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Dogecoin Holds Steady, But Traders Hit Hard This Weekend

Motley Fool - Sat Jan 15, 11:32AM CST

What happened

In early Saturday trading, price fluctuations for meme token Dogecoin (CRYPTO: DOGE) took traders on a wild ride. The price of Dogecoin dropped 2.3% over the past 24 hours, as of 11 a.m. ET. However, this dog-inspired cryptocurrency did hold on to the majority of yesterday's double-digit gains, a net positive for Dogecoin bulls.

Yesterday's massive rally, induced by a tweet from Tesla (NASDAQ: TSLA) CEO Elon Musk who announced that Dogecoin would be accepted for some types of Tesla merch, sent this meme token on its biggest rally in a month. Those shorting this meme token got hurt from this news, with derivatives-linked liquidations totaling nearly $12 million for short-sellers yesterday.

Shiba Inu dog on a couch.

Image source: Getty Images.

So what

Continued volatility for Dogecoin has kept derivatives liquidations relatively high, with $5 million in liquidations reported over the past 24 hours, as per analytics site Coinglass.

Derivatives allow for investors to make leveraged bets on short-term price swings in given tokens. Due to the already elevated volatility and risk levels of cryptocurrencies in general and meme tokens in particular, these financial products can often lead to forced liquidations of positions (similar to margin calls in the equities world).

Now what

Traders don't appear ready to stop trading Dogecoin. The Shiba Inu-inspired token has seen incredible rallies and declines in the past. These short-term swings provide the potential for traders to make a lot of money in a short period of time, or lose in a big way. Over the past two days, losses have mounted, for those taking a bearish view of Dogecoin.

Like any volatile asset class, investors should remember to practice discipline in sizing positions appropriately, according to each individual's risk tolerance level. For most, Dogecoin itself is already too risky to consider as a serious investable asset. Dogecoin derivatives take the risk to a whole new level, aimed at the most risk-loving investors out there.

Thus, the volatility we're seeing in Dogecoin could potentially be amplified by derivatives-linked buying and selling in the near term. Those looking to invest in this token should be aware of what the short-term price volatility implications are, before diving in.

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Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.