The market usually goes up after bearish sentiment-led selloffs.
BTC, ETH, and XRP all have something in common, especially as far as price action goes. The three recently achieved a bit of upside after selling pressure leveled out last week, but demand remained limited.
If you have been keeping tabs on crypto prices this week, then chances are that you observed weak demand for XRP, BTC, and ETH.
A clear indicator that investors were not yet convinced that the crypto market was ready for a recovery.
Moreover, the latest data revealed that investors were growing more bearish. Surprisingly, this could be a sign that a deeper recovery could be at hand, possibly triggered by a liquidation wave.
According to a recent Santiment analysis, twice as many XRP comments were bearish compared to bullish comments made recently.
Bitcoin reportedly experienced a balanced ratio of bullish versus bearish comments, while Ethereum had slightly higher bullish sentiment compared to the bears.
Source: BTC, ETH, XRP sentiment/ Source: Santiment
This kind of sentiment is typically not observed, especially after a major discount, unless investors anticipate more downside.
A Look at How Rising Bearish Expectations Could Also Favor a Bullish Setup
The rising bearish sentiment in the crypto market aligned with the crypto fear and greed sentiment indicator.
It dropped as low as 16 in the last 24 hours. The last time the indicator was this low was in February this year.
crypto fear and greed sentiment/ source: alternative.me
Declining sentiment was indicative of rising bearish expectations, especially among retail traders. The bearish market sentiment could potentially signal capitulation ahead.
The extreme fear in the market may encourage or trigger a demand resurgence. Smart money historically buys back when retail investors are extremely fearful.
Another retail selloff would thus play right in favor smart money traders, allowing them to buy back at discounted crypto prices.
Moreover, the extreme fear sentiment may encourage higher short positions in the derivatives market. An outcome that may lead to a bear trap setup and a short squeeze scenario.
In other words, we could be witnessing the formation of yet another shakedown. Multiple factors may be influencing the extreme fear sentiment.
One of those factors includes the declining interest rate probabilities.
According to recent CME Group data, the probability of a rate cut in December dipped from 65% to 50%. This signaled that the market was second-guessing economic health.
December rate cut probabilities/ source: CME Group
Declining Crypto Market Volumes Water Down Bullish Optimism
Market data also highlighted liquidity risks courtesy of low volumes across the market. A recent market analysis revealed that crypto volumes were relatively weak, underscoring liquidity risks.
According to the analysis, the total crypto market cap jumped from $2.4 trillion to $3.7 trillion in the last 12 months.
However, daily volumes cooled from $352 billion to $178 billion during the same period.
The observation highlighted a divergence that was in line with lower momentum, as well as weaker market participation.
However, the lower trading volumes did not account for the higher demand for cryptocurrencies from institutional players.
Moreover, weaker participation from the retail cohort mirrored the elevated market uncertainty caused by macroeconomic disruptions.
Nevertheless, the lower volumes also revealed the underlying risks if the trend prevails. The top cryptocurrencies are still heavily influenced by liquidity cycles.
The declining rate cut probabilities revealed rising uncertainty in the markets. It was also worth noting that recent Bitcoin dips demonstrated weak demand from smart money.
This could indicate anticipation for lower price levels before the next major accumulation wave kicks off.
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