Every once in a while, a new indicator pops out that can be used to detect price tops and bottoms in the market. This assertion is even more evident in cryptocurrencies because the data comes from exchanges and on-chain data 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 altcoin derivatives volumes and the Bitfinex U.S. dollar lending rate.
Altcoin volumes in futures markets indicate overheat
The futures contract volume is usually triple that of, or even five times higher than, regular spot markets. This phenomenon is not exclusive to cryptocurrency markets, as these contracts allow leverage trading, but the comparison isn’t exactly fair because 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.
The chart above shows that Bitcoin and Ether represented 65% to 85% of the aggregate volume in March. Still, as altcoins gained relevance, this figure dropped to 45% for the first time ever on April 6. 11 days later (April 17), the total cryptocurrency market capitalization tanked 20%.
This phenomenon repeated itself on May 6 as the Bitcoin and Ether market share in derivatives volumes reached a historical low at 39%. On May 10, the total market capitalization dropped 12%. It seems like too much of a coincidence, and it makes sense to consider whether the market overheats whenever the market share held by altcoin derivatives spikes.
There are multiple reasons to relate a sharp increase in altcoin volume to excessive optimism. For example, changing focus from Bitcoin and Ether indicates that investors no longer see much upside and are seeking options elsewhere.