Unveiling Market Sustainability Amid Rising Volatility

This article focuses on analyzing Market Volatility & Sustainability:

Spot Dominance (Solana, Tron):

• Higher spot volume suggests stable price surges driven by organic buyers.

• Solana, Tron saw price hikes with reduced Open Interest, hinting at sustainability.

Perpetuals Exceeding Spot (Chainlink, Polygon):

• Elevated perpetual volume compared to spot indicates potential unsustainability.

• Chainlink, Polygon's price surges coincided with increased Open Interest, suggesting riskier trends.

As volatility surges, signaling the potential onset of a bullish market, a critical question looms: are these rapid price surges sustainable? Understanding the dynamics between spot and perpetual volumes is key to deciphering the stability of these market pumps.

Spot vs. Perpetuals: Analyzing Sustainability

1) Spot Dominance Indicates Sustainability:

When spot volume eclipses perpetual volume, it typically suggests a sustainable surge. Here, organic spot buyers drive prices upward, holding down perps funding rates and minimizing liquidations. Notably, platforms like Solana and Tron exemplify this trend presently.

- Solana's price surge of approximately 30% over the week coincides with a 17% drop in Open Interest.

- Similarly, Tron's price ascension of 8% aligns with a 13% decline in Open Interest.

2) Perpetuals Superseding Spot Volumes Signify Unsustainability:

Conversely, if perpetual volume outpaces spot volume, the surge is often deemed unsustainable. In this scenario, perp buyers drive the price, risking liquidations if spot prices fail to follow suit, leading to soaring funding rates. Notably seen in chains like Chainlink and Polygon (previously known as Matic Network).

- Chainlink's price surged around 42% while Open Interest soared by 38%.

- Polygon (MATIC) noted a 25% price uptick while Open Interest climbed by 15%.

Now, let's break down some terms and concepts for easier understanding:

1. Spot Volume vs. Perpetual Volume:

   - Spot Volume: Refers to the trading volume of assets in the spot market, where transactions involve the immediate exchange of assets at the current market price.

   - Perpetual Volume: Pertains to the trading volume of perpetual contracts or futures contracts that don’t have an expiration date, allowing traders to hold positions indefinitely.

2. Funding Rates in Perpetuals:

   - Funding Rate: This is the mechanism in perpetual contracts that aims to maintain price parity between the contract's price and the spot market. When the funding rate is high, long (buy) positions pay short (sell) positions, and vice versa, to ensure the contract price aligns with the underlying asset’s price.

3. Open Interest:

   - Open Interest: Indicates the total number of outstanding contracts in the derivatives market. It signifies the number of active contracts yet to be settled or closed.

4. Solana and Tron Examples:

   - Solana: A blockchain platform known for its high-speed transactions and scalability, witnessing a significant price increase alongside a decline in Open Interest.

   - Tron: Another blockchain platform experiencing a price surge while observing reduced Open Interest.

5. Chainlink and Polygon (MATIC) Examples:

   - Chainlink: A decentralized oracle network, seeing a substantial price rise combined with a surge in Open Interest, suggesting increased speculative interest.

   - Polygon (MATIC): A scaling solution for Ethereum, witnessing a notable price increase coupled with a rise in Open Interest, hinting at amplified trading activity.

6. Spot Buyers and Perpetual Buyers:

   - Spot Buyers: Individuals or entities purchasing assets directly from the market.

   - Perpetual Buyers: Traders involved in perpetual contracts who contribute to driving prices but might also elevate funding rates and trigger liquidations if the spot market doesn’t follow suit.

7. Velodata and Contributors:

   - Velodata: A platform providing detailed market analysis tools, helping users interpret and visualize market trends through charts and data.

   - Contributors: Experienced individuals offering guidance and insights into market behavior and trends.

Thanks to @velodata for the charts - a great tool to analyze flows.

And thanks to these chads for their guidance.

@0xRemiss@0xMughal@arndxt_xo@rektdiomedes@Dynamo_Patrick@crypto_linn@CryptoShiro_@TheDeFISaint@TheDeFinvestor@0xJok9r@CryptoGideon_@iambullsworth@joel_john95@hrojantorse@Deebs_DeFi@hmalviya9@0xJok9r

via https://twitter.com/Prithvir12/status/1717164115591065759

Remember, this article is not financial advice. It emphasizes the importance of conducting thorough personal research. If you found this content insightful, please consider following and retweeting for more engaging analyses.