Derivatives data points to neutral santiment

Key points:

The total market capitalization of cryptocurrencies has dropped 1.5 percent to $840 billion over the past seven days.

The 7-day funding rate for Bitcoin and altcoins is close to zero, which means that the data indicates a balanced demand between leveraged longs and shorts during this period.

Currently, the volume ratio of puts-to-calls is close to 0.40, as the options market is more neutral to bearish with call options accounting for 60%.

Even after the Bitcoin price failed to surpass $17,500, the demand for futures leverage is balanced, and the BTC options risk assessment indicator remains favorable.

The total market capitalization of cryptocurrencies has dropped 1.5 percent to $840 billion over the past seven days. The mildly negative move failed to break an ascending channel that began on Nov. 12, although the overall sentiment remains bearish, down 64% year-to-date.

Total crypto market cap, USD, 12H. Source - TradingView

The bitcoin price was down 0.8 percent for the week and was steady around $16,800 by 10:00 UTC on Dec. 8 — though it eventually topped $17,200 later in the day. Discussions over the regulation of the crypto market have weighed on the market, with the FTX exchange causing traders' appetites to plummet, prompting lawmakers to turn their attention to the potential impact on financial institutions and the lack of protections for retail investors.

On Dec. 6, the Financial Crimes Enforcement Network (FinCEN) said it was “taking a closer look at decentralized finance (DeFi),” with the agency’s acting director, Himamauli Das, saying the ecosystem of digital assets and digital currencies was “a critical priority area". In particular, the regulator is concerned that DeFi “has the potential to reduce or eliminate the role of financial intermediaries,” which is critical to its anti-money laundering and counter-terrorist financing efforts.

Hong Kong's Legislative Council has approved a new licensing regime for virtual asset service providers. From June 2023, cryptocurrency exchanges will be subject to the same laws as traditional financial institutions. The change requires stricter anti-money laundering and investor protection measures to guarantee a license to operate.

Meanwhile, Australia’s financial regulator is actively examining ways to incorporate payment stablecoins into the financial sector’s regulatory framework. On Dec. 8, the Reserve Bank of Australia released a report on stablecoins, citing risks of disruption to funding markets such as bank exposure and liquidity. The analysis highlights the particular vulnerability of algorithmic stablecoins and points to the collapse of the Terra Luna ecosystem.

The 1.5% weekly total market capitalization decline was largely driven by negative price action with Ether down 3% and BNB trading down 2.5%. Still, the bearish sentiment had a major impact on altcoins, with 10 of the top 80 coins losing 8% or more over the period.

Weekly gains and losses of the top 80 coins. Source - Nomics

Trust Wallet (TWT) gained 18.6 percent as the service provider launched a wallet browser extension in mid-November, gaining market share.

Axie Infinity Shards rose 17.6% after investors adjusted their expectations following a sharp 89% correction from the first quarter of 2022.

Chainlink saw a 10.1% pullback after its staking program opened to early access on Dec. 6, suggesting investors are anticipating the event.

1INCH is down 15.2% after releasing 15% of its supply on Dec. 1 under its original four-year vesting plan.

Leverage demand is balanced between longs and shorts

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

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

Perpetual futures 7-day funding rate, Dec. 8. Source - Coinglass

The 7-day funding rate for Bitcoin and altcoins is close to zero, which means that the data indicates a balanced demand between leveraged longs (buyers) and shorts (sellers) during this period.

Traders should also analyze the options market to see if whales and arbitrage desks are placing larger bets on bullish or bearish strategies.

Options Put/Call Ratio Reflects Moderate Uptrend

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

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, an indicator of 1.40 favors put options by 40%, which can be considered bearish.

BTC options put/call ratio. Source - Laevitas

While bitcoin prices failed to break above the $17,500 resistance on Dec. 5, the demand for options downside protection was only temporarily in excess.

Currently, the volume ratio of puts to calls is close to 0.40, as the options market is more neutral to bearish with calls (buying) options accounting for 60%.

Futures markets point to upside potential

Derivatives indicators show no signs of deteriorating sentiment, despite a handful of altcoins posting weekly losses and a 2% drop in total market capitalization.

Even after the Bitcoin price failed to surpass $17,500, the demand for futures leverage is balanced, and the BTC options risk assessment indicator remains favorable.

As a result, those betting that the ascending channel will prevail are more likely to push the total market capitalization toward the $875 billion resistance level. A breakout of the channel will give the bulls some much-needed breathing room after a week of negative news.