Bearish Signals Dominate Bitcoin and Ethereum Markets: What the Data Says

Bearish Signals Dominate Bitcoin and Ethereum Markets: What the Data Says

Unsettling Macroeconomic Climate Sets the Tone for Crypto

In the face of ongoing macroeconomic uncertainty, Bitcoin bulls are staring down a six-week descending wedge pattern, indicating a continued bearish market sentiment. For the past month and a half, crypto prices have felt the squeeze from this bearish market structure, resulting in a two-month low total market capitalization of $1.13 trillion. As per two key derivative metrics, the uphill climb to disrupt this downtrend might prove challenging for crypto enthusiasts, despite a relatively neutral view in the short term, with average gains of 0.3% observed for Bitcoin, Ether, and BNB between May 12 and May 19.

Sustaining the Bearish Trend: Potential Impacts and Considerations

Take note that the descending wedge pattern that began in mid-April may extend until July, implying that a potential bullish reversal would need significant momentum. Further complicating the situation is the looming U.S. debt ceiling standoff, as the U.S. Treasury’s cash reserves dwindle rapidly.

While most investors anticipate that the Biden administration will secure a deal before the nation defaults on its debt, the risk of a government shutdown and ensuing default remains.

Gold and Stablecoins: A Refuge Amidst Market Uncertainty?

Interestingly, even gold, traditionally the globe’s safest asset class, hasn't been immune to the recent market correction, sliding from $2,050 on May 4 to around $1,980 currently.

Meanwhile, Circle, the company behind USDC stablecoin, has pivoted from Treasurys maturing in more than 30 days to short-term bonds and collateralized loans with major banking institutions such as Goldman Sachs and Royal Bank of Canada, amounting to $8.7 billion. A Circle spokesperson assured Markets Insider that this move adds an extra layer of protection for the USDC reserve in the unlikely event of a U.S. debt default.

DAI, a stablecoin managed by the decentralized organization MakerDAO, increased its U.S. Treasury holdings to $1.25 billion in March to leverage the existing yield environment and generate further income.

Derivative Markets: A Closer Look

Perpetual contracts, often referred to as inverse swaps, have an embedded rate typically charged every eight hours. A positive funding rate signals higher leverage demand from longs (buyers), while a negative rate indicates increased leverage demand from shorts (sellers).

BTC, ETH, and even Litecoin, which experienced a 14.5% weekly increase, showed neutral seven-day funding rates, implying a balance between leveraged longs and shorts using perpetual futures contracts.

To isolate potential factors affecting only futures markets, traders can assess market sentiment by comparing the activity of call (buy) options to put (sell) options.

Bitcoin Options: Reading the Signals

The recent expiration of options led to an $80-million advantage for bearish traders during the May 19 expiry. A put-to-call ratio below 1.0 is generally bullish, while a ratio above 1.0 is typically bearish.

For the past several weeks, Bitcoin options volume has maintained a put-to-call ratio below 1.0, showing a greater inclination towards neutral-to-bullish call options. Even when Bitcoin briefly dropped to $26,800 on May 12, there was no significant increase in demand for protective put options.

Market Sentiment: Is the Glass Half Empty or Half Full?

Despite an 8.3% plunge between May 10 and May 12, options market data shows big players and market makers resisting protective puts. However, given the balanced demand in futures markets, traders appear to be holding off on placing additional bets until there's more clarity on the U.S. debt situation.

With the U.S. Treasury Department's June 1 deadline fast approaching — a date when the federal government might default on its debts — the fate of the total market capitalization breaking from the descending wedge formation remains uncertain.

On a positive note, professional traders aren't using derivatives to bet on a doomsday scenario. Conversely, given the macroeconomic uncertainty, there's no compelling reason for bulls to prematurely wager on a quick crypto market rebound, putting bears in a favorable position according to derivative metrics.