The volumes of altcoin futures and the USD lending rate signal a market crash


From time to time a new indicator will appear that can be used to identify highs and lows in prices in the market. This claim is even clearer with cryptocurrencies as the data comes from exchanges and on-chain data is extracted from the blockchain.

These indicators are constantly monitored and commented on by analysts and traders. Some of the lesser known metrics use data from the volume of altcoin derivatives and the US dollar lending rate from Bitfinex.

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Altcoin volumes in the futures markets indicate overheating

The volume of futures contracts is usually three or even five times the regular spot market. This phenomenon is not exclusive to cryptocurrency markets as these contracts allow leverage, but the comparison is not exactly fair as the contracts are synthetic products while Bitcoin (BTC) is digitally scarce.

By measuring the market share of Bitcoin, Ether (ETH) and the remaining altcoins, it is possible to analyze exactly what traders are focusing on.

Bitcoin, Ether and Altcoins futures volumes. Source: Coinalyze

The graph above shows that Bitcoin and Ether accounted for 65 to 85% of the total volume in March. However, as altcoins began to grow in importance, that number dropped to 45% for the first time on April 6th. 11 days later (April 17th), the cryptocurrency’s total market capitalization rose 20%.

This phenomenon was repeated on May 6, when the market share of Bitcoin and Ether in derivatives volume hit an all-time low of 39%. On May 10, total market capitalization fell 12%. It seems like too big a coincidence, and it makes sense to consider whether the market will overheat as altcoin derivatives market share increases.

There are several reasons to associate a sharp spike in altcoin volume with overly optimism. For example, the changing focus of Bitcoin and Ether shows that investors no longer see much upside potential and are looking for options elsewhere.

Bitfinex’s US dollar lending rate usually goes up before crashes

Margin trading allows an investor to take advantage of their trading position by borrowing money. For example, if you borrow Dolla, you can buy Bitcoin, which increases your exposure. Although there is an interest rate associated with the borrowing, the trader expects the increase in the price of BTC to make up for it.

Whenever there is excessive demand for the dollar loan rate, it is usually an indicator that the market is becoming reckless.

Daily US dollar base rate (above) and Bitcoin price in USD (below). Source: Bitfinex

The data above shows that one such event happened four times in 2021, the last on April 13, a day before Bitcoin’s all-time high of $ 65,800. For example, a daily rate of 0.16% equates to a 5% monthly fee, which is costly even for the most optimistic investor.

Traders should keep in mind that markets can remain irrational longer than any investor can remain solvent. This means that irrationality can prevail for long periods of time, including altcoin euphoria and excessive leverage by buyers.

Whenever multiple indicators suggest that the market is overheating, traders should always consider reducing their positions. Going forward, altcoin futures market share and Bitfinex dollar borrowing rate should be carefully monitored when looking for market spikes.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.