Each infrequently, a brand new indicator pops out that can be utilized to detect value tops and bottoms out there. This assertion is much more evident in cryptocurrencies as a result of the information comes from exchanges and on-chain knowledge extracted from the blockchain.
These indicators are continually monitored and commented on by analysts and merchants. A number of the lesser-known metrics use knowledge from altcoin derivatives volumes and the Bitfinex U.S. greenback lending price.
Altcoin volumes in futures markets point out overheat
The futures contract quantity is often triple that of, and even 5 occasions greater than, common spot markets. This phenomenon is just not unique to cryptocurrency markets, as these contracts enable leverage buying and selling, however the comparability is not precisely truthful as a result of the contracts are artificial merchandise, whereas Bitcoin (BTC) is digitally scarce.
By measuring the market share of Bitcoin, Ether (ETH) and the remaining altcoins, it’s potential to investigate precisely what merchants are specializing in.
The chart above reveals that Bitcoin and Ether represented 65% to 85% of the combination quantity in March. Nonetheless, as altcoins gained relevance, this determine dropped to 45% for the primary time ever on April 6. 11 days later (April 17), the full cryptocurrency market capitalization tanked 20%.
This phenomenon repeated itself on Might 6 because the Bitcoin and Ether market share in derivatives volumes reached a historic low at 39%. On Might 10, the full market capitalization dropped 12%. It looks like an excessive amount of of a coincidence, and it is smart to contemplate whether or not the market overheats every time the market share held by altcoin derivatives spikes.
There are a number of causes to narrate a pointy improve in altcoin quantity to extreme optimism. For instance, altering focus from Bitcoin and Ether signifies that traders now not see a lot upside and are looking for choices elsewhere.
The Bitfinex U.S. greenback lending price often spikes forward of crashes
Margin buying and selling permits an investor to leverage their buying and selling place by borrowing cash. For instance, borrowing dolla will enable one to purchase Bitcoin, thus growing their publicity. Though there’s an rate of interest concerned with borrowing, the dealer expects BTC’s value appreciation to compensate for it.
Every time there’s extreme demand for the greenback lending price, it’s often an indicator that the market is changing into reckless.
The above knowledge reveals that such an occasion occurred 4 occasions in 2021, and the final one occurred on April 13, in the future earlier than the $65,800 all-time excessive for Bitcoin. For instance, reaching a 0.16% day by day price is equal to a 5% month-to-month charge, which is expensive even for essentially the most optimistic traders.
Merchants ought to needless to say markets can stay irrational longer than any investor can stay solvent. Which means that irrationality can prevail for lengthy intervals, together with altcoin euphoria and the extreme use of leverage by patrons.
Every time a number of indicators level to an overheating market, merchants ought to all the time think about decreasing their positions. Going ahead, the altcoin futures market share and the Bitfinex greenback lending price ought to be rigorously monitored when looking for market tops.
The views and opinions expressed listed below are solely these of the writer and don’t essentially replicate the views of Cointelegraph. Each funding and buying and selling transfer includes threat. You must conduct your individual analysis when making a call.