Bitcoin and Ethereum have had a rough week, but derivatives data shows a silver lining

This week, the crypto market suffered a sharp drop in valuation after Coinbase, the top US exchange, reported a quarterly net loss of $430 million and South Korea announced plans to impose a 20 percent tax on crypto profits.

At its worst moment, the overall crypto market cap 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 similarly large drop in valuation was last seen in February 2021, leading to bargains for risk-takers.

Total crypto market cap, billion USD. Source: TradingView

Despite this week’s volatility, there were some blips of relief as Bitcoin (BTC) bounced 18% from a low of $25,400 to the current level of $30,000 and Ether (ETH) price also staged a brief rally to $2,100 after it had fallen to a yearly low of $1,700.

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, making it the largest one-day buy-in on record.

On May 12, US Treasury Secretary Janet Yellen stated that the stablecoin market poses no threat to the country’s financial stability. In a House Financial Services Committee hearing, Yellen added:

“They present the same risks that we’ve known about bank runs for centuries.”

Total crypto cap is down 19.8% in seven days

The aggregate market cap of all cryptocurrencies has shrunk by 19.8% over the past seven days and currently stands at $1.4 trillion. However, some mid-cap altcoins were decimated, falling more than 45% in a week.

Below are the top gainers and losers among the 80 largest cryptocurrencies by market cap.

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

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

Terra (LUNA) faced a staggering 100% plunge after the foundation responsible for managing the ecosystem reserve was forced to sell its Bitcoin position at a loss and issue trillions of LUNA tokens to bolster its breach Compensate stablecoin under $1.

Fantom (FTM) also faced a 15.3% one-day drop in the total locked value, the amount of FTM coins escrowed on the ecosystem’s smart contracts. Fantom has been struggling since celebrity Fantom Foundation team members Andre Cronje and Anton Nell quit the project.

Tether Premium shows falling demand from retailers

The OKX Tether (USDT) premium indirectly measures crypto demand from retailers in China. It measures the difference between the China-based peer-to-peer trading USDT and the official US dollar currency.

Excessive buying demand brings the indicator above fair value, which is 100%. On the other hand, Tether’s market supply is flooded during declining markets, resulting in a discount of 2% or more.

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

Currently, the Tether premium is 101.3%, which is slightly positive. Furthermore, there has been no panic over the past two weeks. Such data suggests that Asian retail demand is not abating, which is optimistic considering total cryptocurrency capitalization is down 19.8% over the past seven days.

Related: What happened? The Terra debacle exposes vulnerabilities plaguing the crypto industry

Altcoin funding rates have also fallen to worrying levels. Perpetual contracts (inverse swaps) have an embedded rate that is typically calculated every eight hours. These instruments are the preferred derivatives of retail traders as their price tends to perfectly replicate regular spot markets.

Exchanges use this fee to avoid imbalances in exchange rate risk. A positive funding rate indicates that longs (buyers) are demanding more leverage. However, the opposite situation occurs when short sellers (sellers) need additional leverage, making the funding rate negative.

Seven Day Cumulative Perpetual Futures Funding Rate. Source: coin jar

Note that the seven-day cumulative funding rate is mostly negative. This data indicates higher leverage from sellers (shorts). For example, Solana’s (SOL) negative weekly rate of 0.90% equates to 3.7% per month, a significant drag for traders holding futures positions.

However, the top two cryptocurrencies did not face the same leverage selling pressure as measured by the cumulative funding rate. Normally, when there is an imbalance caused by excessive pessimism, this rate can easily drop below negative 3% per month.

The lack of leverage shorts (sellers) in the Bitcoin and Ethereum futures markets and modest bullishness from Asian retailers should be interpreted as extremely healthy, especially after a weekly performance of -19.8%.

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 movement involves risk. You should do your own research when making a decision.