The meteoric rise of PEPE, self-billed as the “most memeable memecoin,” has seen its market capitalization soar to over $500 million in just over two weeks. However, this remarkable growth is accompanied by negative funding rates in perpetual futures tied to the token, signaling a dominance of bearish positions in the derivatives market.
In the context of perpetual futures contracts, which have no expiration date, a negative funding rate implies that shorts are dominant, and traders anticipate a price drop. This negative rate could be driven by outright bearish speculation or be the result of hedging activities, where investors short perpetual futures to safeguard their long positions in the spot market against potential declines.
The tendency of small-cap meme tokens like PEPE to be more volatile than established cryptocurrencies such as Bitcoin and Ether has likely fueled hedging activities. These tokens can experience significant price fluctuations in a short timeframe, making negative funding rates a constant since day one. As PEPE’s funding rates may be primarily tied to hedging, this also presents an opportunity for a short squeeze—a sharp rally induced by the mass unwinding of bearish short positions.
In the current scenario, prices may need to move downward, or the funding cost will become too burdensome for bears, which could prompt a short squeeze. Market data tracking platform Laevitas has noted that PEPE’s recent rally may already be partially driven by such a squeeze. However, this raises concerns about the sustainability of the current price levels, given the underlying bearish market sentiment.
Conversely, the prevalence of short positions indicates a general belief in the token’s potential for growth. Moreover, the absence of long positions may leave the market shy of buyers should a downturn occur. As such, investors should weigh the possibility of steep fluctuations in PEPE’s price and the wider market dynamics when making decisions.
In conclusion, the remarkable ascent of PEPE has been accompanied by prevailing negative funding rates and bearish sentiment among traders. While this suggests potential short squeezes and rallies, PEPE’s intrinsic volatility and the role of hedging activities could further amplify its price fluctuations, making it an unpredictable play for investors.