Shane Neagle
Due to their ease of creation, cryptocurrencies have had a bad reputation, often associated with pump and dump scams and rug pulls for quick enrichment. This is one of the main reasons why Bitcoin, which is reliant on its mining infrastructure capex, gained so much traction instead. Bitcoin’s proof-of-work layer serves as a confidence-boosting bulwark against duplication despite being digital as the rest of cryptocurrencies.
Within the crypto sector, memecoins are especially perceived as ephemeral and highly speculative. Not only are there 1,371 of them, which itself brings capital dilution pressure, but meme-related narratives can be redirected into other directions, as what happened with the Official Trump (TRUMP) memecoin.
Yet, there are good reasons to think of memecoins as suitable financial instruments for futures trading. In turn, this has the potential to sustainably grow the crypto ecosystem. Let’s examine how and why.
Crypto Volatility – Dangerous but Fruitful
By now, everyone understands that memecoins are highly volatile. Pick the wrong one based on the initial FOMO and you may end up holding a worthless token bag. However, over the years, it has also been shown that certain coins have consistently high trading volumes. Dog coins still dominate the memecoin pack, with Dogecoin (DOGE) and Shiba Inu (SHIB) side by side.
Top 10 memecoins by market cap as of January 30th. Expectedly, TRUMP coin took the memetic reins over the last month, but other coins had productive bottoms and peaks as well. Image credit: Messari
What is immediately noticeable is that all of the listed coins, except for TRUMP and MAGA, are priced extremely cheap. It has been known for a long time that cheap assets, such as penny stocks, attract trading by lowering the barrier to entry. At the same time, they offer a much greater potential for higher returns.
“An even more important implication of the study is that low-priced stocks offer a higher opportunity from recovery than higher-priced stocks and that if an investor can identify the periods of “bull” and “bear” markets, then low-priced stocks could offer attractive profit-making opportunities.”
Excerpt from Penny Stock IPOs as Investments by Daniel K. Konku
Typically, memecoins are not only cheaper than penny stocks, but are more easily accessible via both centralized crypto exchanges and self-custodial wallets on decentralized exchanges (DEXes) like Raydium, Orca, Uniswap and Curve.
On top of the cheapness that drastically lowers the barrier of entry and boosts participation, memecoin volatility, retail-driven by social media, enhances the underlying principle of futures trading by amplifying both opportunities and risks. Let’s see how exactly.
Cryptos and Futures Trading: Peas in a Speculative Pod
Since the ancient days of trading grain, olive oil, and livestock, futures-like agreements have played a key role in commerce. The concept is straightforward: parties either seek to hedge against potential losses or speculate for profit.
They do this by locking in the price of an asset for a future date, which is why these agreements are called futures contracts. The seller agrees to deliver the asset at that price, while the buyer commits to purchasing it. These contracts are often traded on exchanges until their expiration date, though some are settled over the counter (OTC).
For instance, an ancient farmer might have wanted to lock in a grain price ahead of harvest to avoid the risk of a price drop due to unpredictable factors. In modern times, the same principle applies, but with a much broader range of assets — including cryptocurrencies. In the case of memecoins, their high volatility opens opportunities for both significant gains and losses over short periods.
Typical depth chart for futures contracts, reflecting the pools of buyers and sellers at coin’s different price points. Nearly all futures are settled in USDT stablecoin. Image credit: KuCoin.
Traders can also use leverage to amplify their potential profits (and risks). Many crypto exchanges, such as Kraken, offer multi-asset collateral options for maintaining long positions. A notable innovation in this space is perpetual futures, which do not have expiration dates. Before you engage in any trades, though, make sure you prepare the data properly and run a numbers-based analysis.
Unlike traditional futures that require rolling over to a new contract – often incurring transaction fees and potential costs from contango or backwardation – perpetuals use a funding rate mechanism to keep their price aligned with the spot market. If the funding is maintained during the coin’s price swings, perpetuals offer more flexibility, as there is no need to roll contracts over periodically.
In the above chart, the funding rate of SHIB perpetual is +0.0147%.
This means that long futures traders, ones holding buy positions, must pay a fee of 0.0147% of their position size to short traders, who are holding sell positions. If the funding fee had been negative, the short sellers would’ve been the ones to pay the fee to long traders.
In the latter scenario, this would signal a bearish sentiment. And if more traders are holding shorts, reflected by the market depth chart, this would further push futures prices below spot prices.
If the funding is maintained during the coin’s price swings, perpetuals offer more flexibility, as there is no need to roll contracts over periodically. Ultimately, in this pull and push dynamic between longs and shorts, trend traders pick up on bullish or bearish signals as their favorite futures strategy to position their bets.
The Bottom Line
Although most memecoins are birthed for humorous reasons, they are beholden to market forces. They benefit from FOMO surges from both social media narratives and profit-seeking drives.
So far, certain coins have demonstrated staying power and deeper liquidity, which entices even greater trader participation. And some coins, such as Shiba Inu, are center pieces of a more sophisticated ecosystem of use cases than most cryptos.
In a way, the fact that cryptos lack quarterly earnings like publicly traded companies is ultimately beneficial for future crypto adoption. Unburdened by such obligations and expectations, there is more room for profit-taking opportunities born from community, market sentiment and adoption.
Futures trading thrives on such volatility in both short and long directions. And now that we have the first crypto friendly administration since the ICO boom of 2017, all bets are off.
Disclaimer: The views expressed in this op-ed are those of the author and do not necessarily reflect the views of The Shib Daily. The publication disclaims any responsibility for the content, accuracy, or completeness of the information presented. This article is meant for general informational purposes only and should not be interpreted as professional or expert advice.
