Meme coins soar, crypto market sounds the alarm for overheating speculation

Source: Hive Finance

According to Coingecko data, as of 5 AM on October 28, the 24H low price of Bitcoin was around $58,000. This marks the first significant drop since Bitcoin reached an all-time high of $67,000 on October 20, with a maximum decline of 13% over the past week.

The positive impact of the U.S. approval of Bitcoin futures ETFs has been fully absorbed after a week. The period from the announcement to the official listing of the ETF coincided with Bitcoin's rebound from $56,000 to the $60,000 mark. Combined with market data, this drop in Bitcoin suggests that some investors have taken profits.

The market has indeed quickly shifted towards greed in the short term, one indicator being the excessive leverage in the Bitcoin market. Data from CryptoQuant shows that when Bitcoin was approaching this round of price highs, the estimated leverage across all exchanges was 0.175, which is close to the historical second-high point in April when leverage continued to rise, exceeding 0.18, after which Bitcoin entered a downward channel. This time, when Bitcoin dropped 13%, the leverage had already reached 0.19.

Excessive leverage indicates a market leaning towards greed and suggests that there isn't as much capital as expected to support prices moving higher. Another manifestation of greed is the rise in speculative sentiment, with the meme coin SHIB, favored by retail investors, surging against the trend, reminiscent of the chaotic scene of meme coins flying before the last market crash.

High leverage restricts Bitcoin's upward potential

On October 27, Bitcoin, the largest cryptocurrency by market capitalization, fell to $58,100, nearing its lowest level since October 15. Since reaching an all-time high of $67,016 on October 20, it has dropped 13%.

Tony Sycamore, an analyst at the Australian investment platform City Index, attributed Bitcoin's losses to "traders taking profits from the recent rebound." Additionally, CoinDesk analyst Omkar observed that in the Bitcoin futures market, leveraged funds at the Chicago Mercantile Exchange (CME) raised their Bitcoin bets to a historical high in the week ending October 19, possibly to profit from the widening gap between futures and spot market prices.

Indeed, from the low of $43,000 in early October to the current $58,000, BTC's monthly increase has approached 35%. Recent on-chain data from Glassnode shows that in mid-September, during the price pullback of Bitcoin, there was a significant accumulation on-chain. Some analysts believe that it is not surprising that some individuals sold off after the new highs and the 35% increase.

From the investment principle of buying low and selling high, it is quite common for Bitcoin to experience a drop when reaching its peak, and during this rapid decline of over 13%, the role and impact of "de-leveraging" seem to be magnified, as the current Bitcoin leverage is nearing a new high for the year, indicating excessive leverage in the market.

Data from CryptoQuant shows that as of October 26, the estimated leverage ratio for Bitcoin across all exchanges had reached 0.190, close to last November's peak of 0.195.

The calculation of "estimated leverage ratio" is done by dividing the total open interest of futures across all exchanges by the Bitcoin reserves of those exchanges. The number of open contracts is the number of contracts that remain unsettled at the end of a trading cycle, which is a primary indicator of liquidity; since July, the Bitcoin reserves at exchanges have been in continuous decline. This ratio essentially reflects the leverage level of ordinary investors.

Historically, when Bitcoin's estimated leverage ratio reaches a certain stage during price increases, high leverage often indicates a price peak. Historical data from CryptoQuant shows that when Bitcoin approached this round of price highs near $67,000, the estimated leverage ratio was 0.175, which is close to the historical second-high point in April when leverage continuously rose, exceeding 0.18, after which Bitcoin entered a downward channel. This time, when Bitcoin dropped 13%, the leverage had already reached 0.19.

Ki Young Ju, CEO of CryptoQuant, also stated in an interview with Coindesk that the market is clearly over-leveraged now, "We will soon see some volatility and a lot of liquidations."

