Crypto Traders Remain in Control Despite Market Cap Rejection at $1T

The crypto market capitalization experienced an increase of 29.4% over the course of two weeks, even though Bitcoin’s (BTC) price stayed close to $21,000 on January 19th.

As a consequence, it became more and more difficult to argue that the bearish trend of five months was still in effect after the $930 billion total crypto market cap was surpassed. Nevertheless, the psychological $1 trillion resistance stays strong.

The shift may indicate that investors are becoming more confident in investing in riskier assets after the weaker-than-anticipated inflation figures suggested the Federal Reserve’s interest rate hike policy should be moderated in the course of 2023.

Klaas Knot, the governor of the Dutch central bank, declared on January 19th that the European Central Bank (ECB) will not be content with just one 50 basis point increase – that much is certain.

At the Davos gathering, Knot remarked: “Core inflation has not yet reached a point of stabilization in the Euro area.”

Investors are concerned that further increases in interest rates could have a negative impact on corporate profits, leading to job losses and a severe economic downturn. This could result in a sell-off in the stock market, which would likely be mirrored in the cryptocurrency markets as well.

To demonstrate the close link between cryptocurrencies and the stock markets, the Russell 2000 index dropped 3.4% between Jan. 18 and Jan. 19. This decline coincides with the total crypto market capitalization correcting by 4% after it had approached the $1 trillion mark on Jan. 18.

The increase of 10.4% in total market capitalization between Jan. 12 and Jan. 19 was largely driven by the 10.4% surge in Bitcoin and the 8.7% rise of Ether (ETH). Altcoins, in particular, experienced a more dramatic increase, with eight of the top eighty coins increasing by 20% or more during the period.

Cryptocurrencies related to the Metaverse surged after tech behemoth Apple declared the forthcoming launch of its virtual reality headset. Decentraland (MANA) had the greatest increase of 55%, followed by Enjin (ENJ) with a 37% jump, and The Sandbox (SAND) at 30%.

Frax Share (FXS) saw a surge of 40% as it achieved 65,000 Ether being deposited in its liquid staking protocol, which now has a total value locked of more than U$100 million.

Cryptocurrencies such as Monero (XMR) and ZCash (ZEC) both decreased in value following the heightened regulatory risks and the arrest of the founder of Bitzlato, a now-closed peer-to-peer crypto exchange, as declared by the U.S. Department of Justice.

Demand for leveraged bullish bets rises

Perpetual contracts, also referred to as inverse swaps, typically have an embedded rate that is charged every eight hours. This fee is utilized by exchanges to prevent exchange risk discrepancies.

A positive funding rate reveals that those who are long (buyers) need more leverage. Conversely, when those who are short (sellers) need more leverage, the funding rate becomes negative.

The seven-day funding rate was favorable in each case, suggesting that there was an increased demand for those taking up long positions (buyers) in the time frame. Nevertheless, the 0.25% cost per week to maintain their bullish trades should not be a major worry for the majority of investors.

By examining the options markets, traders can determine if whales and arbitrage desks have taken a bullish or bearish stance.

Investors are not afraid of dips, according to BTC options

Traders can assess the overall sentiment of the market by determining if more transactions are happening with call (buy) options or put (sell) options. Usually, call options are used for bullish strategies, while put options are for bearish strategies.

A 0.70 put-to-call ratio suggests that puts are lagging behind calls by 30%, which is a bullish signal. On the other hand, a 1.40 ratio suggests puts have a 40% advantage over calls, indicating a bearish outlook.

Despite Bitcoin’s failure to surpass the $21,500 mark on January 18, there was no indication of a heightened need for downside protection. This is evident in the fact that the put-to-call volume stayed below 0.80 the entire time, even after the 5.5% decline on January 18.

The preference for call (buy) options in the BTC option markets is strongly evident, with a 23% lead over neutral-to-bearish strategies.

Compass Mining is being sued for not delivering Bitcoin mining machines that were purchased by customers.

Derivatives markets suggest support at the $930 billion level is strong

Despite the cryptocurrency market having experienced significant growth over the preceding week, BitMEX founder Arthur Hayes has cautioned of a potential “global financial meltdown.” Hayes has predicted that this year “could be as bad as 2022” until the Federal Reserve changes its stance, which he has identified as his “base case.”

Crypto derivatives metrics indicate that there is little evidence of fear or lack of leverage buying interest after the total market capitalization failed to exceed the $1 trillion mark. These are positive indications, particularly when combined with the technical analysis of the descending channel breakout.

Consequently, it is likely that the previous channel top at $930 billion will become a strong support level. Therefore, even if traditional markets experience a downturn, crypto bulls should not be overly worried, yet investors should still keep an eye on derivatives metrics.