Current Crypto Markets: Major tokens experience a downturn, while derivatives indicate a sense of caution moving forward.

Although the Federal Reserve’s choice to maintain interest rates was largely anticipated, geopolitical strains and a shift toward safe-haven assets resulted in crypto traders confronting a wave of losses.

The bears are dominating the crypto markets. (Midjourney/Modified by CoinDesk)

Key points:

• Bitcoin declined and the CoinDesk 20 index fell as a shift to risk aversion drove investors towards safe-haven assets.
• Crypto derivatives indicated a decrease in open interest, subdued volatility, and an increasing preference for protective puts and short positions.
• Optimism’s community sanctioned a 12-month strategy to allocate about half of its Superchain earnings for OP token repurchases commencing in February. Nonetheless, the token experienced a decline.

Over the past day, bulls took a pause as risk-averse sentiment permeated global markets, causing bitcoin BTC$84,336.20 retreating toward $88,000.

Despite the Federal Reserve’s widely anticipated decision to keep interest rates stable at 3.5%-3.75%, escalating geopolitical tensions and a pivot to secure assets left crypto traders grappling with substantial losses.

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In the U.S., major stock indices exhibited a blend of optimism and a pullback in response, with the S&P 500 momentarily surpassing 7,000 for the first time before retracting. These indices are significantly affected by earnings announcements from major corporations this week.

However, in the cryptocurrency realm, risk-off sentiment had a severe impact. Bitcoin dropped, and the broader CoinDesk 20 (CD20) index declined by 2.9%.

This flight from crypto prompted gold to soar to unprecedented highs exceeding $5,500 an ounce, propelling gold-backed tokens like XAUT$5,398.47 upward due to aggressive accumulation of the metal from Tether and central banks. Silver also continued to gain, trading at $117 an ounce.

Bitcoin, along with the wider cryptocurrency market, continues to behave more like a liquidity-sensitive risk asset rather than a dependable hedge, given its deeper liquidity for investors seeking to exit the sector. The U.S. Dollar Index (DXY) dropped to a four-year low this week, yet investors are not interpreting this decline as a fundamental shift.

Derivatives positioning

• The total notional open interest across all crypto futures has decreased by nearly 3% to $132.26 billion, reflecting a growing reluctance to take risks.
• Liquidations of crypto futures bets valued at $348.30 million occurred, indicating a 13% rise in the total over 24 hours, with most of these being bullish long positions.
• Despite the price drops of bitcoin and ether following the Fed’s decision, their 30-day implied volatility indexes remain near multi-month lows, suggesting that traders anticipate calmer market conditions rather than panic.
• Open interest in futures linked to HYPE fell by over 12%, resulting in capital outflows from significant tokens such as bitcoin, ether, solana, and XRP.
• Annualized perpetual funding rates for the leading cryptocurrencies are now barely above zero, in contrast to the 10% seen earlier this week, which indicated genuine bullish momentum. Funding rates for XLM have turned decisively negative, reflecting a trader bias towards bearish, or short, positions.
• In the options market on Deribit, the sentiment remains cautious, with BTC and ETH puts maintaining a premium over calls. The put bias is noticeably stronger in ether.
• Block flows (large trades executed outside of public order books) featured BTC call spreads and ETH put calendar spreads, both strategies designed to capitalize on low volatility and theta (time) decay.

Token updates

• The Optimism community ratified a 12-month plan for OP token buybacks utilizing revenue from its Ethereum layer-2 networks.
• More than 84% of votes cast supported the initiative, which met quorum just ahead of the deadline. If a final vote by the protocol’s Joint House achieves a 60% majority, the Optimism Foundation will commence converting ETH acquired from sequencer fees into OP starting in February.
• Half of the Superchain’s revenue, projected to exceed $17 million last year, will be allocated toward monthly token purchases. The Superchain encompasses networks like Coinbase’s Base and World Chain.
• Some detractors argued that coupling buybacks with token emissions negated any value returned to holders. The foundation countered, asserting that the buyback would assist in aligning the OP token with network expansion while safeguarding funds for ecosystem development.
• OP’s price has decreased by 80% over the past year and is now trading below 29 cents, having dropped an additional 5% in the last 24 hours.