A descending wedge formation has resulted in a bearish technical pattern that has caused a decline in the total crypto market capitalization over the past seven weeks. Bitcoin (BTC), BNB (BNB), and XRP (XRP) suffered slight declines, leading to a 1.3% correction between May 18 and May 25.
The descending wedge formation initiated in April points to a potential breakout approaching $1 trillion by the end of July. However, following a bearish structure that brought the total capitalization to $1.11 trillion on May 25, bulls will need to exert extra effort for an eventual break to the upside.
Bitcoin and Ether weakened due to weak macroeconomic data
Perplexing inflation continues to trouble investors, resulting in increased likelihood of further interest rate increases by the United States Federal Reserve. The country’s latest personal consumption expenditure indicator showed a 5% increase, which surpasses the 2% inflation target by a large margin.
Moreover, on May 25, data from Germany’s statistics office revealed a downward revision to the country’s gross domestic product from 0% to -0.3% for the first quarter of 2023, marking the second consecutive decline. Additionally, there is an imminent U.S. debt-ceiling standoff and the fact that the U.S. Treasury is quickly running out of cash.
Various governments’ efforts to tighten their influence on crypto assets have brought regulatory risks into the fore. Most recently, an oversight body within the European Central Bank called the European Systemic Risk Board (ESRB) suggested special attention to bank run risks on stablecoins. The ESRB cited stablecoins’ lack of transparency, highlighting Tether (USDT) as an example.
Derivatives indicate bears are reluctant to short
Perpetual contracts or inverse swaps usually come with an embedded rate that is charged every eight hours. A positive funding rate indicates an increased demand for leverage from longs (buyers). However, when shorts (sellers) demand additional leverage, the funding rate turns negative.
The seven-day funding rate for BTC and Ether (ETH) stayed neutral, indicating that there’s a balanced demand from leveraged longs (buyers) and shorts (sellers) trading on perpetual futures contracts.
Traders can test the market’s sentiment by observing whether more actions are through call (buy) or put (sell) options, in order to exclude externalities that may have only affected futures markets.
A put-to-call ratio of 0.70 implies that put option open interest is less than the more bullish calls, thus being bullish. Conversely, a 1.40 rate favors put options, which can be interpreted as bearish.
Bitcoin options volume’s put-to-call ratio has remained below 1.0 for the last couple of weeks, indicating a higher preference for neutral-to-bullish call options. Most notably, even with Bitcoin briefly correcting to $25,900 on May 25, there was no significant surge in put options demand for protection purposes.
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Multiple factors will continue to pressure Bitcoin’s price
As there is balanced demand on futures markets, traders appear to be hesitant to make more bets until there’s more clarity on the U.S. debt standoff. It is still uncertain if the crypto market can break out of the descending wedge formation.
Even though professional traders are not employing derivatives to bet on a catastrophic scenario for Bitcoin’s value, there is presently a lack of triggers for a bull run owing to the macroeconomic environment’s uncertainty. Thus, the bears are ultimately in control as the descending wedge trend moves toward another 10% correction by July.
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This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.