Dogecoin's recent 95% weekly gains raise questions about excessive optimism among investors. Analysis of futures open interest and funding rates suggests potential overheating in the memecoin sector.
Dogecoin (DOGE) has become synonymous with the craze surrounding meme coins for more than ten years, and its recent surge, including a staggering 95% increase in just the past week, continues to capture attention. However, this rally has coincided with a record-high $1.4 billion in futures open interest for Dogecoin, leading to speculation about excessive investor optimism.
Is Dogecoin poised for another remarkable surge, similar to its previous cycles?
Some experts argue that no altcoin season is complete without a significant rise in DOGE's value, given its track record and current $24 billion market capitalization, which positions it among the top 10 cryptocurrencies.
According to technical analysts, Dogecoin seems to be following patterns observed in previous bullish cycles, with explosive gains following periods of consolidation lasting around 22 months. This sentiment is echoed in a post by user ali_charts on a social media platform.
The price movements of #Dogecoin seem to mimic those observed in its past bull markets. If history repeats itself, we could witness a parabolic breakout for $DOGE around April! pic.twitter.com/fL1J3CP3mR
It's important to note that price charts using a logarithmic scale often downplay past price fluctuations, making it easy to overlook significant surges such as the 120% increase in July 2020 or the 145% gains in October 2022 and categorize them as part of a sideways market. Additionally, the definition of a bull market can be challenged, as some of these periods included corrections of 67% in 40 days between June and July 2017 and a 47% retracement in February 2021.
Whether the recent 95% weekly gains signal the beginning of a bull run or not, the fact remains that DOGE's futures aggregate open interest has never surpassed $1 billion before. Historically, every time it exceeded $550 million open interest, Dogecoin experienced a significant price correction. Therefore, the current surge in open interest suggests either a fundamental shift in leverage demand or excessive optimism among retail investors.
It's worth noting that while Dogecoin's current $1.4 billion open interest is substantially higher than previous peaks, the coin is still trading 77% below its all-time high. This surge in interest in leverage, whether measured in U.S. dollars or DOGE, is unprecedented, but it's premature to attribute it solely to retail traders speculating on price increases without further analysis.
The increased demand for Dogecoin futures open interest could be attributed to institutional players using DOGE's price as a proxy for the altcoin market. Similarly, sophisticated investors could be shorting DOGE while simultaneously opening long positions on other meme coins. These scenarios differ significantly from the reckless use of leverage often associated with retail traders.
Dogecoin futures suggest an excess of bullish sentiment
To gain insight into how leverage is being utilized, it's essential to analyze perpetual contracts (inverse swaps), which include an embedded rate recalculated every eight hours to account for excess demand. A positive funding rate indicates that bulls are seeking additional leverage.
Data indicates that the DOGE futures funding rate has surged to its highest level 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's important not to immediately interpret anything above this threshold as unhealthy.
During bull markets, even market makers and large investors may find themselves temporarily short on liquidity, a situation that can persist for several weeks. As these entities raise capital, the funding rate usually returns to normal levels, which may not necessarily coincide with a price correction.
By comparison, the funding rate for other coins such as Bitcoin (BTC), Solana (SOL), and XRP (XRP) currently hovers around 1.5% per week, suggesting that the entire cryptocurrency market may be overheated.
Therefore, labeling Dogecoin as a leading indicator for a sharp correction in the meme coin sector solely based on its current leverage seems unfounded.
This article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.