The total cryptocurrency market falls to $840 billion, but derivatives data shows traders are neutral

The total capitalization of the cryptocurrency market decreased by 1.5% in the last 7 days to $840 billion. A slight downside move failed to break the bullish channel that started on November 12, although overall sentiment remains bearish and losses for the year are 64%.

Total cryptocurrency market volume in USD, 12 hours. Source: TradingView

The price of Bitcoin (BTC) fell 0.8% for the week, stabilizing near $16,800 at 10:00 UTC on December 8th – although it eventually broke above $17,200 by the end of the day. Debate over regulation of cryptocurrency markets has gripped markets, and the FTX exchange’s collapse has curbed traders’ appetite, prompting lawmakers to focus on the potential impact on financial institutions and the lack of protection for retail investors.

On December 6, the Financial Crimes Enforcement Network (FinCEN) said it was “looking closely” at decentralized finance (DeFi), and the agency’s acting director Himamauli Das said the digital asset ecosystem and digital currencies were a “top priority area.” .” In particular, the regulator was concerned about DeFi’s “potential to reduce or eliminate the role of financial intermediaries” that are important to efforts to combat money laundering and terrorist financing.

Hong Kong’s legislative council has 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 amendment will require tightening of Anti-Money Laundering and investor protection measures before a license to operate is guaranteed.

Meanwhile, Australian financial regulators are actively working on ways to incorporate payment stablecoins into the regulatory framework for the financial sector. On December 8, the Reserve Bank of Australia published a report on stablecoins that noted the risks of disruptions in funding markets, such as banking risk and liquidity. The analysis highlighted the particular fragility of algorithmic stablecoins, noting the collapse of the Terra-Luna ecosystem.

The 1.5% weekly drop in total market capitalization was mainly driven by Ether (ETH)’s 3% negative price movement and BNB’s (BNB) decline of 2.5%. Still, low sentiment weighed heavily on altcoins, with 10 of the top 80 coins losing 8% or more in the period.

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

Trust Wallet (TWT) gained 18.6% as the service provider gained market share from browser extensions purse will be launched in mid-November.

Axie Infinity Shards (AXS) is up 17.6% after a sharp correction of 89% since Q1 2022 as investors adjusted their expectations.

Chainlink (LINK) saw a 10.1% correction after its staking program opened for early access on December 6, indicating that investors are anticipating the event.

1 INCH, based on the original four-year ownership chart, is down 15.2% since the December 1 open, 15% of supply.

Leverage demand is balanced between bulls and bears

Standing contracts, also known as reverse swaps, typically have an embedded exchange rate that settles every eight hours. Exchanges use this fee to hedge currency risk imbalances.

A positive funding ratio indicates that long-term (buyers) require more leverage. However, the opposite occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

7-day funding rate with fixed futures accumulated on December 8. Source: Coinglass

The seven-day funding rate was close to zero for Bitcoin and altcoins, meaning the data shows balanced demand between leveraged longs (buyers) and shorts (sellers) during that period.

Traders should also analyze options markets to understand whether whales and arbitrage tables place higher bets on bullish or bearish strategies.

The put/call ratio of options reflects the average upside

Traders can gauge overall market sentiment by gauging whether more activity is coming from call (buy) or put (sell) options. Generally, call options are used for bullish strategies and put options are used for bearish strategies.

A strike ratio of 0.70 indicates that open interest put options lag more than 30% of bullish calls and are therefore bullish. In contrast, the 1.40 indicator favors 40% put options, which can be considered bearish.

BTC options volume to call ratio. Source: Laevitas

Although the price of Bitcoin failed to break the $17,500 resistance on December 5th, there was only temporary excess demand to hedge on the downside using options.

Currently, the put-to-call volume ratio is close to 0.40, as the options market is more heavily populated with neutral than bearish strategies, with a 60% preference for call (buy) options.

Related: US lawmakers are questioning federal regulators about banks’ ties to crypto companies

Derivatives markets point to upside potential

Despite several altcoins experiencing weekly price declines and a 2% drop in overall market capitalization, there is no sign of sentiment deteriorating by derivatives metrics.

There is a balanced demand for leverage using futures contracts, and the BTC options risk assessment metric remains favorable even after the price of Bitcoin fails to rise above the $17,500 level.

As a result, the odds favor the bets that the ascending channel will prevail, bringing the total market capitalization to resistance at $875 billion. A break above the channel would give bulls some much-needed breathing room after a week of negative news flow.