An ascending triangle setup has pushed the total cryptocurrency market capitalization towards the $1.2 trillion level. The problem with this 7-week setup is the decline in volatility, which could last until the end of August. From there, the pattern can be broken either way, but data from Tether and futures markets shows that the bulls lack enough conviction to catalyze a breakout to the upside.
Investors are cautiously awaiting new macroeconomic data on the state of the economy as the US Federal Reserve (FED) raises interest rates and maintains its asset purchase program. On August 12, the United Kingdom recorded a contraction in gross domestic product (GDP) of 0.1% year-on-year. Meanwhile, UK inflation reached 9.4% in July, the highest figure seen in 40 years.
The Chinese real estate market has prompted the credit agency Fitch Ratings to issue a “special report” on August 7 to quantify the impact of prolonged difficulties on a potentially weaker economy in China. Analysts expect asset management and small steelmaking and construction companies to suffer the most.
In short, investors in risk assets are eagerly waiting for the Federal Reserve and Central Banks around the world to signal that policy tightening is coming to an end. On the other hand, expansionary policies are more favorable for scarce assets, including cryptocurrencies.
Sentiment improves to neutral 4 months later
The risk-averse attitude caused by rising interest rates has instilled a bearish sentiment in crypto investors since mid-April. As a result, traders have been unwilling to allocate to volatile assets and have sought refuge in US Treasuries, even though their yields do not offset inflation.
The Fear and Greed Index hit 6/100 on June 19, near the lowest reading ever for this data-driven sentiment gauge. However, investors backed away from the “extreme fear” reading for August as the indicator held at the 30/100 level. On August 11, the metric finally entered a “neutral” zone after a 4-month negative trend.
Below are the tokens that have risen and fallen the most over the last seven days, as the total capitalization of cryptocurrencies increased by 2.8% to $1.13 billion. While Bitcoin (BTC) posted a mere 2% gain, a handful of mid-cap altcoins jumped 13% or more in the period.
Celsius (CEL) soared 97.6% after Reuters reported that Ripple Labs has shown interest in acquiring Celsius Network and its assets, which are currently bankrupt.
Chainlink (LINK) rose 17% after announcing on Aug. 8 that it would stop supporting upcoming Ethereum proof-of-work (PoW) forks occurring during the merger.
Avalanche (AVAX) gained 14.6% after going public on Robinhood on August 8.
Curve DAO (CRV) lost 6% after the nameserver of the Curve.Fi website was compromised on August 9. The team quickly fixed the issue, but the front-end hack caused some of their users to lose.
Market may have rallied but retail traders are neutral
The Tether (USDT) premium on OKX is a good indicator of demand from China-based retail traders. It measures the difference between China-based peer-to-peer (P2P) trading and the US dollar.
Excessive buying demand tends to push the indicator above 100% fair value and during bear markets the Tether market supply is flooded causing a discount of 4% or more.
On August 8, the price of Tether on Asia-based intermarkets entered a 2% discount, indicating moderate selling pressure from the retail side. More importantly, the metric has not improved while the total cryptocurrency capitalization has gained 9% in 10 days, indicating weak demand from retail investors.
To exclude the specific externalities of the Tether instrument, traders should also analyze the futures markets. Perpetual contracts, also known as reverse swaps, have an implied rate that is typically charged every eight hours. Exchanges use this rate to avoid currency risk imbalances.
A positive funding rate indicates that longs (buyers) require more leverage. However, the opposite situation occurs when shorts (sellers) demand more leverage, causing the funding rate to turn negative.
Perpetual contracts reflected neutral sentiment after Bitcoin and Ether held a slightly positive (bullish) funding rate. The current rates imposed on the bulls are not a concern and resulted in a balanced situation between leveraged longs and shorts.
The continuation of the recovery depends on the Federal Reserve
Based on derivatives and trading indicators, investors are less inclined to increase their positions at current levels, as shown by Tether’s discount in Asia and the absence of a positive funding rate in futures markets.
These neutral to bearish market indicators are worrying given that the total capitalization of cryptocurrencies is in a 7-week uptrend. Investor angst over Chinese property markets and further Fed tightening moves are the most likely explanation.
For now, the odds of the ascending triangle breaking above the predicted $1.25 trillion mark look low, but more macroeconomic data is needed to estimate the direction central banks might take.
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