Total crypto market capitalization soared 29.4% in two weeks, though the price of Bitcoin (BTC) stabilized near $21,000 on Jan. 19.
As a result, it became increasingly difficult to justify that the 5-month downtrend still prevails after the total crypto channel cap of $930 billion has been breached. Still, the $1 trillion psychological resistance remains strong.
The move likely reflects investors becoming more bullish on risky assets after weaker-than-expected inflation metrics signaled that the US Federal Reserve’s interest rate hike strategy should be eased to throughout 2023.
However, Klaas Knot, who serves as governor of the Dutch central bank, declared on January 19 that the European Central Bank (ECB) “won’t stop after a single 50 basis point increase, that’s for sure.”
At the Davos forum, Knot added: “Core inflation has not yet turned the corner in the euro area.”
In essence, investors fear that another round of interest rate hikes could further pressure corporate profits, causing unemployment and a deep recession. In this case, a stock market sell-off becomes the base case, and crypto markets will likely follow the downtrend.
Further demonstrating the strong correlation between cryptocurrencies and stock markets, the Russell 2000 Index faced a 3.4% drop on January 18-19. The move coincides with the total crypto market cap correcting by 4% after flirting with $1 trillion. marks January 18.
The 10.4% gain in total market capitalization between January 12-19 was mainly affected by Bitcoin and Ether (ETH) gains of 10.4%, which were up 8.7%. Bullish sentiment was choppiest for altcoins, with 8 of the top 80 coins gaining 20% or more in the period.
Metaverse-related tokens rallied after tech giant Apple announced the upcoming release of its VR headset. Major movers included Decentraland (MANA) with 55%, Enjin (ENJ) with 37% and The Sandbox (SAND) with 30% more.
Frax Share (FXS) rallied 40% to reach 65,000 Ether deposited into its liquid share protocol, which currently has more than $100 million in total value locked up.
Privacy coins like Monero (XMR) and ZCash (ZEC) declined after regulatory risks increased and the US Department of Justice announced the arrest of the founder of Bitzlato, a peer-to-peer cryptocurrency exchange.
Demand for leveraged bullish bets increases
Perpetual contracts, also known as reverse swaps, have a built-in fee that is typically charged every eight hours. Exchanges use this fee to avoid currency risk imbalances.
A positive funding rate indicates that long buyers require more leverage. However, the opposite situation occurs when short sellers require additional leverage, causing the funding rate to turn negative.
The 7-day funding rate was positive in all cases, which means that the data points to more demand for long leverage (buyers) in the period. Still, charging 0.25% per week to keep your bullish trades open shouldn’t be a major concern for most investors.
Therefore, traders must analyze the options markets to understand whether the whales and arbitrage desks have placed higher bets on bullish or bearish strategies.
Investors do not fear dips, according to BTC options
Traders can gauge overall market sentiment by gauging if there is more activity through call options or put options. Generally speaking, call options are used for bullish strategies while put options are for bearish strategies.
A put to put ratio of 0.70 indicates that the open interest of put options lags the most bullish bets by 30% and is therefore positive. On the contrary, an indicator of 1.40 favors put options by 40%, which can be considered negative.
Although Bitcoin price failed to break the $21,500 resistance on Jan. 18, there were no signs of further demand for downside protection. This becomes evident as the volume of the put and call ratio remained below 0.80 all the time, even after the negative movement of 5.5% on January 18th.
Neutral to bearish strategies continue to be in strong demand in the BTC options markets, favoring call options by 23%.
Derivatives markets suggest support at the $930 billion level is strong
After solid gains in the last 7 days, the cryptocurrency market continues to show resilience despite warnings of a “global financial collapse” from BitMEX founder Arthur Hayes. “2023 could be as bad as 2022 until the Fed changes,” Hayes wrote, calling that scenario his “base case.”
According to crypto derivatives metrics, there is almost no sense of fear or lack of leveraged buying demand after total market capitalization first missed the opportunity to breach the $1 trillion mark. Those are encouraging signs, especially when combined with the technical analysis of the breakout of the descending channel.
Consequently, the odds favor the previous channel top at $930 billion becoming a strong support level. So for now, even a downturn in traditional markets shouldn’t be a big concern for crypto bulls, but investors should continue to monitor derivatives metrics.
The views, thoughts and opinions expressed herein are solely those of the author 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, readers should do their own research when making a decision.