The cryptocurrency market has been steadily gaining momentum since March 16, with a total market capitalization soaring to $1.2 trillion. Despite encountering resistance at the same level in August 2022, the market has been holding strong near this range, indicating potential bullishness for cryptocurrencies. During the same period, Bitcoin managed to gain 0.3%, while Ether recorded a modest 1.6% growth.
One key driver of the recent bullish run is the Federal Reserve’s monetary policy change. In March, the US Federal Reserve increased its balance sheet by $393 billion, which helped to provide short-term loans to failing banks. This move was aimed at reducing inflation, which had significantly impacted the cost of living and had impeded economic expansion in the US. This balance sheet reduction is contrary to the central bank’s previous nine-month trend of shedding its debt instruments, exchange-traded funds, and mortgage-backed securities. The reversal of this strategy is propelling growth in risk assets as the Fed encourages struggling financial institutions and hedge funds.
However, the cryptocurrency sector faces severe regulatory risks. Coinbase, one of the largest cryptocurrency exchanges in the world, received a Wells notice from the US Securities and Exchange Commission, highlighting possible violations of securities laws. This uncertainty stems from a lack of clarity on which digital assets qualify as securities.
Despite these competing forces, there are signs that the cryptocurrency market may rally towards $1.35 trillion, with a potential retest of the $1 trillion threshold. Derivatives data provides compelling arguments for this trend, with options traders demonstrating a reasonably bullish sentiment above $1 trillion. In March, Bitcoin’s put-to-call ratio favored neutral-to-bullish call options, indicating that traders are not concerned about an imminent price slump. This trend remains despite a 41% rise in Bitcoin’s price in the last two weeks.
Similarly, perpetual contracts, also known as inverse swaps, indicate that leverage demand is balanced despite facing resistance at $1.2 trillion. The seven-day funding rate of the majority of leading cryptocurrencies has been stable, with no excessive buying leverage used to support prices. This translates into firepower for bulls and a significant reduction in liquidation risks.
The only exception has been Binance Coin (BNB), with short sellers paying 1.25% per week to maintain their positions. The regulatory uncertainties surrounding Binance Exchange likely explain why whales are shorting BNB.
However, the question remains whether the recent rally is sustainable from a derivative perspective. While the cryptocurrency market has gained momentum, the bullish run may have been fueled by the Fed’s emergency action to avoid a banking crisis, indicating that lateral price movement may continue. Despite this uncertainty, the cryptocurrency market presents a potential alternative for investors seeking higher returns amid inflation fears.
In conclusion, the cryptocurrency market has been gaining momentum since March, with total market capitalization inching closer to $1.2 trillion. A key driver of this bullish trend is the Federal Reserve’s monetary policy shift, though the sector faces severe regulatory risks. Derivatives data presents compelling arguments for a rally towards $1.35 trillion, with options traders demonstrating a bullish sentiment above $1 trillion. Despite the rally, it remains unclear whether the gains are sustainable. Nevertheless, the cryptocurrency market provides an alternative investment opportunity amid looming inflation concerns.