Dogecoin stock and Shiba Inu stock, two “meme” cryptocurrencies, dropped on Wednesday as a furious rise seemed to wind down. Both tokens could experience another significant swing due to the Federal Reserve’s impending key decision and the continued presence of market leverage.
Shiba Inu has fallen 7% over the past day, trailing Dogecoin, which has fallen 17% since Tuesday, when its week-long surge peaked.
These digital currencies are known as meme coins and were first introduced as online jokes rather than important blockchain initiatives like BitcoinBTCUSD -0.41% or ether. Dogecoin is a reference to a Shiba Inu dog meme. It has given rise to other spinoff tokens, the most popular of which is called Shiba Inu.
These dog-meme-inspired coins have been surging higher in a rally over the past week, driven by Dogecoin. Elon Musk, the richest man in the world, is to blame for Dogecoin’s success. He has been intrinsically linked to cryptocurrency for years, referring to himself as the “Dogefather” and promoting it through tweets and allusions on Saturday Night Live.
Speculation over Dogecoin’s potential uses in the early stages of the rise was driven by expectations that the token may eventually be integrated into Twitter’s payments network now that Musk has finalized his acquisition of the social media company.
But during the past few days, “short squeeze” dynamics have been present, resembling the situation that sparked the early 2021 rise at GameStop GME -1.73% (GME).
As the rise gained momentum, traders flooded into positions betting against or shorting the price of Dogecoin, but those bets proved poorly timed as speculation fuelled sky-high leaps. Many people who shorted Dogecoin were obliged to buy back their positions to stop further losses, or their broker liquidated their positions, accelerating gains in a market that was already moving upward.
Shiba Inu and Dogecoin stock are susceptible to a significant move the next day due to two considerations.
The Federal Reserve is scheduled to make a significant decision in the next few hours. In 2022’s challenging macroeconomic environment, the asset class of cryptocurrencies has grown more closely associated with stocks, fluctuating in lockstep with the Dow Jones Industrial AverageDJIA -0.37% and S&P 500. The profits on riskier trades like cryptocurrency are now far less alluring due to higher interest rates set by the Fed.
Investors are prepared to react to any indications from the central bank that it may soon “pivot” or step back from its relentless tightening of financial conditions, even if the Fed is set to deliver yet another supersized interest-rate boost on Wednesday. Stocks and other risk-sensitive assets, including cryptocurrencies, might experience a significant decline if this message isn’t received. On the other hand, a motivating statement might encourage cryptocurrency values or result in gains.
The continuation of dogecoin-related short positions as well as The second reason is that the circumstances that led to the most recent wave of volatility are still in place. There are still a lot of positions betting on the price of Dogecoin, and leverage—money borrowed from brokers to finance traders—can amplify price movements—is still in use.
Suppose prices stabilize or rise, maybe due to the Fed’s decision. In that case, it might put more pressure on traders holding short positions, which, according to data provider Coinglass, still make up 52% of bets in the Dogecoin futures market. However, the converse of a short squeeze may occur if risk-sensitive assets decline and drag Dogecoin along with them, wiping out traders with leveraged long bets.
Almost $800 million is still being wagered on the direction of Dogecoin pricing through open futures positions. Therefore, even though the meme coin boom has temporarily slowed, it will become more unpredictable.
Featured Image- Unsplash @ Kanchanara
Author Valerie Remorosa 
