Dogecoin (DOGE) has been the center of attention in the memecoin craze for over a decade and continues to experience significant gains, with a recent 95% increase in just the past week. However, this rally has also brought about a record-high $1.4 billion in futures open interest for Dogecoin, leading to speculation about excessive optimism among investors.
Some analysts argue that a DOGE pump is essential for an altcoin season, and this claim holds some truth given Dogecoin’s track record and its position as a top-10 cryptocurrency with a market cap of $24 billion.
Technical analysts suggest that Dogecoin is repeating patterns seen in previous bull markets after 22 months of consolidation. They point to examples such as the 120% pump in July 2020 and the 145% gains in October 2022, which may have been overlooked due to the logarithmic scale of price charts. However, it is important to note that these past bull markets also experienced corrections, such as a 67% correction in 40 days in June and July 2017 and a 47% retrace in February 2021.
Regardless of whether the recent 95% weekly gains mark the start of a bull run or not, it is worth noting that DOGE’s futures aggregate open interest has never exceeded $1 billion before. In fact, every previous venture above $550 million open interest has been followed by a sharp correction in DOGE’s price. This raises the question of whether there has been a fundamental shift in leverage demand or if retail investors are overly optimistic about the bullish momentum.
It is important to highlight that Dogecoin’s current $1.4 billion open interest is significantly higher than previous peaks, even though DOGE is currently trading 77% below its all-time high. This data indicates a surge in interest in leverage, both in terms of U.S. dollar value and DOGE terms. However, it is difficult to attribute this increase solely to retail traders gambling on price increases without further details.
One possible explanation for the increased demand in Dogecoin futures open interest could be institutional players using DOGE’s price as a proxy for the altcoin market. Additionally, savvy whales may be shorting DOGE while simultaneously opening long positions on other memecoins. These scenarios differ from the reckless use of leverage typically associated with retail traders and should not be seen as risky or unhealthy.
To gain a more comprehensive understanding of how leverage is being utilized, it is necessary to analyze perpetual contracts (inverse swaps) that incorporate an embedded rate recalculated every eight hours to account for excess demand. A positive funding rate indicates that bulls are seeking additional leverage.
Data reveals that DOGE futures funding rate has surged to the highest levels in over 18 months, standing at 0.11%, equivalent to 2.3% per week. Typically, rates above 1% per week suggest excessive optimism, but it is important not to immediately label anything above this threshold as unhealthy.
During bull runs, even market makers and whales may temporarily face liquidity issues, which can last for a couple of weeks. As these entities raise cash, the funding rate normalizes, and this adjustment is not necessarily driven by a price correction.
For comparison, the funding rate for other coins like Bitcoin (BTC), Solana (SOL), and XRP (XRP) currently stands near 1.5% per week, suggesting that the entire cryptocurrency market may be overheated.
Therefore, it is unfounded to consider Dogecoin as a leading indicator for a sharp correction in the memecoin sector solely based on its current leverage.
Please note that this article does not provide investment advice or recommendations. Investing and trading involve risks, and readers should conduct their own research before making any decisions.