Dogecoin prices often rise and fall on the whims of Elon Musk’s activity on Twitter.
Dreamstime
Dogecoin
has continued to fall after prices jumped earlier this week, when Elon Musk’s Twitter made its homepage logo an homage to the meme cryptocurrency. There are signs that a deeper correction may be due.
The price of Dogecoin has dropped 6% over the past 24 hours, slipping lower for a second day after beating
Bitcoin
to surge some 30% on Tuesday, when Twitter changed its homepage logo to that of a Shiba Inu dog. Dogecoin is a so-called memecoin because it was founded as a reference to an internet joke involving a Shiba Inu dog, or “doge.”
And Elon Musk is a big fan of the jokey crypto. He has dubbed himself the “Dogefather” and has toyed with its price for years through references on Twitter and television, which tend to spur spikes in the price of the digital asset.
But the link between Twitter and Dogecoin goes further. The meme token has seen multiple rallies since the
Tesla
(ticker: TSLA) CEO bought social media company Twitter last year amid hopes that Musk might incorporate Dogecoin into a future Twitter that involves widespread adoption of digital assets in payments. While the latest stunt over the logo has reignited those hopes, it looks fairly immaterial.
The lack of fundamentals behind Dogecoin’s latest surge, paired with what looks like over-exuberance among traders, means the memecoin may be due for a correction. The evidence lies in the crypto derivatives market, where trade in the likes of futures contracts represents one of the most liquid markets in all of crypto, dwarfing trade in “spot” digital assets themselves.
Traders have piled into bullish bets behind Dogecoin, with the open interest—or total value in outstanding contracts—in Dogecoin perpetual futures surging to near $600 million by Thursday, according to data provider Coinglass.
These are overwhelmingly bullish bets, with the Dogecoin “funding rate” firmly in positive territory. Funding rates are used to help ensure that the price of spot Dogecoin—the token itself, as traded on exchanges like
Coinbase Global
(COIN)—matches the price of the futures contract. When the futures price is higher than spot—indicating that most bets are for prices to rise—the funding rate is positive. Traders that take these positions then have to pay money to traders with short positions, incentivizing some equilibrium in the futures market.
High open interest and a skewed funding rate for Dogecoin suggest that the market is lopsided, which means a correction could be violent if prices continue to swing against bullish traders. Traders often take these positions with margin, or borrowed money, and can be forcibly closed out of their positions by brokers if the market swings against them in a process called liquidation. The forcible closing of positions can also trigger automatic sell orders, adding more downward pressure to an already-declining market.
It can take the fun out—real quick—of trading cryptocurrencies with funny names that reference internet memes.
Write to Jack Denton at [email protected]
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