Total crypto market cap takes a hit amid Silvergate Bank crisis

Cryptocurrency markets experienced a relatively calm month in February as the total market capitalization gained 4% in the period. However, the fear of regulatory pressure appears to be having an impact on volatility in March.

Bulls will undoubtedly miss the technical pattern that has been guiding the total crypto market capitalization upward for the past 48 days. Unfortunately, not all trends last forever, and the 6.3% price correction on March 2 was enough to break below the ascending channel support level.

As displayed above, the ascending channel initiated in mid-January saw its $1.025-trillion market cap floor ruptured after Silvergate Bank, a major player in crypto on- and off-ramping, saw its stock plunge by 57.7% at the New York Stock Exchange on March 2. Silvergate announced “additional losses” and suboptimal capitalization, potentially triggering a bank run that could lead to the situation spiraling out of control.

Silvergate provides financial infrastructure services to some of the world’s largest cryptocurrency exchanges, institutional investors and mining companies. Consequently, clients were incentivized to seek alternative solutions or sell their positions to reduce exposure in the crypto sector.

On March 2, the bankrupt cryptocurrency exchange FTX revealed a “massive shortfall” in its digital asset and fiat currency holdings, contrary to the previous estimate that $5 billion could be recovered in cash and liquid crypto positions. On Feb. 28, former FTX engineering director Nishad Singh pleaded guilty to charges of wire fraud along with wire and commodities fraud conspiracy.

With billions worth of customer funds missing from the exchange and its United States-based arm, FTX US, there is less than $700 million in liquid assets. In total, FTX recorded an $8.6 billion deficit across all wallets and accounts, while FTX US recorded a deficit of $116 million.

The 4% weekly decline in total market capitalization since Feb. 24 was driven by the 4.5% loss from Bitcoin (BTC) and Ether’s (ETH) 4.8% price decline. As expected, there were merely six out of the top 80 cryptocurrencies with positive performances in the past seven days.

EOS gained 9% after the EOS Network Foundation announced the final testnet for the Ethereum Virtual Machine launch on March 27.

Immutable X (IMX) traded up 5% as the project became a “Unity Verified Solution,” reportedly allowing seamless integration with the Unity SDK.

DYdX (DYDX) traded down 14.5% as investors await a $17-million token unlock on March 14.

Leverage demand is balanced despite the recent price correction

Perpetual contracts, also known as inverse swaps, have an embedded rate that is usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

The seven-day funding rate was marginally positive for Bitcoin and Ether, reflecting a balanced demand between leverage longs (buyers) and shorts (sellers) using perpetual futures contracts. The only exception was the slightly higher demand for betting against BNB’s (BNB) price, although it was far from an alarming level at 0.2% per week.

Related: Dollar’s sharp recovery puts Bitcoin’s $25K breakout prospects at risk

The options put/call ratio reflects traders’ optimism

Traders can gauge the market’s overall sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.

A 0.70 put-to-call ratio indicates that put options open interest lags the more bullish calls and is therefore bullish. In contrast, a 1.40 indicator favors put options, which can be deemed bearish.

Apart from a brief moment on March 2 when Bitcoin’s price traded down to $22,000, the demand for bullish call options has exceeded the neutral-to-bearish puts since Feb. 25. Moreover, the current 0.71 put-to-call volume ratio shows that the Bitcoin options market is more strongly populated by neutral-to-bullish strategies that favor call (buy) options.

From a derivatives market perspective, the market showed resilience, so Bitcoin traders may not expect additional corrections despite the bearish indicator from the failed ascending channel. The 4% weekly decline in total market capitalization reflects the uncertainty brought by Silvergate Bank, and it is unlikely to have roots deep enough to cause systemic risk.