Total crypto market cap falls to $840 billion, but derivatives data shows traders are neutral

Regulatory pressure continues to limit each upside breakout, but data shows some compelling reasons for an eventual crypto market rally.

The total cryptocurrency market capitalization dropped 1.5% in the past seven days to rest at $840 billion. The slightly negative movement did not break the ascending channel initiated on Nov. 12, although the overall sentiment remains bearish and year-to-date losses amount to 64%.

Bitcoin (BTC) price dropped 0.8% on the week, stabilizing near the $16,800 level at 10:00 UTC on Dec. 8 — even though it eventually broke above $17,200 later on the day. Discussions related to regulating crypto markets pressured markets and the FTX exchange collapse limited traders’ appetites, causing lawmakers to turn their attention to the potential impact on financial institutions and the retail investors’ lack of protection.

On Dec. 6, the Financial Crimes Enforcement Network (FinCEN) said it is “looking carefully” at decentralized finance (DeFi), while the agency’s acting director, Himamauli Das, said the digital asset ecosystem and digital currencies are a “key priority area” for the agency. In particular, the regulator was concerned with DeFi’s “potential to reduce or eliminate the role of financial intermediaries” that are critical to its AML and CFT efforts.

Hong Kong’s legislative council approved a new licensing regime for virtual asset service providers. From June 2023, cryptocurrency exchanges will be subject to the same legislation followed by traditional financial institutions. The change will require stricter anti-money laundering and investor protection measures before being guaranteed a license of operation.

Meanwhile, Australian financial regulators are actively working on methods for incorporating payment stablecoins into the regulatory framework for the financial sector. On Dec. 8, the Reserve Bank of Australia published a report on stablecoins citing risks of disruptions to funding markets, increasing bank exposure and liquidity. The analysis highlighted the particular fragility of algorithmic stablecoins, noting the Terra-Luna ecosystem collapse.

The 1.5% weekly drop in total market capitalization was impacted mainly by Ether’s (ETH) 3% negative price move and BNB, which traded down 2.5%. Still, the bearish sentiment significantly impacted altcoins, with 10 of the top 80 coins dropping 8% or more in the period.

Trust Wallet (TWT) gained 18.6% as the service provider gained market share from the browser extension wallet launch in mid-November.

Axie Infinity (AXS) rallied 17.6% as investors adjusted their expectations after a drastic 89% correction since the 1Q of 2022.

Chainlink (LINK) saw a 10.1% correction after its staking program opened up for early access on Dec. 6, indicating investors had anticipated the event.

1INCH dropped 15.2% after 15% of the supply was unlocked on Dec. 1, according to their original 4-year vesting schedule.

Leverage demand is balanced between bulls and bears

Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

The 7-day funding rate was near zero for Bitcoin and altcoins, meaning the data points to a balanced demand between leverage longs (buyers) and shorts (sellers) in the period.

Traders should also analyze the options markets to understand whether whales and arbitrage desks have placed higher bets on bullish or bearish strategies.

The options put/call ratio reflects moderate bullishness

Traders can gauge the market’s overall sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.

A 0.70 put-to-call ratio indicates that put options open interest lag the more bullish calls by 30% and is therefore bullish. In contrast, a 1.40 indicator favors put options by 40%, which can be deemed bearish.

Even though Bitcoin’s price failed to break the $17,500 resistance on Dec. 5, there was only temporary excessive demand for downside protection using options.

Presently, the put-to-call volume ratio stands near 0.40 as the options market is more strongly populated by neutral-to-bearish strategies, favoring call (buy) options by 60%.

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Derivatives markets point to upside potential

Despite the weekly price decline in a handful of altcoins and the 2% drop in total market capitalization, there have been no signs of sentiment worsening, according to derivatives metrics.

There’s balanced demand for leverage using futures contracts, and the BTC options risk assessment metric remains favorable even after Bitcoin’s price failed to break above the $17,500 level.

Consequently, the odds favor those betting that the ascending channel will prevail, propelling the total market capitalization to the $875 billion resistance. A break above the channel would give bulls the much-needed breathing room after a week of negative newsflow.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.