Fed policy and crumbling market sentiment could send the total crypto market cap back under $1T

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Fed policy and crumbling market sentiment could send the total crypto market cap back under T
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After a painful 35 days below a key psychological level, the total cryptocurrency market capitalization topped $1 trillion on July 18. Over the next seven days, Bitcoin (BTC) is flat around $22,400 and Ether (ETH) faces a 0.5% correction to $1,560.

The total market capitalization of cryptocurrencies, in billions of dollars. Source: TradingView

On July 24, the total market capitalization of cryptocurrencies closed at $1.03 trillion, down 0.5% for seven consecutive days. The apparent stability favors the smooth performance of BTC and Ether and the $150 billion stablecoin value. The broader data hides the fact that 7 of the top 80 coins are down 9% or more over the period.

While the chart shows support at $1 trillion, it will take some time for investors to regain confidence in investing in cryptocurrencies, and the actions of the Federal Reserve could have the biggest impact on price action.

Additionally, the wait-and-see mentality may reflect important macroeconomic events planned for the week ahead. Broadly speaking, worse-than-expected data tends to increase investor expectations for expansionary measures, which favors riskier assets such as cryptocurrencies.

okex

The Fed’s policy meeting is scheduled for July 26-27, and investors expect the Fed to raise interest rates by 75 basis points. In addition, U.S. second-quarter gross domestic product (GDP) — the broadest indicator of economic activity — will be released on July 27.

$1 trillion is not enough to instill confidence

Investor sentiment has improved since July 18, as reflected in the Fear and Greed Index, a data-driven sentiment gauge. The indicator is now at 30 out of 100, up from 20 on July 18 when it hovered in “extremely fearful” territory.

Crypto Fear and Greed Index. Source: alternative.me

It must be noted that despite the $1 trillion total cryptocurrency market cap being recaptured, the spirit of traders has not improved much. Listed below are the winners and losers from July 17-24.

Weekly winners and losers in the top 80 coins.Source: Economics

Arweave (AR) faced a technical correction of 20.6% after surging 58% from July 12-18 after the network file-sharing solution’s data storage volume exceeded 80 terabytes (TB).

Polygon (MATIC) fell 11.7% after ethereum co-founder Vitalik Buterin backed the implementation of the zero-knowledge aggregation technology Polygon is currently developing.

Solana (SOL) corrected 9% after Ethereum’s imminent migration to proof-of-stake consensus could negatively impact demand for the smart contract network.

Retail investors are not interested in long positions

The OKX Tether (USDT) premium is a good measure of demand from retail crypto traders in China. It measures the difference between peer-to-peer (P2P) transactions in China and the U.S. dollar.

Excessive buying demand tends to stress the indicator above 100% of fair value, and during bearish markets, Tether’s market quotes are flooded and result in discounts of 4% or more.

Tether (USDT) peer-to-peer with USD/CNY. Source: OKX

Tether has been trading at a slight discount in Asian P2P markets since July 4. Even a 25% rally in total market cap between July 13-20 was not enough to show excessive buying demand from retail investors. For this reason, these investors continue to abandon the crypto market by seeking refuge in fiat currencies.

Crypto derivatives metrics should be analyzed to rule out externalities specific to the stablecoin market. For example, perpetual contracts have an embedded rate, usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that bulls (buyers) need more leverage. However, when the shorts (sellers) need additional leverage, the opposite happens, causing the funding rate to go negative.

Cumulative financing rate for perpetual contracts on July 24. Source: Coinglass

Derivatives contracts show little demand for leveraged long (long) positions in Bitcoin, Ethereum and Cardano. Still, after 0.15% weekly funding equals 0.6% monthly cost, nothing out of the ordinary, so calm. Solana, XRP, and Ether Classic (ETC) have had opposing movements, but it’s not enough to be a cause for concern.

As investors’ attention turns to global macroeconomic data and the Fed’s response to weak conditions, the window of opportunity for cryptocurrencies to prove themselves as credible alternatives is shrinking.

Even in the face of a 67% correction since its November 2021 peak, cryptocurrency traders have signaled fear and a lack of leveraged buying. Overall, derivatives and stablecoin data show a lack of confidence in the $1 trillion market cap support.

The views and opinions expressed here are those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading action involves risk. You should do your own research when making a decision.

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