Memecoins Have a Bad Reputation, But They're Perfect for Futures Trading

Due to their ease of creation, cryptocurrencies have had a bad reputation, often associated with pump and dump scams and rug pulls for quick enrichment.

Cryptocurrencies have gained a notorious reputation for their ease of creation, often associated with pump and dump scams and rug pulls for quick enrichment. This is one of the main reasons why Bitcoin, which is reliant on its mining infrastructure capex, gained so much traction instead. Bitcoin’s proof-of-work layer serves as a confidence-boosting bulwark against duplication despite being digital as the rest of cryptocurrencies.

Within the crypto sector, memecoins are especially perceived as ephemeral and highly speculative. Not only are there 1,371 of them, which itself brings capital dilution pressure, but meme-related narratives can be redirected into other directions, as what happened with the Official Trump (TRUMP) memecoin.

Yet, there are good reasons to think of memecoins as suitable financial instruments for futures trading. In turn, this has the potential to sustainably grow the crypto ecosystem. Let’s examine how and why.

Crypto Volatility – Dangerous but Fruitful

By now, everyone understands that memecoins are highly volatile. Pick the wrong one based on the initial FOMO and you may end up holding a worthless token bag. However, over the years, it has also been shown that certain coins have consistently high trading volumes. Dog coins still dominate the memecoin pack, with Dogecoin (DOGE) and Shiba Inu (SHIB) side by side.

Top 10 memecoins by market cap as of January 30th. Expectedly, TRUMP coin took the memetic reins over the last month, but other coins had productive bottoms and peaks as well. Image credit: Messari

What is immediately noticeable is that all of the listed coins, except for TRUMP and MAGA, are priced extremely cheap. It has been known for a long time that cheap assets, such as penny stocks, attract trading by lowering the barrier to entry. At the same time, they offer a much greater potential for higher returns.

“An even more important implication of the study is that low-priced stocks offer a higher opportunity from recovery than higher-priced stocks and that if an investor can identify the periods of “bull” and “bear” markets, then low-priced stocks could offer attractive profit-making opportunities.”

Excerpt from Penny Stock IPOs as Investments by Daniel K. Konku

Typically, memecoins are not only cheaper than penny stocks, but are more easily accessible via both centralized crypto exchanges and self-custodial wallets on decentralized exchanges (DEXes) like Raydium, Orca, Uniswap and Curve.

On top of the cheapness that drastically lowers the barrier of entry and boosts participation, memecoin volatility, retail-driven by social media, enhances the underlying principle of futures trading by amplifying both opportunities and risks. Let’s see how exactly.

Cryptos and Futures Trading: Peas in a Speculative Pod

Since the ancient days of trading grain, olive oil, and livestock, futures-like agreements have played a key role in commerce. The concept is straightforward: parties either seek to hedge against potential losses or speculate for profit.

They do this by locking in the price of an asset for a future date, which is why these agreements are called futures contracts. The seller agrees to deliver the asset at that price, while the buyer commits to purchasing it. These contracts are often traded on exchanges until their expiration date, though some are settled over the counter (OTC).

For instance, an ancient farmer might have wanted to lock in a grain price ahead of harvest to avoid the risk of a price drop due to unpredictable factors. In modern times, the same principle applies, but with a much broader range of assets — including cryptocurrencies. In the case of memecoins, their high volatility opens opportunities for both significant gains and losses over short periods.

Typical depth chart for futures contracts, reflecting the pools of buyers and sellers at coin’s different price points. Nearly all futures are settled in USDT stablecoin. Image credit: KuCoin.

Traders can also use leverage to amplify their potential profits (and risks). Many crypto exchanges, such as Kraken, offer multi-asset collateral options for maintaining long positions. A notable innovation in this space is perpetual futures, which do not have expiration dates. Before you engage in any trades, though, make sure you prepare the data properly and run a numbers-based analysis.

Unlike traditional futures that require rolling over to a new contract – often incurring transaction fees and potential costs from contango or backwardation – perpetuals use a funding rate mechanism to keep their price aligned with the spot market. If the funding is maintained during the coin’s price swings, perpetuals offer more flexibility, as there is no need to roll contracts over periodically.

In the above chart, the funding rate of SHIB perpetual is +0.0147%.

This means that long futures traders, ones holding buy positions, must pay a fee of 0.0147% of their position size to short traders, who are holding sell positions. If the funding fee