Data suggests further downside for crypto market cap at $850B

Key points:

• The 17.6% weekly decline in total market capitalization was largely driven by Bitcoin’s 18.3% loss and Ether’s 22.6% negative price action.
• The current USDC premium is 100.8%, unchanged from last week. Thus, despite the drop in the crypto market cap, there has been no panic selling by Asian retail investors.
• 7-day funding rates for the two largest cryptocurrencies are slightly negative, and the data suggests there is too much demand for shorts.
• The Bitcoin options market remains more neutral-to-bearish, as indicated by the current 0.63 level.
• Traders aren't sure if the support for the $850 billion market cap will last in the near term.

The total market capitalization of cryptocurrencies fell 24 percent between Nov. 8 and 10, hitting a low of $770 billion. However, a strong recovery of 16% followed after the initial panic faded and the forced futures liquidation no longer weighed on asset prices.

This week's plunge isn't the first time the market has dipped below the $850 billion market cap level, with similar patterns seen throughout June and July. In both cases, support shows strength, but the daily low of $770 billion on Nov. 9 was the lowest since December 2020.

The 17.6% weekly decline in total market capitalization was largely driven by Bitcoin’s 18.3% loss and Ether’s 22.6% negative price action. For altcoins, however, the price impact was more severe, with 8 of the top 80 coins dropping 30% or more during the period.

FTX Token and Solana were severely affected by liquidation following the bankruptcy of FTX Exchange and Alameda Research.

Aptos (APT) fell 33% despite denying rumors that FTX owns Aptos Labs or Aptos Foundation Treasuries.

Stablecoin demand in Asia remains neutral

The USD token premium is a good measure of demand from Chinese cryptocurrency retailers. It measures the difference between China-based peer-to-peer transactions and the U.S. dollar.

Excessive buying demand tends to push metrics up to 100% above fair value, and during bear markets, the stablecoin market is flooded with supply, leading to discounts of 4% or more.

The current USDC premium is 100.8%, unchanged from last week. Thus, despite the 24% drop in the cryptocurrency’s total market capitalization, there has been no panic selling by Asian retail investors.

However, the data should not be viewed as bullish, as the buying pressure on USDC suggests that traders are seeking protection from stablecoins.

Few leveraged buyers use futures markets

Perpetual contracts, also known as inverse swaps, have embedded interest rates that are typically calculated every eight hours. Exchanges use this fee to avoid exchange rate risk imbalances.

A positive funding rate indicates that bulls (buyers) need more leverage. However, when bears (sellers) need additional leverage, the opposite happens, making funding rates negative.

As the chart above shows, 7-day funding rates for the two largest cryptocurrencies are slightly negative, and the data suggests there is too much demand for shorts (sellers). While the weekly cost of maintaining an open position is 0.40%, that's not a problem.

Traders should also analyze the options market to see if whales and carry traders are placing bigger bets on bullish or bearish strategies.

Options Put/Call Ratio Signals Deterioration in Sentiment

Traders can gauge overall market sentiment by measuring whether more activity is coming from call (buy) options or put (sell) options. Generally, call options are used for bullish strategies, and put options are used for bearish strategies.

A put-to-call ratio of 0.70 indicates that put open interest is lagging the bullish call by 30% and is therefore bullish. In contrast, the indicator at 1.20 supports put options by 20%, which can be considered bearish.

Investors sought downside protection when bitcoin prices fell below $18,500 on Nov. 8. This then increases the put ratio to 0.65. Still, the Bitcoin options market remains more neutral-to-bearish, as indicated by the current 0.63 level.

Combine that with a lack of stablecoin demand in Asia and negatively skewed perpetual premiums, and it's clear that traders aren't sure if the support for the $850 billion market cap will last in the near term.