Crypto market rally stalls at $1.2T level, but bulls get positioned
After gaining 11% between March 16 and March 18, the total crypto market cap has been battling resistance at $1.2 trillion. The same level was reached on August 14, 2022 and was followed by a 19.7% decline to $960 billion over the next two weeks. During the lateralization period between March 20 and March 27, Bitcoin (BTC) gained 0.3%, while Ether (ETH) had modest gains of 1.6%.
One source of favorable short-term momentum is a change in the Federal Reserve’s monetary policy. The US Federal Reserve was forced to increase its balance sheet by $393 billion between March 9 and March 23 to provide short-term loans to failing banks. The goal of the plan was to reduce inflation, which has significantly affected the cost of living and ultimately hampered economic expansion in the United States.
The balance sheet reduction is contrary to the central bank’s previous nine-month trend of relieving some of the debt instruments, exchange-traded funds and mortgage-backed securities. The reversal of this strategy is basically bullish for risk assets because the Fed acts as a lifeline for struggling banks and hedge funds.
On the other hand, the sector’s regulatory risks worsened on March 22 when Coinbase received a Wells notice from the US Securities and Exchange Commission. The exchange’s betting program, some of its digital asset listings and wallet services could all be targeted by the regulator. Again, the uncertainty comes from not knowing which assets qualify as securities.
These competing forces may have been the primary reason for cryptocurrencies’ narrow trading range near $1.18 trillion between March 17th and March 27th. However, derivatives data present a compelling case for a rally towards $1.35 trillion and a retest of the $1 trillion threshold.
The overall crypto market capitalization has remained stable since March 20, with XRP gaining 22% and Litecoin (LTC) gaining 17%. XRP’s gains can likely be attributed to investors’ expectations that Ripple will prevail in its ongoing legal battle against the SEC. As for Litecoin, analysts point to the upcoming halving in August, when the rewards for mining new blocks will be halved.
Options traders are reasonably certain of over $1 trillion
Traders can gauge market sentiment by gauging whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, while put options are for bearish strategies.
A put-to-call ratio of 0.70 indicates that open interest for put options lags behind the larger number of call options. Conversely, a 1.40 indicator favors put options, which is a bearish sign.
Since March 10, Bitcoin’s put-to-call ratio has either been balanced or favored neutral-to-bullish call options. Although Bitcoin’s price has risen by 41% in the past two weeks, options traders are indicating that they are not increasingly worried about a price correction.
Related: Will BTC ditch the bear market? 5 things to know in Bitcoin this week
Lending demand is balanced despite the $1.2 trillion resistance
Perpetual contracts, also known as inverse swaps, have a built-in rate that is usually charged every eight hours. Exchanges use this fee to avoid imbalances in currency risk.
A positive funding rate indicates that longs (buyers) require more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to become negative.
Over the past week, the seven-day funding rate for the majority of the leading cryptocurrencies has been neutral, indicating that no excessive buying power has been used to support prices. This means firepower for bulls, if necessary, and a significant reduction in liquidation risk.
The only exception was BNB, where short sellers paid 1.25% per week to maintain their positions. Regulatory uncertainty surrounding the Binance exchange is likely behind the whales’ interest in shorting BNB.
The recent rally seems sustainable from a derivatives perspective, and bulls are well positioned to defend against future declines. But given that the crypto price gains may have been fueled by the Fed’s emergency measures to avoid a banking crisis, the odds favor further sideways price movement.
The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
