Dogecoin Open Interest Surpasses $1.4 Billion — Is It Time for a Meme Correction?

Dogecoin has been at the heart of the memecoin craze for more than a decade and continues to rise sharply, such as a 95% increase in the past 7 days alone. However, the rise has also been accompanied by a record high of $1.4 billion in open interest in Dogecoin futures, sparking speculation that investors are overly optimistic.

Can Dogecoin repeat the 10-fold increase of the previous cycle?

Some analysts believe that there would be no altcoin season without DOGE rally, which makes sense given its track record and $24 billion market cap, making it a top 10 cryptocurrency.

Technical analysts believe that after 22 months of consolidation, Dogecoin is repeating the explosive rise of "past bull runs." One example includes a post by user ali_charts on the X social network.

#Dogecoin's price action appears to be mirroring patterns observed in past bull runs. If history repeats itself, we may see $DOGE enter a parabolic breakout around April!

First, one should note that logarithmic-scale price charts tend to minimize past price swings, making it easier to "forget" the 120% rally in July 2020 or the 145% gain in October 2022 and attribute these to sideways markets. Furthermore, the definition of a bull market can be seriously questioned, as some of these periods include a 67% retracement within 40 days between June and July 2017 and a 47% retracement in February 2021.

Regardless of whether the recent 95% weekly gains are the initial stages of a bull run, DOGE’s total futures open interest has never exceeded $1 billion. In fact, every previous investment above $550 million in open interest has been accompanied by a significant correction in DOGE’s price. Therefore, either the demand for leverage has fundamentally changed, or retail investors are too optimistic about the bullish momentum.

Dogecoin futures open interest since 2022. Source: Coinglass

Note that Dogecoin’s current open interest is $1.4 billion, significantly higher than its previous peak, but Dogecoin is trading 77% below its all-time high. Essentially, the data suggests that interest in leverage has surged to unprecedented levels when measured in the United States. Still, without further details, one cannot attribute the price increase to retail investors betting on price increases.

The increase in open interest in Dogecoin futures can be explained by institutional players using the price of Dogecoin as a proxy for the altcoin market. Similarly, savvy whales may be shorting DOGE, betting on a decline, while establishing leveraged long (bull) positions on other memecoins. None of these cases should be considered risky or unhealthy, as they differ significantly from the typical reckless use of leverage by retail traders.

Dogecoin Futures Suggest Bulls Became Overly Optimistic

To understand the use of leverage in detail, one should analyze perpetual contracts (inverse swaps), which contain an embedded interest rate that is typically recalculated every eight hours to compensate for excess demand. A positive funding rate indicates that longs require additional leverage.

DOGE perpetual futures 8-hour funding rate. Source: Coinglass

Data shows that the DOGE futures financing rate has risen to an 18-month high of 0.11%, equivalent to 2.3% per week. Typically, a rate above 1% per week indicates excessive optimism, but one cannot immediately assume that anything above this threshold is unhealthy.

During bull markets, even market makers and whales may find themselves temporarily illiquid, which can last for weeks. As these entities raise cash, funding rates will eventually normalize, which is not necessarily driven by price adjustments.

Therefore, considering Dogecoin as some form of leading indicator for a major correction in the memecoin industry seems unwarranted due to its current leverage.