Total cryptocurrency market capitalization fell 1.5% in the past seven days to $840 billion. The slightly negative move did not break the ascending channel initiated on November 12, although general sentiment remains bearish with year-to-date losses standing at 64%.
Bitcoin (BTC) price fell 0.8% on the week, stabilizing near the $16,800 level as of 10:00 UTC on December 8, though it finally broke above $17,200 later in the day. Debates related to the regulation of cryptocurrency markets put pressure on the markets and the collapse of the FTX exchange limited the appetite of traders, causing lawmakers to focus their attention on the potential impact on financial institutions and the lack of protection of the retail investors.
On Dec. 6, the Financial Crimes Enforcement Network (FinCEN) said it is “carefully examining” decentralized finance (DeFi), while the agency’s acting director, Himamauli Das, asserted that the ecosystem of digital assets and currencies digital are a “key priority area” for the agency. In particular, the regulator expressed concern about the “potential for DeFi to reduce or eliminate the role of financial intermediaries,” which are critical to its anti-money laundering and anti-terrorist financing efforts.
The Hong Kong Legislative Council approved a new licensing regime for virtual asset service providers. Starting in June 2023, cryptocurrency exchanges will be subject to the same legislation as traditional financial institutions. The change will require stronger anti-money laundering and investor protection measures before they are granted a license to operate.
Meanwhile, Australian financial regulators are actively working on methods to incorporate payment stablecoins into the financial sector regulatory framework. December 8th, The Reserve Bank of Australia published a report on stablecoins citing the risks of disruption to funding markets and increased exposure and liquidity for banks. The analysis highlighted the particular fragility of algorithmic stablecoins, pointing to the collapse of the Terra-Luna ecosystem.
The 1.5% weekly drop in total market capitalization was mainly affected by the negative 3% movement in the price of Ether (ETH) and BNB, which was down 2.5%. Still, the bearish sentiment affected altcoins significantly, with 10 of the top 80 coins falling 8% or more in the period.
Trust Wallet (TWT) gained 18.6% as the service provider gained market share thanks to the launch of the wallet with browser extension in mid-November.
Axie Infinity (AXS) rose 17.6% as investors adjusted their expectations following a drastic 89% correction from the first quarter of 2022.
Chainlink (LINK) experienced a 10.1% correction after its staking program opened for early access on Dec. 6, indicating that investors had anticipated the event.
1INCH fell 15.2% after 15% of the deal was unlocked on December 1, in accordance with its original 4-year buyout schedule.
Leverage demand is balanced between bulls and bears
Perpetual contracts, also known as reverse swaps, have an implicit fee that is typically charged every eight hours. Exchanges use this rate to avoid imbalances in foreign exchange risk.
A positive funding rate indicates that the longs (buyers) are demanding more leverage. Nevertheless, The opposite situation occurs when shorts (sellers) require more leverage, causing the funding rate to turn negative.
The 7-day funding rate was close to zero for Bitcoin and altcoins, meaning the data points to balanced demand between longs (buyers) and shorts (sellers) for leverage over the period.
Traders should also analyze the options markets to see if the whales and arbitrage desks have been more bullish or bearish.
The put/call options ratio reflects a moderate upward trend
Traders can gauge overall market sentiment by gauging if there is more activity through call or put options. Usually, Call options are used for bullish strategies, while put options are used for bearish ones.
A put to call option ratio of 0.70 indicates that the open interest on put options is 30% behind the more bullish call options and is therefore bullish. Conversely, an indicator of 1.40 favors put options by 40%, which can be considered bearish.
Even though Bitcoin price failed to break the $17,500 resistance on Dec. 5, there was only temporary over-demand for downside protection via options.
Currently, the ratio of put option volume to call option volume is close to 0.40, as the options market is more populated by neutral and bearish strategies, favoring call options by 60%.
Derivatives markets point to upside potential
Despite the weekly price decline of a handful of altcoins and a 2% decline in total market capitalization, there have been no signs of worsening sentiment, according to derivatives metrics.
There is balanced demand for leverage via futures contracts, and the BTC options risk assessment metric remains favorable even after the Bitcoin price failed to break above the $17,500 level.
Consequently, the odds favor those who bet the ascending channel will prevail, pushing total market capitalization to the $875 billion resistance. A break above the channel would give the bulls a much-needed breather after a week of negative news.
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