Bitcoin and Ethereum had a rough week, but derivatives data reveals a silver lining

Published at: May 13, 2022

This week the crypto market endured a sharp drop in valuation after Coinbase, the leading U.S. exchange, reported a $430 million quarterly net loss and South Korea announced plans to introduce a 20% tax on crypto gains.

During its worst moment, the total market crypto market cap faced a 39% drop from $1.81 trillion to $1.10 trillion in seven days, which is an impressive correction even for a volatile asset class. A similar size decrease in valuation was last seen in February 2021, creating bargains for the risk-takers.

Even with this week’s volatility, there were a few relief bounces as Bitcoin (BTC) bounced 18% from a $25,400 low to the current $30,000 level and Ether (ETH) price also made a brief rally to $2,100 after dropping to a near-year low at $1,700.

Institutional investors bought the dip, according to data from the Purpose Bitcoin ETF. The exchange-traded instrument is listed in Canada and it added 6,903 BTC on May 12, marking the largest single-day buy-in ever registered.

On May 12, the United States Treasury Secretary Janet Yellen stated that the stablecoin market is not a threat to the country’s financial stability. In a hearing of the House Financial Services Committee, Yellen added:

“They present the same kind of risks that we have known for centuries in connection with bank runs.”

The total crypto capitalization down 19.8% in seven days

The aggregate market capitalization of all cryptocurrencies shrank by 19.8% over the past seven days, and it currently stands at $1.4 trillion. However, some mid-capitalization altcoins were decimated and dropped more than 45% in one week.

Below are the top gainers and losers among the 80 largest cryptocurrencies by market capitalization.

Maker (MKR) benefited from the demise of a competing algorithmic stablecoin. While TerraUSD (UST) succumbed to the market downturn, breaking its peg well below $1, Dai (DAI) remained fully functional.

Terra (LUNA) faced an incredible 100% crash after the foundation responsible for administering the ecosystem reserve was forced to sell its Bitcoin position at a loss and issue trillions of LUNA tokens to compensate for its stablecoin breaking below $1.

Fantom (FTM) also faced a one-day 15.3% drop in the total value locked, the amount of FTM coins deposited on the ecosystem’s smart contracts. Fantom has been struggling since prominent Fantom Foundation team members Andre Cronje and Anton Nell resigned from the project.

Tether premium shows trickling demand from retail traders

The OKX Tether (USDT) premium indirectly measures retail trader crypto demand in China. It measures the difference between China-based USDT peer-to-peer trades and the official U.S. dollar currency.

Excessive buying demand puts the indicator above fair value, which is 100%. On the other hand, Tether‘s market offer is flooded during bearish markets, causing a 2% or higher discount.

Currently, the Tether premium stands at 101.3%, which is slightly positive. Furthermore, there has been no panic over the past two weeks. Such data indicate that Asian retail demand is not fading away, which is bullish, considering that the total cryptocurrency capitalization dropped 19.8% over the past seven days.

Altcoin funding rates have also dropped to worrying levels. Perpetual contracts (inverse swaps) have an embedded rate that is usually charged every eight hours. These instruments are retail traders‘ preferred derivatives because their price tends to perfectly track regular spot markets.

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.

Notice how the accumulated seven-day funding rate is mostly negative. This data indicates higher leverage from sellers (shorts). As an example, Solana‘s (SOL) negative 0.90% weekly rate equals 3.7% per month, a considerable burden for traders holding futures positions.

However, the two leading cryptocurrencies did not face the same leverage selling pressure, as measured by the accumulated funding rate. Typically, when there‘s an imbalance caused by excessive pessimism, that rate can easily move below negative 3% per month.

The absence of leverage shorts (sellers) in futures markets for Bitcoin and Ethereum and the modest bullishness from Asian retail traders should be interpreted as extremely healthy, especially after a -19.8% weekly performance.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.