Crypto markets dip as traders position for downside protection

Bitcoin extended losses on Monday as derivatives data signaled a pronounced shift toward risk-off sentiment in crypto markets.

The largest cryptocurrency struggled to hold above $70,000 following last week’s sharp drop, sliding more than 2.8% in 24 hours while remaining well above recent lows near $60,000. Traders and analysts remain divided on whether the market is entering a deeper bear phase or approaching a bottom, with slowing downside momentum cited by bulls as a possible sign of exhaustion.

The broader crypto market also saw declines. The CoinDesk 5 Index (CD5) fell 3.4%, while Ether underperformed, dropping roughly 5% to $2,037 but holding above the psychological $2,000 level. The CoinDesk 20 (CD20) index declined 3.7% as traders reduced risk across major tokens.

Derivatives signal growing caution

Futures markets showed a clear defensive shift. Bitcoin open interest fell from $19 billion to $16 billion over the past week, reflecting widespread deleveraging. Funding rates on Bybit (-2.24%) and Binance (-0.5%) turned negative, indicating short sellers are increasingly in control.

Options data reinforced the cautious sentiment. One-week 25-delta skew rose to 20%, while call dominance dropped to 48%, pointing to rising demand for downside protection. Implied volatility entered extreme backwardation, with front-end volatility at 85% compared to around 50% for longer-dated contracts, suggesting a steep premium for near-term hedges.

Liquidations also increased. Coinglass reported $397 million in 24-hour liquidations, split roughly evenly between long and short positions. Bitcoin accounted for $234 million, Ether $74 million, and Solana $14 million. Binance data flagged $68,160 as a key liquidation level to watch in case of further price drops.

Rainbow token launch hits turbulence

In other news, crypto wallet Rainbow’s RNBW token had a rocky debut. Launched last week on Ethereum’s Base layer-2 network, the token dropped to $0.025, a 75% decline from its $0.10 ICO just two months earlier, before recovering slightly to $0.031.

The selloff slashed the token’s expected fully diluted valuation from $100 million to roughly $31 million. Delays in token distribution to early buyers and rewards program participants contributed to the chaotic launch. Some U.S.-based investors will not have full access to their tokens until December 2026, according to the vesting schedule.

Rainbow co-founder Mike Demarais blamed the issues on backend infrastructure being overwhelmed. The wallet, known for its gamified features, raised $18 million in a 2022 Series A led by Reddit co-founder Alexis Ohanian’s firm, Seven Seven Six.