Bitcoin and Ethereum have had a rough week, but derivatives data reveals a positive side

The cryptocurrency market this week suffered a sharp drop in valuation after Coinbase, the leading US exchange, reported a quarterly net loss of $430 million and South Korea announced plans to impose a 20% tax on cryptocurrency gains.

During its worst moments, the total market capitalization of cryptocurrencies faced a 39% drop from $1.81 trillion to $1.10 trillion in seven days, an impressive correction even for a volatile asset class. A similar drop in valuation volume was last seen in February 2021, which led to deals for risk takers.

Total cryptocurrency market cap, billion USD. Source: TradingView

Even with this week’s volatility, there were some comfortable bounces as Bitcoin (BTC) rebounded 18% from its low of $25,400 to the current level of $30K, and Ether (ETH) price made a brief rally to $2,100 after falling to its lowest level in the near year. Priced at $1700.

Institutional investors bought the dip, according to data from the Purpose Bitcoin ETF. The exchange-traded instrument is listed in Canada and added 6,903 BTC on May 12, marking the largest one-day purchase ever recorded.

On May 12, US Treasury Secretary Janet Yellen stated that the stablecoin market does not pose a threat to the country’s financial stability. Yellen added at a House Financial Services Committee hearing:

“They represent the same kind of risk that we’ve known for centuries in terms of bank management operations.”

Total crypto capitalization down 19.8% in seven days

The total market capitalization of all cryptocurrencies has shrunk by 19.8% over the past seven days, and currently stands at $1.4 trillion. However, some medium-cap altcoins were destroyed and fell by more than 45% in one week.

Below is the list of gainers and losers among the 80 largest cryptocurrencies by market capitalization.

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

Maker (MKR) has benefited from the demise of a rival algorithmic stablecoin. While TerraUSD (UST) succumbed to the market pullback, breaking its peg at well below $1, Dai (DAI) remained fully operational.

Terra (LUNA) faced an astonishing 100% collapse after the institution responsible for managing the ecosystem’s reserve was forced to sell its Bitcoin position at a loss and issue trillions of LUNA tokens to make up for its stablecoin break below $1.

Fantom (FTM) also faced a 15.3% drop in its total locked value, which is the amount of FTM coins deposited in ecosystem smart contracts. Fantom has been struggling since prominent Fantom Foundation team members Andre Cronje and Anton Nell resigned from the project.

Tether Premium Shows Dripping Demand From Retailers

OKX Tether (USDT) premium indirectly measures the demand for cryptocurrency for retail traders in China. It measures the difference between China-based USDT trades and the official US dollar.

Excessive buying demand puts the index above the fair value, which is 100%. On the other hand, Tether’s market offering was swamped by bear markets, causing a discount of 2% or higher.

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

Currently, Tether’s premium is 101.3%, which is somewhat positive. Furthermore, there has been no panic over the past two weeks. Such data indicates that retail demand in Asia is not fading, which is bullish considering that the total cryptocurrency capitalization has fallen by 19.8% over the past seven days.

Related: What happened? Terra debacle exposes flaws in the crypto industry

Altcoin funding rates have also fallen to alarming levels. Perpetual contracts (reverse swaps) have a built in rate that is usually charged every eight hours. These instruments are preferred derivatives for retail traders because their prices tend to follow the normal spot markets perfectly.

Exchanges use these fees to avoid misalignments in exchange risk. A positive funding rate indicates that longer contracts (buyers) require more leverage. However, the opposite situation occurs when short positions (sellers) require additional leverage, causing the financing rate to turn negative.

Seven-day cumulative perpetual future funding rate. Source: Coinglass

Note how the seven-day cumulative funding rate is mostly negative. This data indicates increased leverage from sellers (quick selling). For example, Solana’s negative weekly rate (SOL) of 0.90% equals 3.7% per month, which is a huge burden for traders who occupy futures positions.

However, the two leading cryptocurrencies did not experience the same leverage selling pressure, as measured by the backlog of funding. Normally, when there is an imbalance caused by excessive pessimism, this rate can easily move to less than 3% per month.

The absence of short leverage (sellers) in the Bitcoin and Ethereum futures markets and the modest rise of Asian retailers should be interpreted as very healthy, especially after the 19.8% weekly performance.

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