Market manipulation and liquidity problems

Since Dogecoin’s debut in 2013, the meme coin market has seen significant growth, reaching a total market capitalization of $60 billion by June 2024.

In March alone, the asset class attracted a whopping $13 billion in spot trading volumes on exchanges, outpacing major blue-chip cryptocurrencies like Ethereum and Solana. However, this sector is struggling with risks.

Red Flags Identified in Meme Coin Investments

According to the latest CoinShares report, the high concentration of assets among holders of meme coins highlights a notable risk of market manipulation and liquidity challenges due to the significant concentration of assets among a few holders.

Larger holders or whales can significantly affect the price of the token by making large trades, causing volatility. Also, if a small number of addresses hold the majority of tokens, liquidity problems may arise. This is especially true if the same addresses also control the supply of liquidity on decentralized exchanges.

The high Gini coefficient of around 0.8 for these same coins indicates a significant centralization of token holdings.

For the uninitiated, this metric evaluates the distribution of tokens between different addresses. This centralization brings with it risks such as potential market manipulation, liquidity challenges and increased investor caution, which need careful consideration when evaluating these “joke” tokens.

“The high Gini coefficient of ~0.8 indicates substantial centralization of token holdings, which carries risks such as market manipulation and liquidity issues, as well as a degree of volatility that is intolerable for the majority of investors”.

Investors flock to Meme Coin Futures

While examining relative trading volumes, CoinShares found that the influence of older meme coins, such as the OG Dogecoin and Shiba Inu, is declining. Meanwhile, PEPE and a number of new Solana meme coins have gained traction, now collectively accounting for more than 50% of trading volume.

This shift reflects a recent investor preference for newer meme coins. There are several factors at play, including growing communities, blockchain ecosystems, as well as the potential for higher returns.

Despite this, the liquidity and longer track record of established meme coins remains important.

Accordingly, the high futures open interest reflects the massive market footprint of these currencies and suggests increased speculative trading. For example, Dogecoin’s open interest hit a record $1.8 billion recently, while PEPE’s jumped nearly 50% to $850 million in May.

The increase in open interest, which has now exceeded $3 billion, points to increased price volatility and indicates that investors are increasingly using futures positions to manage their exposure to meme currencies.

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