of bitcoins (BTC) the flash crash on January 10 saw the price trade below $40,000 for the first time in 110 days and this was a wake-up call for leveraged traders. $1.9 billion worth of long (buy) futures contracts were liquidated that week, causing morale among traders to plummet.
The “Fear and Greed” crypto index, which ranges from 0 “extreme fear” to 100 “greed,” hit 10 on Jan. 10, the lowest level since the March 2020 crash. The indicator gauges sentiment among traders using historical volatility, market momentum, volume, Bitcoin dominance, and social media.
As usual, the panic turned out to be a buying opportunity as the total crypto market capitalization surged 13.5%, going from a low of $1.85 trillion to $2.1 trillion in less than three days.
Currently, investors appear to be digesting this week's economic data showing that December 2021 US retail sales were down 1.9% compared to the previous month.
Investors have reason to worry about stagflation, a scenario in which inflation accelerates despite a lack of economic growth. However, even if this ultimately proves Bitcoin's digital scarcity to be a positive feature, markets will continue to hunker down with whatever asset is deemed safe. Therefore, the first wave will be potentially damaging for cryptocurrencies.
The Bitcoin price has been flat for the past seven days, falling short of the altcoin market's 7% gain. Part of this unusual movement can be explained by layer 1 decentralized application platforms showing positive performance driven by Fantom (FTM), Cardano (THERE ARE), Near Protocol (NEAR) and Harmony (ONE).
Loopring (LRC), an open zkRollup protocol for decentralized exchanges on Ethereum, was the worst performer of the week. DEX volume using the protocol peaked at $30 million per day in early December 2021, but is now close to $6 million. Meanwhile, Dfinity (ICP) and Chainlink (LINK) are adjusting after a rally of 40% or more in the first 10 days of 2022.
Tether premium and futures premium held up well
The OKEx belt (USDT) premium or discount measures the difference between China-based peer-to-peer (P2P) transactions and the official US dollar. Figures above 100% indicate excessive demand for investment in cryptocurrencies. On the other hand, a 5% discount usually indicates a lot of sales activity.
The Tether gauge bottomed out at a 3% discount on Dec 31, which is slightly bearish but not alarming. However, this metric has been down a decent 2% discount over the past week, indicating no panic selling by China-based traders.
To further demonstrate that the structure of the crypto market has held up, traders should look at the CME Bitcoin futures contract premium. That metric looks at the difference between longer-dated futures contracts and the current spot price in regular markets.
Anytime this indicator fades or turns negative, it's an alarming red flag. This situation is also known as a lag and indicates that there is bearish sentiment.
These fixed-month contracts typically trade at a small premium, indicating sellers are asking for more money to hold onto settlements longer. As a result, futures should trade at a premium of 0.5% to 2% in healthy markets, a situation known as contango.
Notice how the indicator took a negative turn on December 9 when Bitcoin traded below $49,000 but still managed to hold onto a slightly positive number. This shows that institutional traders are showing a lack of confidence, although it is not yet a bearish structure.
Considering that the total cryptocurrency market capitalization is down 9.5% YTD, the market structure held up pretty well. The CME futures premium would have turned negative had there been excessive demand from short sellers.
Unless these fundamentals change significantly, there is not yet enough information available to support calls for a Bitcoin price below $40,000.
The views and opinions expressed herein are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making a decision.
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