Data shows that Bitcoin and altcoins risk a 20% drop to new yearly lows

After the rising wedge formation was broken on August 17, the total crypto market capitalization quickly fell to $1 trillion, and the bulls’ dream of regaining the $1.2 trillion support, last seen on June 10, became even more distant.

The deteriorating conditions are not exclusive to crypto markets. The price of WTI oil yielded 3.6% on August 22, down 28% from the peak of $122 seen on June 8. USTreasury’s 5-year yield, which bottomed on August 1 at 2.61%, reversed its trend and is now trading. of 3.16%. These are all signs that investors feel less confident about the central bank’s guidelines for asking for more money to hold these debt instruments.

Recently, Goldman Sachs chief US equity strategist David Kostin stated that the risk reward for the S&P 500 is skewed to the downside after a 17% rally since mid-June. According to a client note written by Kostin, inflation surprises to the upside would require the US Federal Reserve to tighten the economy more aggressively, negatively impacting valuations.

Meanwhile, extended shutdowns reportedly to limit the spread of COVID-19 in China and real estate debt problems led the PBOC to cut its five-year prime rate to 4.30% from 4.45% on August 21. the move came a week after China’s central bank cut interest rates in a surprise move.

Crypto investor sentiment is on the edge of “neutral-to-bearish”

The risk-off attitude brought by rising inflation led investors to expect further interest rate hikes, which in turn will reduce investors’ appetite for growth stocks, commodities and cryptocurrencies. As a result, traders are likely to seek shelter in the US dollar and inflation-protected bonds during periods of uncertainty.

The Fear and Greed index hit 27/100 on August 21, the lowest reading in 30 days for this data-driven sentiment gauge. The move confirmed that investor sentiment was moving away from a neutral 44/100 reading on August 16, and it reflects the fact that traders are relatively fearful of the crypto market’s short-term price action.

Below are the winners and losers from the past seven days as total crypto capitalization fell 12.6% to $1.04 trillion. While Bitcoin (BTC) posted a 12% decline, a handful of mid-cap altcoins fell 23% or more during the period.

EOS jumped 34.4% after the community turned bullish on the “Almond” hard fork planned for September. The update is expected to completely end the relationship with Block.one.

Chiliz (CHZ) rose 2.6% after Socios.com invested $100 million for a 25% stake in Barcelona Football Club’s new digital and entertainment arm.

Celsius (CEL) fell 43.8% after an Aug. 14 bankruptcy report revealed a $2.85 billion mismatch.

Most tokens performed negatively, but retail demand in China improved slightly

The OKX Tether (USDT) premium is a good measure of China-based crypto trader demand. It measures the difference between China-based peer-to-peer (P2P) trades and the US dollar.

Excessive buying demand tends to push the indicator above fair value of 100%, and during bearish markets, Tether’s market supply is flooded causing a discount of 4% or higher.

On August 21, the Tether price in Asia-based peer-to-peer markets hit its highest level in two months, currently at a 0.5% discount. However, the index remains below the neutral-to-bearish range, signaling weak retail demand.

Traders must also analyze futures markets to rule out externalities specific to the Tether instrument. 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.

Perpetual contracts reflected neutral sentiment after Bitcoin and Ether held a relatively flat funding rate. The current fees were the result of a balanced situation between leveraged longs and shorts.

As for the remaining altcoins, even the 0.40% weekly negative funding rate for Ether Classic (ETC) was not enough to dissuade short sellers.

A 20% drop to test annual lows is likely on the way

According to derivatives and trading indicators, investors are moderately concerned about a steeper global market correction. The absence of buyers is evident in Tether’s slight discount when priced in Chinese yuan and the near-zero funding rates in futures markets.

These neutral-to-bearish market indicators are worrisome, given that total crypto capitalization is currently testing the critical $1 trillion support. If the US Federal Reserve does in fact continue to tighten the economy to suppress inflation, the chances of crypto testing annual lows of $800 billion are high.

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