How Bitcoin Bulls Stumbled On A Frog Amid Pepe Meme Coin Frenzy

A frog-themed digital symbol that has only been around for a month could signal pain ahead for Bitcoin bulls.

Trading in meme coins – cryptocurrency assets that can be inspired by viral images and memes and attract loyal social media communities, but otherwise lack intrinsic utility – surged in recent days.

Leading the pack was Pepe, a newfangled amphibian theme that sparked wild speculation and spawned many copycats since it was born in April.

Pepe was obsessively promoted on Twitter before and after its launch, and it peaked at a market capitalization of more than $1.6 billion on May 5 before reversing course and plunging as much as 70 percent in the following days, according to CoinMarketCap.

The ill-fated frog – which, as is the case with many meme coins, never traded higher than a fraction of a cent even at its height – took Bitcoin and Ether with it.

Both coins have fallen around 10 percent since May 5, a notable decline after four straight months of gains.

Longtime cryptocurrency traders have seen this play out before: Meme coin booms usually start during frothy periods, when traders whose wallets have recently fattened are more willing to take on extra risk.

These speculators typically offload some of their Bitcoin or Ether holdings to invest in meme coins, so a craze could lead to a decline in the prices of the two major coins, said Kyle Doane, a trader at digital-asset manager Arca .

When the meme coin frenzy dies down, as it inevitably does, most traders lose their money and have less to invest back into Bitcoin and Ether, he said.

“At the end of the day, it’s a lottery ticket,” said Doane, who isn’t trading Pepe. “This type of trade is basically a centralized casino.”

Previous meme coin manias have signaled market tops that have been followed by months of moves 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 soon followed by a Bitcoin selloff that lasted into July.

Another meme coin rally of the same year occurred in October. It was a few weeks before Bitcoin reached its all-time high of more than $68,000, after which it began a horrific retreat that lasted all of last year.

To be sure, Bitcoin is still up 60 percent since the beginning of 2023, while Ether is up 48 percent.

And there are many other factors that play into price actions, such as the macroeconomic environment and the regulatory climate. For example, Ether’s price can be heavily influenced by expectations related to the network’s software upgrades.

See: What Happened to the Bitcoin Price?

But the meme coin hype could be a sign of an overextended market.

And this time the speculation has led to more disturbances on the blockchains where the coins are minted.

Meme coins only became available on the Bitcoin network this year, and when these “BRC-20” tokens started taking off in April, they began clogging the network and raising transaction fees to two-year highs.

Ethereum, where most of the speculation still takes place, was similarly affected – meaning customers of really useful financial and gaming apps had to pay more too.

Perhaps most importantly, “mom-and-pop” traders burned by meme coins may be hesitant to re-enter the market for a while.

“When the buzz wears off and the hype wears off, value tends to plummet and investors can suffer significant losses,” said Joe Rotunda, director of enforcement 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. Apart from investing not being a game, losses can be all too real.”

Cryptocurrencies — in pictures

Withdrawals of meme coins – which many traders jump into out of fear of missing out, or Fomo – are usually difficult because when everyone wants to sell, there are often few takers.

“Everybody feels Fomo behavior, but it’s $1 million paper,” said Merav Ozair, a FinTech expert at Cornell University. “Because it’s illiquid, they can’t sell it.”

Some meme coins have a long life. Doge and Shiba Inu have remained top 15 coins by market value – but they are the exceptions.

Several thousand of tokens have turned into barely traded zombies. However, that has not stopped the boom-and-bust pattern from repeating itself.

“I think every single meme coin trader including me trades them for profit,” said one Pepe trader who goes by the handle Pooordart on Twitter and declined to give their real name.

“Gamifying trading, making it fun, avoids the stress to a certain extent – but at the end of the day, of course, it’s only for profit.”

Until the music stops.

Updated: 15 May 2023 at 05.47