Fed policy and crumbling market sentiment could send the total crypto market cap back below $1 trillion

The total crypto market cap broke above $1 trillion on July 18 after an agonizing 35-day stint below the key psychological level. Over the next seven days, bitcoin (BTC) traded flat near $22,400 and ether (ETH) faced a 0.5% correction to reach $1,560.

Total crypto market cap, billion USD. Source: TradingView

Total crypto capitalization closed at $1.03 trillion on July 24, a modest negative 7-day move of 0.5%. The apparent stability is aligned with the flat performance of BTC and Ether and the $150 billion value of stablecoins. The broader data hides the fact that seven of the top 80 coins are down 9% or more over the period.

Even though the chart shows support at the $1 trillion level, it will take time for investors to regain confidence to invest in cryptocurrencies and Federal Reserve actions could have the biggest impact on price action.

Additionally, the sit-and-wait mentality could reflect major macroeconomic events scheduled for the week ahead. Broadly speaking, worse-than-expected data tends to raise investor expectations for dovish moves that are beneficial to riskier assets like cryptocurrencies.

The Federal Reserve monetary policy meeting is scheduled for July 26-27 and investors expect the US Federal Reserve to hike interest rates by 75 basis points. In addition, on July 27, the second quarter of US gross domestic product (GDP) – the most comprehensive measure of economic activity – will be released.

$1 trillion not enough to inspire confidence

Investor sentiment has improved since July 18, as reflected by the Fear and Greed Index, a data-driven sentiment indicator. The indicator is currently holding 30 out of 100, up from 20 on July 18 when it was hovering in the extreme fear zone.

Crypto Fear and Greed Index. Source: alternative.me

It is important to note that despite recapturing the entire $1 trillion crypto market cap, trader sentiment has not improved significantly. Below are the winners and losers from July 17th to 24th.

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

Arweave (AR) faced a 20.6% technical correction after an impressive 58% rally from July 12-18 after the network filesharing solution surpassed 80 terabytes (TB) of data storage.

Polygon (MATIC) is down 11.7% after Ethereum co-founder Vitalik Buterin supported the implementation of zero-knowledge rollups technology, a feature currently in the works for Polygon.

Solana (SOL) corrected 9% after demand for the smart contract network could be negatively impacted by Ethereum’s upcoming migration to a proof-of-stake consensus.

Retailers are not interested in bullish positions

OKX Tether (USDT) premium is a good gauge of demand from crypto traders from China. It measures the difference between China-based peer-to-peer (P2P) trades and the US dollar.

Excessive buying demand tends to push the indicator 100% above fair value, and during bearish markets, Tether’s market supply is flooded, causing a discount of 4% or more.

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

Tether has been trading at a slight discount in Asian peer-to-peer markets since July 4th. Not even the 25% rally in total market cap from July 13th to 20th was enough to show excessive buying demand from retailers. Because of this, these investors continued to exit the crypto market, seeking protection in fiat currency.

One should analyze crypto derivatives metrics to rule out externalities specific to the stablecoin market. For example, perpetual contracts have an embedded rate that is typically charged every eight hours. 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.

Cumulative perpetual futures funding rate on July 24th. Source: Coinglass

The derivative contracts show modest demand for leveraged long (bull) positions on Bitcoin, Ether and Cardano. Still, nothing is out of the norm since a weekly funding of 0.15% equates to a monthly cost of 0.6%, ie uneventful. The opposite move happened in Solana, XRP and Ether Classic (ETC), but it’s not enough to cause concern.

As investor attention shifts to global macroeconomic data and the Fed’s response to weakening conditions, the window for cryptocurrencies to prove themselves as a solid alternative is shrinking.

Crypto traders are signaling fear and a lack of leveraged buying, even in the face of a 67% correction since the November 2021 peak. Overall, derivatives and stablecoin data show a lack of confidence in supporting the $1 trillion market cap Dollar.

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.

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