Data Shows Bitcoin and Altcoins Likely to Fall 20% to Annual Low

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

Worsening conditions are not exclusive to cryptocurrency markets. The price of WTI oil fell 3.6% on August 22, down 28% from the high of $122 reached on June 8. The US 5-year bond yield, which settled on August 1 at 2.61%, has reversed and is now trading at 3.16%. These are all signs that investors are feeling less confident in the central bank’s policy of asking for more money to hold these debt instruments.

Recently, David Kostin, chief US equity strategist at Goldman Sachs, said the risk-reward ratio for the S&P 500 is declining after rising 17% since mid-June. According to a client note authored by Kostin, upside inflation would surprise the US Federal Reserve into tightening the economy, which would negatively affect valuations.

Meanwhile, prolonged lockdowns meant to contain the spread of COVID-19 in China and housing debt issues caused by the PBOC led the central bank to cut its five-year base lending rate from 4.45% to 4.30% on 21 August. Curiously, this move came a week after China’s central bank cut interest rates in a surprise move.

Cryptocurrency Investor Sentiment Ranges ‘Neutral to Bearish’

Due to the risk sentiment due to the rise in inflation, investors are anticipating further interest rate hikes, which will reduce investor appetite for stocks, growth, commodities and cryptocurrencies. Therefore, traders are likely to seek refuge in the US dollar and inflation-protected bonds during periods of uncertainty.

The Fear and Saint Index hit 27/100 on August 21, a 30-day low for this data-driven sentiment gauge. This move confirmed that investor sentiment was moving away from a neutral reading of 44/100 on August 16 and shows that traders are fearful of the near-term price action of the cryptocurrency market.

Here are the winners and losers of the past seven days, as the cryptocurrency’s total capitalization fell 12.6% to $1.04 trillion. While bitcoin (BTC) showed a 12% drop, a handful of mid-cap altcoins fell 23% or more during the period.

EOS jumped 34.4% after the public expressed hope about the “Mandel” hard fork scheduled for September. The update should completely end the relationship with Block.one.

Chiliz (CHZ) gained 2.6% after Socios.com invested $100 million for a 25% stake in the new digital and entertainment arm of Barcelona soccer club.

Celsius (CEL) fell 43.8% after its August 14th bankruptcy filing revealed a $2.85 billion irregularity.

Most of the signs performed negatively, but consumer demand in China improved slightly

The OKX Tether (USDT) premium is a good indicator of demand from cryptocurrency traders based in China. It measures the difference between China-based peer-to-peer (P2P) transactions and the US dollar.

Excessive buying demand usually pushes the indicator above 100% fair value, and during bear markets the market supply of Tether is flooded causing a discount of 4% or more.

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

Traders should also analyze futures markets to rule out externalities specific to the Tether instrument. Permanent contracts, also known as reverse swaps, have an embedded rate that is usually charged every eight hours. Stock exchanges use this rate to avoid currency risk imbalances.

A positive financing rate indicates that ships (buyers) want more leverage. However, the opposite happens when the shorts (sellers) ask for additional leverage, causing the funding rate to become negative.

Perpetual contracts showed neutral sentiment after Bitcoin and Ether maintained a relatively stable funding rate. The current charges arise from an equilibrium situation between leveraged longs and shorts.

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

A 20% drop is likely to retest the annual lows

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

These neutral to bearish market indicators are worrying since the total cryptocurrency capitalization is currently testing the crucial $1 trillion support. If the US Federal Reserve continues to tighten the economy to prevent inflation, the cryptocurrency is very likely to fall back to an annual low of $800 billion.

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