Memecoins have a greater beta than the rest of the crypto sector, but does their recent 25% price collapse indicate a worsening bear market for BTC, ETH, and large caps?

Memecoins were heavily damaged by the current crypto crisis, which resulted in a 9% reduction in total market capitalization from August 14 to August 21. Pepecoin, Shiba Inu, and ApeCoin all experienced a 25% drop at the same time period. The main question is whether this pattern will have an impact on the larger market, signifying a broader bear market, or whether it merely represents the slow performance of memecoins.

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Total crypto market cap (blue) vs. PEPE/USDT (green), SHIB/USDT (red), APE/USDT (orange), August 2023. Source: TradingView source: Tradingview

Memecoins such as Dogecoin sprung onto the scene, propelled by viral memes and community enthusiasm. However, their popularity waned owing to a variety of circumstances. These currencies rely on media hype and internet groups for attention, but they have little value outside of their meme roots. Their speculative character causes price fluctuations and volatility.

Furthermore, the memecoin market has grown oversaturated with clones, diverting attention and resources away from more traditional cryptocurrencies.

Capital shifts as investors shift their focus to new trends

The mid-August crypto market crisis served as a stark reminder of memecoin volatility for speculators. Many of these coins, such as PEPE and Milady Meme Coin (LADYS), have surfaced in the previous six months. This might drive away new entrants and create negative sentiment, potentially extending a bear market to the larger crypto ecosystem.

However, this underperformance is typical for memecoins, as evidenced by APE, SHIB, and PEPE behind the overall crypto market by 18% between June 5 and June 15.

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Total crypto market cap (blue) vs. PEPE/USDT (green), SHIB/USDT (red), APE/USDT (orange), June 2023. Source: TradingView

These two examples do not necessarily imply that memecoins will always do worse than the overall crypto market. They indicate a larger beta in the industry, as memecoins have a tendency to exaggerate market swings. Regardless, it is unclear whether extreme price declines represent a backward-looking occurrence or a market reversion.

Memecoins, contrary to popular belief, can also lag during bull markets. Memecoins, for example, decreased between March 13 and March 30, while the whole crypto market cap increased by 17.5%.

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Total crypto market cap (blue) vs. FLOKI/USDT (green), SHIB/USDT (red), APE/USDT (orange), March 2023. Source: TradingView

Following an examination of the two most recent instances of memecoin underperformance, it is critical to investigate their aftermath. This includes analyzing if the price reduction foreshadowed a future market bottom or simply signaled investors moving their focus to other cryptocurrencies.

Despite the evidence to the contrary, external variables influence memecoin price movement.

Following the period between mid-June and late-March when memecoins underperformed, the entire cryptocurrency market capitalization either remained stable or increased significantly in the following weeks. During these times, a variety of things could have influenced investor sentiment. For example, BlackRock's application for a Bitcoin exchange-traded fund (ETF) on June 15 could have influenced mood.

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Cryptocurrency market total capitalization, USD. Source: TradingView

Similarly, Bitcoin options worth $4.2 billion expired on March 31. This event was viewed as a potential catalyst for Bitcoin's $28,000 support level to be strengthened. This was owing to a significant disparity between call (buy) and put (sell) instruments, with call options outperforming put options by $1.2 billion. This most likely helped Bitcoin bulls, who might have used the expiry profits to boost the BTC price.

However, because neither of the previous two significant losses in memecoins were followed by broader cryptocurrency market drops, the prospect of Bitcoin finding support near $26,000 remains. Nonetheless, as demonstrated by the ETF and option expiry accidents, market trends and memecoin price action are mostly influenced by news and events.

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