Bitcoin and Ethereum have had a rough week, but derivatives data shows a silver lining

This week, the cryptocurrency market suffered a sharp drop in valuation after major US exchange Coinbase reported a quarterly net loss of $430 million and South Korea announced plans to impose a 20 percent tax on crypto earnings.

In the worst case, the total cryptocurrency market cap saw a 39% drop, falling from $1.81 trillion to $1.10 trillion in seven days, an impressive correction even for a volatile asset class. A similarly large fall in valuation was last seen in February 2021, creating bargains for risk seekers.

Total cryptocurrency market cap in billions of dollars. Source: TradingView

Despite this week’s volatility, there were some blips of relief as Bitcoin (BTC) rallied 18% from a low of $25,400 to the current level of $30,000 and Ether (ETH) price also saw a brief rally to $2,100, after falling to almost one. Year low at $1,700.

Bitcoin and Ethereum have had a rough week, but derivatives data shows a silver lining
Bitcoin and Ethereum have had a rough week, but derivatives data shows a silver lining

Institutional investors bought the dip, according to data from the Purpose Bitcoin ETF. The exchange-traded instrument is listed in Canada and was trading at 6,903 BTC on May 12, making it the largest single-day buy on record.

On May 12, US Treasury Secretary Janet Yellen stated that the stablecoin market poses no threat to the country’s financial stability. At a House Financial Services Committee hearing, Yellen added

“They pose the same risks that we’ve known about bank runs for centuries.”

Total Cryptocurrency Capitalization Drops 19.8% in Seven Days

The aggregate market cap of all cryptocurrencies is down 19.8% in the last seven days and currently stands at $1.4 trillion. However, some mid-cap altcoins have been decimated, losing more than 45% in a week.

Below are the top gainers and losers among the top 80 cryptocurrencies by market cap.

Weekly winners and losers among the 80 largest coins. Source: nomics

Maker (MKR) benefited from the demise of a rival algorithmic stablecoin. While TerraUSD (UST) succumbed to the market decline and broke its peg well below $1, DAI remained fully operational.

Terra (LUNA) suffered an incredible 100% drop after the foundation responsible for managing the ecosystem reserves was forced to sell its Bitcoin position at a loss and issue trillions of LUNA tokens to compensate their stablecoin fell below $1.

Fantom (FTM) also faced a 15.3% daily decline in total locked value, the amount of FTM coins held in the ecosystem’s smart contracts. Fantom has been struggling ever since prominent members of the Fantom Foundation team, Andre Cronje and Anton Nell, left the project.

Tether premium shows are in demand by retailers

The Tether (USDT) premium on OKX indirectly measures demand for cryptocurrencies from retailers in China. It measures the difference between China-based peer-to-peer trades in USDT and the US domestic currency.

When there is excess demand, the indicator is above the fair value, which is 100%. On the other hand, Tether’s market supply is flooded during bear markets, resulting in a discount of 2% or more.

Tether (USDT) USD/CNY peer-to-peer premium. Source: OKX

Tether’s premium is currently at 101.3%, which is slightly positive. Also, there hasn’t been any panic in the past two weeks. This data shows that Asian retail demand is not abating, which is bullish considering total cryptocurrency capitalization is down 19.8% over the past seven days.

Altcoin funding rates have also fallen to worrying levels. Perpetual contracts (reverse swaps) have an implied rate that is typically calculated every eight hours. These instruments are the derivatives of choice for retail traders as their price tends to closely follow regular spot markets.

Exchanges use this rate to avoid currency risk imbalances. A positive funding rate indicates that longs (buyers) need more leverage. However, the opposite situation occurs when short sellers (sellers) ask for additional leverage, making the funding rate negative.

Seven Day Cumulative Perpetual Futures Funding Rate. Source: coin jar

Note that the seven-day cumulative funding rate is mostly negative. This data indicates higher leverage by sellers (shorts). For example, Solana’s (SOL) negative weekly price of 0.90% equates to 3.7% per month, a significant drag for traders holding futures positions.

However, the two largest cryptocurrencies have not faced the same leverage selling pressure as measured by the cumulative funding rate. Normally, when there is an imbalance caused by excessive pessimism, this rate can easily drop below negative 3% per month.

The lack of leverage shorts (sellers) in the Bitcoin and Ethereum futures markets and modest bullishness from Asian retailers should be interpreted as extremely healthy, especially after a weekly return of -19.8%.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should do your own research when making a decision.

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