Meme Coins Pumping: The Wealth Effect Behind the Alt Season
Why exactly are meme coins like Dogecoin (DOGE), Shiba Inu (SHIB), and Pepe (PEPE) pumping all of a sudden? Bitwise CIO Matt Hougan says there’s a method to the madness.
According to Hougan, the primary driver behind the alt season is a classic “wealth effect.” Crypto natives who have made money in Bitcoin feel rich and then look for more speculative assets to invest in.
Bitcoin (BTC) has been performing exceptionally well, with a 54% increase year-to-date. This surge can be attributed to inflows and media hype surrounding new Bitcoin spot ETFs launched by BlackRock, Fidelity, and others, including Bitwise itself. On Friday, Bitcoin even reached a new all-time high above $70,000, marking an 11.5% increase over the last seven days.
However, this week has seen several runner-up cryptocurrencies gaining momentum at a faster rate:
- Ethereum (ETH) is up 16.4% at $4,000, despite uncertainty surrounding its prospects for a U.S. spot ETF.
- Dog-themed coins like DOGE, SHIB, and FLOKI—originally launched as jokes without any specific purpose or utility—are up 31%, 145%, and 259% respectively.
Hougan explains that this phenomenon is not unique to the crypto market but also occurs in traditional financial markets. Investors often cash out their profits from large-cap stocks and reinvest in riskier small-caps and venture capital opportunities.
The catalyst for alt season is not the percentage return of Bitcoin but rather the cumulative size of the wealth effect. Although Bitcoin’s long-term percentage return has declined, its absolute gains in terms of market cap have grown exponentially. This has created a pattern where altcoins outperform Bitcoin during bull runs, despite Bitcoin being the initial catalyst for investor gains.
Since November 2022, Bitcoin’s market cap has increased by $1 trillion, providing Bitcoin investors with extra capital to invest in altcoins. Additionally, altcoins like PEPE—with lower market caps and thinner trading volumes—require less buying power to experience significant price increases.
While some may view the outflow from Bitcoin into altcoins as a negative trend for Bitcoin HODLers (those who hold onto their Bitcoin for the long term), Hougan believes that it won’t lead to an early end of the crypto bull run. This is because Bitcoin now has a new source of massive and persistent demand through ETFs, which can sustain the wealth effect for a considerable period.
Hougan concludes that the current market conditions are more indicative of an “everything season” rather than a traditional alt season. He predicts that this trend will continue in the foreseeable future.
Hot Take: Alt Season and the Wealth Effect
The recent surge in meme coins like DOGE, SHIB, and PEPE can be attributed to the wealth effect—a phenomenon where investors who make money in Bitcoin feel rich and seek more speculative assets to invest in. This trend is not exclusive to the crypto market but is also observed in traditional financial markets.
Bitcoin’s exponential growth in terms of market cap has fueled the alt season. Altcoins tend to outperform Bitcoin during bull runs, despite Bitcoin being the catalyst for investor gains. The increase in Bitcoin’s market cap has provided investors with additional capital to gamble on altcoins with lower market caps and higher potential for price appreciation.
While some may view the outflow from Bitcoin into altcoins as a concern, the introduction of ETFs has created a new source of demand for Bitcoin. This persistent demand can prolong the wealth effect and sustain the crypto bull run.
The current market conditions can be best described as an “everything season,” where various assets experience significant price increases. This trend is expected to continue in the coming months.
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