Upside capped at $980B total crypto market, according to derivatives metrics

Upside capped at $980B total crypto market, according to derivatives metrics


It is becoming increasingly challenging to support a bullish short-term view for cryptocurrencies as the total crypto market capitalization has been below $1.4 trillion for the past 146 days. Furthermore, a descending channel initiated in late July has limited the upside after two strong rejections.

Total crypto market cap, USD. Source: TradingView

The 1% weekly negative performance in cryptocurrency markets was accompanied by stagnation in the S&P 500 stock market index, which remained basically flat at $3,650. Uncertainty continues to limit the eventual recovery as worsening global economic conditions have caused trans-Pacific shipping rates to plunge 75% versus the previous year, forcing ocean carriers to cancel dozens of sailings.

Conflicting macroeconomic signals limit risk market upside

From one side, the global macroeconomic scenario improved after the United Kingdom’s government reverted plans to cut income taxes on Oct. 3. On the other hand, investors’ fear increased as global investment bank Credit Suisse’s credit default swaps reached their highest level on Oct. 3. Such instruments allow investors to protect against default, and their cost surpassed levels seen at the height of the 2008 financial crisis.

Below is a list of the winners and losers of the crypto market capitalization’s 1% loss to $935 billion. Bitcoin (BTC) stood out with a 1% gain, which led its dominance rate to hit 41.5%, the highest since Aug. 5.

Weekly winners and losers among the top-80 coins. Source: Nomics

Quant (QNT) jumped 15% on speculation that its interoperable blockchain protocol would find adoption across governmental and regulatory bodies.

Maker (MKR) gained 10.6% after MakerDAO launched a proposal to decrease the stability fee for the Curve protocol staked Ether (ETH) pool.

UniSwap Protocol (UNI) gained 10.6% after UniSwap Labs, a startup contributing to the protocol, reportedly raised over $100 million from venture capitalists.

Still, a single week of negative performance is not enough to interpret how professional traders are positioned. Those interested in tracking whales and market markers should analyze derivatives markets.

Derivatives markets point to further downside

For instance, perpetual futures, 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.

Accumulated 7-day perpetual futures funding rate on Oct. 3. Source: Coinglass

Perpetual contracts reflected neutral sentiment as the accumulated funding rate was relatively flat in most cases over the past seven days. The only exception was Ether Classic (ETC), although a 0.50% weekly cost to maintain a short (bear) position should not be deemed relevant.

Since Sept. 26, the yields on the U.S. Treasury’s 5-year notes declined from 4.2% to 3.83%, indicating investors are demanding fewer returns to hold extremely safe assets. The flight-to-quality movement shows how risk-averse traders are as mixed sentiment emerges from lackluster economic indicators and corporate earnings.

For this reason, bears believe that the prevailing longer-term descending formation will continue in the upcoming weeks. In addition, professional traders’ lack of interest in leveraging cryptocurrency longs (buys) is evident in the neutral futures funding rate. Consequently, the current $980 billion market capitalization resistance should remain strong.