After gaining 11% between March 16 and 18, the total crypto market capitalization has been fighting resistance at the $1.2 trillion level. This same level was reached on August 14, 2022 and was followed by a 19.7% decline to $960 billion over the next two weeks. During the lateralization period between March 20 and 27, Bitcoin (BTC) gained 0.3% while Ether (ETH) posted modest gains of 1.6%.
A source of favorable short-term momentum is a change in monetary policy from the Federal Reserve. The US Federal Reserve was forced to increase its balance sheet by $393 billion between March 9 and 23 to provide short-term loans to failing banks. The goal of the plan was to reduce inflation, which has significantly affected the cost of living and ultimately hampered economic expansion in the United States.
The balance sheet reduction goes against the central bank's previous nine-month trend of dumping some of its debt instruments, ETFs and mortgage-backed securities. The reversal of this strategy is initially bullish for risk assets because the Fed is acting as a lifeline for struggling banks and hedge funds.
On the other hand, the regulatory risks of the sector worsened on March 22 when Coinbase received a notice from Wells from the US Securities and Exchange Commission. The regulator could target the exchange's staking program, some of its digital asset listings, and its wallet services. Again, the uncertainty arises from not knowing which assets qualify as securities.
These competing forces may have been the main reason for the narrow trading range of cryptocurrencies near $1.18 trillion between March 17 and 27. However, the derivatives data makes a compelling case for a rally towards $1.35 trillion and a retest of the $1 trillion threshold.
Total crypto market capitalization has been flat since March 20, with XRP (XRP) rebounding 22% and Litecoin (LTC) earning 17%. XRP's gains are likely driven by investor expectations that Ripple will prevail in its ongoing legal battle against the SEC. As for Litecoin, analysts point to its next halving in augustwhen the rewards for mining new blocks will be halved.
Options traders are reasonably confident above $1 trillion
Traders can gauge market sentiment by gauging if there is more activity through call options or put options. Generally speaking, call options are used for bullish strategies while put options are for bearish strategies.
A put to call ratio of 0.70 indicates that the put option open interest lags behind the largest number of call options. Conversely, a 1.40 indicator favors put options, which is a bearish sign.
Since March 10, Bitcoin's put-call ratio has balanced or favored calls from neutral to bullish. Although the price of Bitcoin has risen 41% in the last two weeks, options traders indicate that they are not becoming increasingly concerned about a price correction.
Related: Will BTC leave the bear market? 5 things to know about Bitcoin this week
Leverage demand is balanced despite resistance at $1.2 trillion
Perpetual contracts, also known as reverse swaps, have a built-in fee that is typically charged every eight hours. Exchanges use this fee to avoid currency risk imbalances.
A positive funding rate indicates that long buyers require more leverage. However, the opposite situation occurs when short sellers require additional leverage, causing the funding rate to turn negative.
Over the past week, the seven-day funding rate for most major cryptocurrencies has been neutral, indicating that excessive buying leverage has not been used to support prices. This translates to firepower for the bulls, if needed, and a significant reduction in liquidation risks.
The only exception was BNB (bnb), where short sellers paid 1.25% per week to hold their positions. Regulatory uncertainty surrounding the Binance exchange is likely behind the whales' interest in shorting BNB.
The recent rally looks sustainable from a derivative perspective, and bulls are well positioned to fend off further declines. However, since cryptocurrency price gains may have been driven by the Fed emergency action to avoid a banking crisis, the odds favor more sideways price movement.
Magazine: Unstable currencies: decouplings, bank runs and other risks loom
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
