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- Every now and again, a new signal arises that may be used to detect price peaks and bottoms in the market
- Some of the lesser-known metrics rely on data from altcoin futures volumes and the Bitfinex US dollar lending rate
- Traders should keep in mind that markets might remain irrational for as long as an investor can keep his or her money. This indicates that irrationality, such as cryptocurrency euphoria and buyers’ excessive use of leverage, might continue for a long time
Every now and again, a new signal emerges that may be utilized to detect market price peaks and bottoms. Because the data originates from exchanges and on-chain data retrieved from the blockchain, this statement is much more obvious with cryptocurrencies. Analysts and traders are continuously monitoring and commenting on these indications.
Data from altcoin futures volumes and the Bitfinex U.S. dollar loan rate are used in some of the lesser-known measures. The volume of futures contracts is generally three times, if not five times, that of ordinary spot markets. This issue is not unique to cryptocurrency markets, as these contracts allow for leveraged trading. However, the analogy isn’t quite fair because the contracts are synthetic, whereas Bitcoin (BTC) is digitally rare.
It is easy to determine what traders are focused on by analyzing the market share of Bitcoin, Ether (ETH), and the remaining altcoins. In March, Bitcoin and Ether accounted for 65 percent to 85 percent of total volume, as seen in the graph above. Nonetheless, as cryptocurrencies grew in popularity, this percentage fell to 45 percent for the first time on April 6.
The overall cryptocurrency market capitalization dropped by 20% 11 days later (on April 17). This situation occurred again on May 6, when the market share of Bitcoin and Ether in futures trading fell to a new low of 39%. The entire market capitalization fell by 12% on May 10th. It appears to be too much of a coincidence, and it’s reasonable to wonder if the market overheats whenever the market share represented by cryptocurrency derivatives increases.
There are several reasons to link a significant rise in cryptocurrency volume to overconfidence. Changes in emphasis away from Bitcoin and Ether, for example, suggest that investors no longer see much potential and are looking for alternatives. Margin trading allows an investor to borrow money to increase the size of their trading position.
Borrowing dollars, for example, allows one to purchase Bitcoin, therefore increasing their vulnerability. Although borrowing involves an interest rate, the trader anticipates that BTC’s price gain will pay for it. When there is a lot of demand for the dollar lending rate, it typically means the market is becoming a little crazy.
According to the statistics above, such an occurrence occurred four times in 2021, the most recent of which occurred on April 13, one day before Bitcoin’s all-time high of $65,800. For example, a 0.16 percent daily rate equates to a 5% monthly charge, which is prohibitively expensive even for the most optimistic investors. Traders should remember that markets may stay irrational for as long as an investor can stay solvent.
This means that irrationality, such as altcoin exuberance and purchasers’ excessive use of leverage, might persist for lengthy periods of time. Traders should always consider decreasing their holdings if several signs indicate an overheated market. When looking for market peaks in the future, keep an eye on the market share of cryptocurrency futures and the Bitfinex dollar loan rate.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
