

Kraken is the 5th biggest exchange by volume according to CoinGecko.