After breaking the rising wedge formation on August 17, the total market capitalization of cryptocurrency rapidly dropped to $1 trillion, and the bulls’ dream of reclaiming the $1.2 trillion support last seen on June 10 is far away.
Total cryptocurrency market cap, billion USD. Source: TradingView
The deteriorating conditions are not limited to the cryptocurrency markets. The price of West Texas Intermediate crude oil fell 3.6% on August 22, down 28% from its peak of $122 seen on June 8. by 3.16%. These are all signs that investors are feeling less confident about the central bank’s policies of asking for more money to hold these debt instruments.
Recently, David Kostin, chief US equity strategist at Goldman Sachs, stated that risk-reward for the S&P 500 index is skewed to the downside after a 17% rise since mid-June. According to Kostin’s client note, inflation surprises to the upside require the US Federal Reserve to tighten the economy more aggressively, negatively impacting valuations.
Meanwhile, extended shutdowns that were supposed to contain the spread of COVID-19 in China and real estate debt problems caused the People’s Bank of China (PBOC) to cut the five-year loan base rate to 4.30% from 4.45% on August 21. The move occurred a week after the Chinese central bank cut interest rates in a surprise move.
Cryptocurrency investor sentiment on the brink of “neutral to bearish”
The risk aversion caused by rising inflation has led investors to expect additional interest rate hikes, which in turn will reduce investor appetite for growth stocks, commodities and cryptocurrencies. As a result, traders are likely to seek refuge in the US dollar and inflation-protected bonds during periods of uncertainty.
Index of Fear and Greed in Cryptography. Source: Alternative.me
The Fear and Greed Index reached 27/100 on August 21, the lowest reading in 30 days for the data-driven sentiment gauge. The move confirmed that investor sentiment was shifting away from the neutral reading of 44/100 on August 16, reflecting the fact that traders are relatively scared of short-term price action in the cryptocurrency market.
Here are the winners and losers from the past seven days as total cryptocurrency capital fell 12.6% to $1.04 trillion. While Bitcoin (BTC) posted a 12% drop, a few medium-cap cryptocurrencies dropped 23% or more in this period.
Weekly winners and losers among the top 80 coins. Source: Nomex
EOS jumped 34.4% after its community turned bullish on a steady “Mandel” cross slated for September. The update is expected to completely terminate the relationship with Block.one.
Chiliz (CHZ) rose 2.6% after Socios.com invested $100 million for a 25% stake in the new digital and entertainment arm of FC Barcelona.
Celsius (CEL) fell 43.8% after its August 14 bankruptcy filing showed a $2.85 billion fund mismatch.
Most tokens performed negatively, but retail demand in China improved slightly
The premium of OKX Tether (USDT) is a good measure of retailer demand in China. It measures the difference between China-based peer-to-peer (P2P) trading and the US dollar.
Excessive buying demand tends to pressure the index above fair value at 100%, and during bear markets, it floods Tether’s market supply and causes a discount of 4% or higher.
Tether (USDT) is peer-to-peer against USD/CNY. Source: OKX
On August 21, the price of Tether in Asia-based peer-to-peer markets reached a two-month high, and is currently at a discount of 0.5%. However, the index remains below the neutral to bearish range, indicating lower demand from retail buying.
Traders should also analyze the futures markets to rule out the externalities of the Tether instrument. Perpetual contracts, also known as reverse swaps, have a built-in rate that is typically charged every eight hours. Exchanges use these fees to avoid misalignments in exchange risk.
A positive funding rate indicates that longer contracts (buyers) require more leverage. However, the opposite situation occurs when short positions (sellers) require additional leverage, causing the financing rate to turn negative.
Accumulated future funding rate on August 22. Source: Coinglass
Perpetual contracts reflected a neutral sentiment after Bitcoin and Ether maintained a relatively flat funding rate. The current fee resulted from a balanced situation between long and short term purchases.
For the remaining altcoins, even Ether Classic’s 0.40% weekly negative funding rate (ETC) wasn’t enough to discourage short sellers.
Likely 20% drop to retest annual lows
According to derivatives and trading indices, investors are moderately concerned about a sharper correction in the global market. The absence of buyers is evident in Tether’s slight discount when priced in Chinese yuan and near-zero funding rates in the futures markets.
Neutral to bearish market indicators are worrying