The total cryptocurrency market capitalization plummeted between June 10 and 13, falling below $1 trillion for the first time since January 2021. Bitcoin (BTC) is down 28% in a week and Ethereum (ETH) faces a painful 34.5% pullback.
Currently, the total cryptocurrency market capitalization is $890 million, down 24.5% since June 10. This certainly raises the question of how these two leading cryptoassets have managed to underperform the rest of the coins. The answer is that $154 billion worth of stablecoins have distorted broader market performance.
Although the chart shows support at $878 billion, it will take a while for traders to accept every recent event that has impacted the market. For example, the Fed raised interest rates by 75 basis points on June 15, the largest rate hike in 28 years. The central bank also launched a balance sheet reduction program in June aimed at reducing its $8.9 trillion position, including mortgage-backed securities (MBS).
Venture capital firm Three Arrows Capital (3AC) has reportedly failed to meet margin calls from its lenders, setting off a serious bankruptcy red flag across the industry. The firm’s large exposure to Grayscale Bitcoin Trust (GBTC) and Lido’s staked ETH (stETH) is part of the reason for the mass liquidation event. A similar issue forced crypto lending and mortgage firm Celsius to halt user withdrawals on June 13.
Investor spirit is effectively broken
Bearish sentiment was clearly reflected in the crypto markets, as the data-driven sentiment gauge Fear and Greed Index hit 7/100 on June 16. The reading was the lowest since August 2019 and was last outside the “extreme fear” zone on May 7.
Here are the winners and losers since June 10th. Curiously, Ethereum was the only top 10 cryptocurrency on the list, which is unusual during a strong correction.
WAVES fell another 37% after Vires Finance, the project’s largest decentralized finance (DeFi) app, implemented a daily stablecoin withdrawal limit of $1,000.
Ether fell 34.5% as developers delayed the switch to the proof-of-stake consensus mechanism by another two months. The “difficulty bomb” will essentially stop the mining process, paving the way for Merge.
Aave (AAVE) shares fell 33.7% after MakerDAO voted to remove the ability of lending platform Aave to generate Dai (DAI) for its lending pools. The community-led decision is aimed at mitigating the risk of the protocol being potentially affected by staking ether (stETH) collateral.
Asian traders flock to stablecoins
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.
Unexpectedly, Tether has been trading at a premium in Asian P2P markets since June 12. Despite the massive sell-off in cryptocurrency prices, investors have been seeking the protection of stablecoins rather than exiting fiat currencies. This movement continued until June 17, as USDT paired its price with the official foreign exchange rate.
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.
These derivatives contracts show greater demand for leveraged short (short) positions across the board. Despite the insignificant amounts of Bitcoin and Ethereum, the situation with TRX token and Polkadot (DOT) is worrying.
Pokadot’s negative weekly interest rate of 0.90% equates to 3.7% per month, meaning those betting on falling prices are willing to pay a reasonable fee to maintain their leveraged positions. This is often interpreted as a sign of confidence for the bears; hence, a little concerning.
Market drops 70%, leveraged bulls still have no demand
The big question is how far behind investors’ fear and lack of interest from leveraged buyers is despite a 70% correction since the November 2021 peak. Encouragingly, Asian traders moved positions to Tether rather than exiting all markets for fiat deposits.
There may not be any clear signs of a bottom forming, but Bitcoin bulls need to hold on to $20,000 to avoid breaking a 13-year pattern of not breaking below all-time highs in the previous four-year cycle.
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