Fed policy and crumbling market sentiment could send the total crypto market cap back below $1T

The total crypto market capitalization broke above $1 trillion on July 18 after an agonizing thirty-five-day stay below the key psychological level. Over the next seven days, Bitcoin (BTC) traded flat near $22,400 and Ether (ETH) faced a 0.5% correction to $1,560.

Total crypto capitalization ended July 24 at $1.03 trillion, a modest 0.5% negative seven-day move. The apparent stability is biased against the flat performance of BTC and Ether and the $150 billion value of stablecoins. The broader data hides the fact that seven of the top 80 coins fell 9% or more during the period.

Although the chart shows support at the $1 trillion level, it will take some time for investors to regain confidence in investing in cryptocurrencies and actions by the US Federal Reserve may have the biggest impact on price action.

In addition, the sit and wait mentality may be a reflection of important macroeconomic events planned for the coming week. Generally speaking, worse-than-expected data tends to raise investor expectations for expansionary measures, which are beneficial for riskier assets such as cryptocurrency.

The Federal Reserve’s policy meeting is scheduled for July 26 and 27, and investors expect the US central bank to raise interest rates by 75 basis points. Also, the second quarter of US gross domestic product (GDP) – the broadest measure of economic activity – will be released on July 27.

$1 trillion is not enough to create trust

Investor sentiment improved from July 18, as reflected in the Fear and Greed Index, a data-driven sentiment gauge. The indicator currently stands at 30 out of 100, up from 20 on July 18 when it hovered in the “extreme fear” zone.

One must note that even though the total crypto market cap of $1 trillion was recovered, traders’ mood has not improved much. Below are the winners and losers from July 17 to 24.

Arweave (AR) faced a 20.6% technical correction after an impressive 58% gain from 12-18. July after the network file sharing solution exceeded 80 terabytes (TB) of data storage.

Polygon (MATIC) was down 11.7% after Ethereum founder Vitalik Buterin supported the implementation of Zero-Knowledge Rollups technology, a feature currently in the works for Polygon.

Solana (SOL) corrected 9% after demand for the smart contract network could be negatively impacted by Ethereum’s upcoming migration to a proof-of-stake consensus.

Retail traders are not interested in bullish positions

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.

Tether has been trading at a slight discount in Asian peer-to-peer markets since July 4. Not even the total market value increase of 25% during 13-20. July was enough to show excessive buying demand from retailers. For this reason, these investors continued to leave the crypto market by seeking shelter in fiat currency.

One should analyze crypto derivatives to rule out externalities specific to the stablecoin market. For example, perpetual contracts have a built-in price 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.

The derivative contracts show modest demand for leveraged long (bull) positions on Bitcoin, Ether and Cardano. Still, nothing out of the norm after a weekly funding of 0.15% equates to a monthly charge of 0.6%, so uneventful. The opposite movement occurred on Solana, XRP and Ether Classic (ETC), but it is not enough to cause concern.

As investors’ attention shifts to global macroeconomic data and the Fed’s response to weakening conditions, the opportunity for cryptocurrencies to prove themselves as a solid alternative is diminishing.

Crypto traders are signaling fear and a lack of buying leverage, even in the face of a 67% correction since the November 2021 peak. Overall, derivatives and stablecoin data show a lack of confidence in support for the $1 trillion market cap.

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.