Total Crypto Market Cap Continues to Crash as Dollar Index Hits 20-Year High

From a bearish perspective, it is highly likely that the crypto market entered a descending channel (or wedge) on August 15 after failing to break above the $1.2 trillion total market cap resistance. . Even if the trend is not yet clearly identifiable, the last two weeks have not been positive.

Total crypto market capitalization, in billions of dollars. Source: Trading View

For example, the total market capitalization of $940 billion seen on August 29 was the lowest in 43 days. Deteriorating conditions have been accompanied by a sharp correction in traditional markets, and the tech-heavy Nasdaq Composite Index has fallen 12% since August 15 and even WTI oil prices have fallen 11 % from August 29 to September 1.

Investors sought refuge in the dollar and US Treasuries after Federal Reserve Chairman Jerome Powell reiterated the bank’s commitment to containing inflation by tightening the economy. As a result, investors took profits on riskier assets, causing the US dollar index (DXY) to hit its highest level in more than two decades at 109.6 on September 1. The index measures the strength of the dollar against a basket of major foreign currencies.

More importantly, the flow of regulatory information remains largely unfavorable, particularly after US federal prosecutors requested internal records from crypto exchange Binance to investigate possible money laundering and the recruitment of US clients. Since late 2020, authorities have been investigating whether Binance violated the Bank Secrecy Act, according to Reuters.

Crypto Investor Sentiment Reenters Bearish Zone

The risk attitude caused by the tightening of the Federal Reserve has led investors to expect a broader market correction and is having a negative impact on growth stocks, commodities and cryptocurrencies.

Crypto fear and greed index. Source: Alternative.me

The data-driven Fear and Greed Index peaked on August 14 as the indicator hit a neutral reading of 47/100, which didn’t look too promising either. On September 1, the metric reached 20/100, the lowest reading in 46, and generally considered a bearish level.

Below are the winners and losers for the past seven days, with the total crypto market capitalization down 6.9% to $970 billion. While Bitcoin (BTC) and Ether (ETH) exhibited a 7%-8% drop, a handful of mid-cap altcoins fell 13% or more during the period.

Weekly winners and losers among the top 80 coins. Source: Nomics

eCash (XEC) jumped 16.5% after lead developer Amaury Séchet announced the post-consensus launch of Avalanche on eCash Mainnet, scheduled for September 14. The update aims to bring 1-block finality and increase attack protection by 51%.

NEXO gained 3.4% after committing an additional $50 million to its buyback program, giving the company more discretionary ability to buy back its native token on the open market.

Helium (HNT) lost 29.3% after major developers offered to abandon its own blockchain in favor of Solana’s. If adopted, helium-based HNT, IOT and MOBILE tokens and data credits (DC) would also be transferred to the Solana blockchain.

Avalanche (AVAX) fell 18.2% after CryptoLeaks released an unverified video showing Roche Freedman partner Kyle Roche saying he may sue Solana, one of Avalanche’s main rivals, in name of Ava Labs.

Most tokens performed negatively, but retail demand in China improved slightly

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

Excessive buying demand tends to pressure the indicator above 100% fair value, and during bear markets the market supply of Tether is flooded and results in a discount of 4% or more .

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

On Oct. 30, the Tether price in Asia-based peer-to-peer markets hit a premium of 0.4%, its highest level since mid-June. Curiously, the move came as the crypto’s total market capitalization fell 18.5% since August 15. The data shows that there has been no panic selling from retail traders as the index remains relatively neutral.

Traders should also analyze futures markets to rule out externalities specific to the Tether instrument. Perpetual contracts, also known as reverse swaps, have an embedded rate typically charged every eight hours. Exchanges use these fees to avoid currency risk imbalances.

A positive funding rate indicates that longs (buyers) require more leverage. However, the opposite situation occurs when the shorts (shorts) require additional leverage, causing the funding rate to become negative.

Cumulative perpetual futures funding rate as of September 1. Source: Coinglass

Perpetual contracts reflected moderately bearish sentiment, with the cumulative funding rate negative in all cases. The current fees are the result of an unstable situation with increased demand for leveraged shorts, those that bet on falling prices. Yet even the negative 0.70% weekly funding rate for Ethereum Classic (ETC) was not enough to deter short sellers.

Negative regulatory and macroeconomic sentiment

The negative weekly performance of 6.9% should be the least worry for investors right now as regulators have targeted major crypto exchanges. For example, they claim that altcoins should have been registered as securities and that the sector was used to facilitate money laundering.

Additionally, weak sentiment indicators and lopsided leverage data indicate that investors are worried about the impacts of a global recession. Even though Tether data in Asian markets shows no signs of retail panic selling, there is no evidence that traders have a bullish appetite as the total crypto market capitalization has approached its lowest level in 45 days. Thus, the bears have reason to believe that the current downward formation will continue in the coming weeks.

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 conduct your own research when making a decision.

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