Bitcoin bulls trip on a frog, as Pepe memecoin frenzy signals market top

A FROG-THEMED digital token that has only been around for a month may be signalling pain ahead for Bitcoin bulls.

Trading in memecoins – crypto assets that can be inspired by viral images and memes and attract loyal social-media communities, but otherwise lack in inherent utility – soared in recent days. Leading the pack was Pepe, a newfangled amphibian-themed token, which sparked frenzied speculation and spawned many copycats following its birth in April. 

Pepe was obsessively promoted on Twitter before and after its launch. It peaked at a market value of more than US$1.6 billion on May 5, before reversing course and plummeting as much as 70 per cent in the following days, according to CoinMarketCap.

The ill-fated frog – which, like many memecoins, never traded higher than a fraction of a cent even at its height – took Bitcoin and Ether down with it. Both coins have dropped about 10 per cent since May 5, a notable step-down after four straight months of gains.

Long-time crypto traders have seen this play out before. Memecoin booms typically start during frothy periods, when traders whose wallets have recently grown fat become more willing to take on added risk. These speculators typically offload some of their Bitcoin or Ether holdings to invest in memecoins, so a craze can lead to a drawdown in the prices of the two major coins, said Kyle Doane, a trader at digital-asset manager Arca.

Once the memecoin frenzy fades – as it inevitably does – most traders lose their funds, and have less to invest back in Bitcoin and Ether, he said.

“At the end of the day it’s a lottery ticket,” said Doane, who does not trade Pepe. “That type of trading is basically a centralised casino.”

Past memecoin crazes have signalled market tops, that have been followed by multi-month drawdowns in Bitcoin, data from price tracker Dune shows. For example, when shiba inu-themed Dogecoin led a meme-based boom in May 2021, it was followed soon after by a Bitcoin sell-off that lasted into July. 

Another memecoin rally that same year happened in October. That was just weeks before Bitcoin reached its all-time high, after which it began a wrenching retreat that lasted all of last year. 

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To be sure, Bitcoin is still up 60 per cent since the beginning of 2023, while Ether is up 48 per cent. And there are many other factors that play into price action, such as the macroeconomic environment and regulatory climate. Ether’s price, for example, can be hugely impacted by expectations related to the network’s software upgrades. 

But memecoin hype may be a sign of an overextended market. And this time around, the speculation has led to more disruptions on the blockchains where the coins are minted. Memecoins only became available on the Bitcoin network this year, and when these “BRC-20” tokens started to take off in April, they began clogging up the network and driving up transaction fees to two-year highs. Ethereum, where most of the speculation takes place still, was similarly impacted – which means that customers of truly useful financial and gaming apps had to pay more as well. 

Most importantly, perhaps, mom-and-pop traders burned by memecoins may be hesitant to re-enter the market for some time.

“When the buzz disappears and the hype dissipates, the value tends to plummet and investors can suffer significant losses,” said Joe Rotunda, director of enforcement division at the Texas State Securities Board. “It’s like musical chairs – when the music stops, investors often can’t find a safe place to land. Except investing isn’t a game, losses can be far too real.”

Cashing out of memecoins – which many traders jump into for fear of missing out, or FOMO – is typically difficult, because when everyone wants to sell, there are often few takers.

“Everyone is feeling FOMO behavior, but it’s a million dollars of paper,” said Merav Ozair, a fintech expert at Cornell University. “Because it’s illiquid, they can’t sell it.”

Some memecoins do have longevity. Doge and another similarly themed token, Shiba Inu, have remained among the top 15 coins by market value – but they are the exceptions. Thousands more of the tokens have turned into barely traded zombies. That hasn’t stopped the boom-and-bust pattern from repeating, though.

“I think every single memecoin trader, including me, is trading them for profit,” said a Pepe trader who goes by Poordart on Twitter and declined to provide their real name. “Gamifying trading, making it fun, avoids the stress bit to a degree – but ultimately it is of course for profit only.” 

Until the music stops.