Despite the recent negative crypto and macroeconomic newsflow, the total cryptocurrency market capitalization broke above $1 trillion on Jan. 21. An encouraging sign is that derivatives metrics are not showing increased demand from bearish traders at the moment.
One area of concern is Genesis Capital’s largest debtor, the Digital Currency Group, its parent company. Consequently, Grayscale funds management could be at risk, with investors unsure if Grayscale Bitcoin Trust assets could face liquidation. The investment vehicle currently holds over $14 billion worth of Bitcoin positions for its holders.
A United States appeals court is set to hear the arguments relating to Grayscale Investment’s lawsuit against the Securities and Exchange Commission (SEC) on March 8. The fund manager questioned the SEC’s decision to deny their asset-backed exchange-traded fund launch.
Regulatory concerns also negatively impacted the markets after South Korean prosecutors requested an arrest warrant for Bithumb exchange owner Kang Jong-Hyun. On Jan. 25, the Financial Investigation 2nd Division of the Seoul Southern District Prosecutor’s Office sentenced Kang and two Bithumb executives on charges of conducting fraudulent illegal transactions.
The 7% weekly increase in total market capitalization was held back by Ether’s (ETH) 0.3% negative price move. Still, the bullish sentiment significantly impacted altcoins, with 11 of the top 80 coins gaining 18% or more in the period.
Aptos (APT) gained 91% after the smart contract network total value locked reached a record-high $58 million, fueled by the PancakeSwap decentralized exchange.
Optimism (OP) saw 21% gains after a sharp increase in transaction volumes during a nonfungible token incentive program called Optimism Quest.
Leverage demand slightly favors bulls
Perpetual contracts, also known as inverse swaps, have an embedded rate usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.
A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.
The 7-day funding rate was positive for Bitcoin and Ethereum, meaning the data points to slightly higher demand for leverage longs (buyers) versus shorts (sellers). Still, a 0.25% weekly funding cost is not enough to discourage leverage buyers.
Interestingly, Aptos was the only exception as the altcoin presented a negative 0.6% weekly funding cost, with short sellers paying to keep their positions open. This movement can be explained by the 91% rally in seven days and it suggests that sellers expect some sort of technical correction.
The options put/call ratio shows no signs of fear
Traders can gauge the market’s overall sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.
A 0.70 put-to-call ratio indicates that put options open interest lag the more bullish calls by 30% and is therefore bullish. In contrast, a 1.40 indicator favors put options by 40%, which can be deemed bearish.
Even though Bitcoin’s price failed to break the $23,300 resistance, the demand for bullish call options has exceeded the neutral-to-bear puts since Jan. 6.
Presently, the put-to-call volume ratio stands near 0.50 as the options market is more strongly populated by neutral-to-bullish strategies, favoring call (buy) options by 50%.
Derivatives markets point to further upside potential
After the third consecutive week of gains, which totals 40% year-to-date when excluding stablecoins, there are no signs of demand from short sellers. More importantly, leverage indicators show bulls are not using excessive leverage.
Derivatives markets point to further upside potential. Even if the market revisits the $950 billion market capitalization from Jan. 18, there is no reason for panic. Currently, Bitcoin option markets show whales and market makers favoring the neutral-to-bullish strategies.
Ultimately, the odds favor those betting that the $1 trillion total market cap will hold, opening room for further gains.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.