A bearish market structure has pressured cryptocurrency prices over the past six weeks, pushing the total market cap to a two-month low of $1.13 trillion. According to two derived metrics, although shorter timeframe analysis provides a neutral view, crypto bulls will find it difficult to break the downtrend as Bitcoin (BTC), Ether (ETH) and BNB averaged between May 12 around Up 0.3% and May 19th.
Total cryptocurrency market cap in USD, 12 hours. Source: TradingView
Note that the descending wedge formation initiated in mid-April could last into July, suggesting that an eventual break to the upside would require an additional effort from the bulls.
Additionally, a stalemate on the US debt ceiling looms as the US Treasury runs out of money fast.
While the majority of investors believe the Biden administration can reach an agreement before actually defaulting on its debt, no one can rule out the possibility of a government shutdown and subsequent default.
Gold or stablecoins as a safe haven?
Even gold, once considered the world’s safest asset class, has not been spared the recent correction, as the precious metal fell from $2,050 on May 4 to the current level of $1,980.
Related: Bitcoin, Gold and the Debt Ceiling – Must Something Give?
Circle, the company behind USDC stablecoin, has swapped $8.7 billion worth of 30-day+ government bonds for short-term notes and secured loans at banking giants like Goldman Sachs and Royal Bank of Canada.
According to Markets Insider, a Circle representative explained:
“The inclusion of these highly liquid assets also provides additional protection for the USDC Reserve in the unlikely event of a US debt default.”
Stablecoin DAI, managed by decentralized organization MakerDAO, approved an increase in its portfolio holdings of U.S. Treasuries to $1.25 billion in March to “take advantage of the current yield environment and generate further revenue.”
Derivatives markets show no signs of a bear market
Perpetual contracts, also known as inverse swaps, have an embedded interest rate that is typically calculated every eight hours.
A positive funding rate indicates that long positions (buyers) require more leverage. However, the opposite situation occurs when short sellers (sellers) need additional leverage, causing the funding rate to become negative.
Perpetual futures accumulated 7-day funding rate on May 19th. Source: Coinglass
The 7-day funding rate for BTC and ETH was neutral, indicating balanced demand from leveraged long positions (buyers) and short positions (sellers) utilizing perpetual futures contracts. Curiously, even Litecoin (LTC) failed to show excessive long-term demand after a 14.5% weekly rally.
To rule out externalities that may have only impacted the futures markets, traders can assess market sentiment by measuring whether more activity is occurring via call (buy) or put (sell) options.
BTC option volume put to call ratio. Source: Laevitas.ch
Options expiration can increase volatility in the bitcoin price, resulting in an $80 million advantage for the bears at the last expiry on May 19.
A put-to-call ratio of 0.70 indicates that open interest in put options is lagging the more bullish calls and is therefore bullish. In contrast, an indicator of 1.40 favors put options, which can be considered bearish.
The put-to-call ratio for bitcoin options volume has been below 1.0 for the past few weeks, indicating a higher preference for neutral to bullish call options. More importantly, even when Bitcoin briefly fell to $26,800 on May 12, there was no meaningful increase in demand for the protective put options.
The glass is half full or are investors preparing for the worst?
The options market shows whales and market makers unwilling to make protective puts even after Bitcoin plummeted 8.3% between May 10-12.
However, given the balanced demand in the futures markets, traders appear reluctant to place additional bets until there is more clarity on the US debt stalemate.
Less than two weeks remain until June 1, when the US Treasury Department warned that the federal government might not be able to pay its debts.
Related: US Debt Ceiling Crisis: Bullish or Bearish for Bitcoin?
It is unclear if the total market cap can break the descending wedge formation. From an optimistic perspective, professional traders do not use derivatives to bet on a catastrophic scenario.
On the other hand, given the uncertainty surrounding the macroeconomic environment, there seems to be no reason for the bulls to jump too fast and bet on a crypto market recovery anytime soon. So, judging by derivatives metrics, the bears are ultimately in a comfortable position.
This article does not contain any investment advice or recommendations. Every investment and trading activity involves risk and readers should do their own research in making their decision.