In a broader financial market context, leverage generally refers to the ratio of total assets to equity capital on a balance sheet. High leverage means that during economic booms, the liquidity stimulated by leverage allows financial assets to achieve higher equity returns; however, when the market reverses, insufficient liquidity and excessive leverage will face the risk of significant declines in returns.

From this general perspective, the recent rise in Bitcoin may also be influenced by high leverage, which perhaps suggests that the amount of capital supporting the rise itself is not as large as expected, limiting the upward potential.

Speculative frenzy as SHIB leads the meme sector

Starting from the evening of October 27, the meme coin sector has shown a strong upward trend in stark contrast to Bitcoin's decline, with Shiba Inu's ecological token SHIB leading the way.

As Bitcoin plummeted to around $58,000, SHIB reached a historical high of $0.000088, the highest since its issuance over a year ago, with a maximum increase of 60% in 24 hours. This cryptocurrency has continuously broken previous highs since last weekend, and its total market capitalization of $37 billion has surpassed that of DOGE, the earliest asset in the meme sector, pushing it into the top ten of the cryptocurrency market capitalization rankings, ranking ninth.

SHIB's rise has also driven other meme coins to soar. According to data from Coingecko, among 73 meme coins, 31 were in an upward trend within 24 hours, with the total market capitalization of this sector reaching $74.4 billion, accounting for 2.8% of the total cryptocurrency market capitalization.

Although this proportion is small, it has risen by 13.8% over the past 24 hours, highlighting the recent new attraction of meme coins to market capital. Of course, SHIB has taken the lead, becoming the most traded cryptocurrency on multiple exchanges recently, even surpassing the trading volume of Bitcoin and Ethereum.

Since the beginning of this year, meme coins have become a popular category in the cryptocurrency market, mostly created based on jokes, satire, or the influence of celebrities in online social environments. For example, Dogecoin (DOGE) originated from the founder's satire of cryptocurrencies, while one of the motivations for the creation of Shiba Inu (SHIB) was to combat the "worthless" DOGE, and a token named Floki simply used the name of Tesla founder Elon Musk's pet dog.

These meme coins are often referred to as "animal coins" in the crypto circle, with the "dog concept" occupying most of them. They typically use cartoon images of animals as logos, and their issuance is as large as the reproductive capacity of animals, with relatively lower value. SHIB, with an issuance of 100 billion, had an initial price that once dropped to as low as ten decimal places. Due to the low price, meme coins are favored by users with smaller capital, as holders hope to make big profits during market speculation cycles, showing obvious speculative sentiment.

During the period from April to May this year, DOGE surged after Musk's endorsement, driving various meme coins to engage in price competition, forming a "消0游戏风" (消0 game wind), with retail market capital flooding in during the price frenzy. However, after the "5·12" Bitcoin crash, they also quickly fell, with many meme coins experiencing declines of 90%, causing significant losses for many holders. As a result, cryptocurrency investors have reinforced a regular impression that in the past, a surge in altcoins indicated a market peak, and now a surge in meme coins signals a peak.

Coincidentally, at the time of SHIB's surge, mainstream cryptocurrencies like Bitcoin and Ethereum entered a downward channel again.

Analysts at Delphi Digital stated in a market report released on Monday, "The rise of dog concept coins again has historically been a sign of market overheating… The first frenzy of dog concept coins occurred from April to May this year, and as the cryptocurrency market cooled, they quickly fell. In early September, this type of concept coin became popular again, and the broader cryptocurrency market experienced considerable de-leveraging."

The surge in activity of assets like SHIB indicates that speculative enthusiasm may be reaching a critical point. "The Crypto Fear and Greed Index has returned to levels we haven't seen since early March, officially marking 'extreme greed' levels," Delphi Digital stated in a later market update analysis.

As of October 28, Bitcoin's "Fear and Greed Index" has dropped from last week's "extreme greed" level of 82 to today's 73, but it still falls within the "greed" category, while the performance of meme coins has illustrated one aspect of greed, and the alarm for overheating speculative sentiment has been sounded.