The Rise and Risk of Memecoins
The Effect of Memecoins on the Digital Asset Market
Successfully positioning a portfolio through the full investing cycle requires a willingness to balance fundamental and technical factors. Digital asset markets are subject to these same forces but exhibit unique features affecting risk-taking behavior. A hot topic of recent weeks has been the rise in memecoin speculation. Memecoins are digital tokens that are based on internet memes or jokes, such as Dogecoin or Shiba Inu. They have no intrinsic value or utility but attract investors who hope to profit from their popularity and volatility. One of these signals is when risk-taking narrows to a handful of assets - for example, the chase for memecoins and selling the 'long tail' of tokens - within a broader market. This often indicates that investors are losing patience with the market’s ability to generate returns and are seeking glory in a few assets showing positive momentum. This leads to lower demand and higher supply for tokens with less hype and liquidity, pushing their prices down. This intuition comes from experience, although studies provide supporting evidence that investor risk perception drives market asset prices. As a result, staying informed on trends is important, as they can indicate changes in market sentiment and risk appetite. To that end, this article will try to provide more context on the subject of memecoins.
Blockchain technology is revolutionizing the way we solve real-world problems. From supply chain management to digital identity, blockchain offers a secure and transparent platform for innovation. But not all cryptocurrencies that run on blockchains have a noble vision. Some are just memes, inspired by internet jokes that attract communities - often communities of speculators! Over 700 meme coins exist, but many are not actively traded and are effectively worthless.
The question of what makes a cryptocurrency valuable is at the heart of the matter. One take is that these tokens created are simply art; like all art, not everyone will 'get it.' The price is defined simply by what another will pay you for it, as it takes two to make a market, after all. This blog post will explore some memecoin market dynamics. We may be skeptical and alive to the security risks of this market niche, but we also argue that it is best not to dismiss an asset's valuation just because it does not make sense to us.
What are Memecoins?
Memecoins are cryptocurrencies that are based on popular internet memes. They are often created as jokes or parodies of other cryptocurrencies. This does not prevent them from gaining popularity and value due to the viral nature of memes and the power of social media.
Some of the most well-known memecoins are Dogecoin and Shiba Inu, which are both inspired by the Doge meme featuring a Shiba Inu dog. Dogecoin was created in 2013 as a fun alternative to Bitcoin, but it gained mainstream attention in 2021 thanks to the support of celebrities like Elon Musk and Mark Cuban. Shiba Inu was launched in 2020 as a "Dogecoin killer," - quite literally a meme of a meme - and it has since become one of the top 20 cryptocurrencies by market capitalization.
Another recent example is the $PEPE Coin derived from the Pepe the Frog meme. Pepe the Frog originated as an innocuous cartoon character in 2005 by artist Matt Furie. It became an internet meme in 2008 when users on Myspace and other platforms started modifying its expression and adding captions to convey various emotions or opinions. However, Pepe was also associated with crypto culture, as some users created rare and unique versions of Pepe with watermarks like “RARE PEPE DO NOT SAVE” or “PEPE COIN.” These Pepe's were later turned into non-fungible tokens (NFTs) on a peer-to-peer marketplace called Counterparty in 2016, making them some of the oldest NFTs in existence. Some of these Pepe's have sold for millions of dollars at auctions, such as "Pepenopoulos", which sold for $3.6 million at Sotheby's in 2021.
A comparison meme often used alongside Pepe is Wojak, a simple drawing of a bald man with a blank expression. Wojak was originally created in 2010 to represent an average internet user's feelings or thoughts. However, Wojak has also been adapted into various crypto-related memes, such as "pink wojak", which depicts a Wojak with pink skin and tears streaming down his face, symbolizing the frustration and despair of losing money in crypto markets. Another variation is "brainlet wojak", which shows a Wojak with a small brain and a confused look, implying a lack of understanding of crypto concepts.
Other examples of memecoins include Floki Inu, which is based on Elon Musk's pet dog; Mongoose Coin, which was created after a member of Congress made up the name during a hearing on digital currency; and Dogelon Mars, which is a pun on Elon Musk's SpaceX project.
Why are Memecoins Popular?
Memecoins have several factors contributing to their popularity among cryptocurrency users and investors. Some of these factors are:
- Meme culture: Biologist Richard Dawkins proposed a meme to describe a piece of culture that spreads itself across minds, like a gene. Meme culture is the powerful expression and exchange of memes, which are usually witty or critical media that comment on popular culture or current issues. Memes resonate with our human ability for narrative and insight, as they enable us to convey complex messages or feelings in a simple and compelling way. Memes can also transform the public sphere by shifting the spectrum of views that are acceptable or reasonable, also known as the Overton window. They are widely shared and enjoyed by people across different platforms and communities. Memecoins tap into this culture by creating a sense of fun, belonging, and identity for their users.
- Social media influence: Memecoins can benefit from the exposure and endorsement of influential figures on social media, such as celebrities, influencers, or even politicians. These figures can boost the awareness and demand for memecoins by tweeting, posting, or mentioning them to their followers. For example, Elon Musk's tweets about Dogecoin have caused significant price and trading volume spikes.
- Community support: Memecoins often have loyal and enthusiastic communities that support their projects and promote them to others. These communities can be incredibly creative with producing memes, videos, songs, or artworks featuring their favorite memecoins or organizing campaigns, events, or donations to raise awareness and funds for their causes. For example, the Dogecoin community has sponsored several charitable and sporting initiatives, such as sending the Jamaican bobsled team to the Winter Olympics in 2014.
- Speculation and FOMO: Memecoins can also attract investors who are looking for quick profits or who display a Fear Of Missing Out (FOMO) on the next big thing. Memecoins can experience huge price fluctuations due to their high volatility and low liquidity. This can create opportunities for traders who want to ride the wave of hype and momentum.
What are the Risks of Memecoins?
While memecoins can offer entertainment and potential gains for some users, they also come with significant risks that should not be overlooked. Some of these risks include:
- Lack of fundamentals: Memecoins often lack a clear purpose, vision, or utility beyond being a joke or a meme. They may not have a solid development team, a working product, or a roadmap for future improvements. They may also face technical issues, such as bugs, hacks, or forks that can compromise their security or functionality. Indeed, the $PEPE webpage clearly states: "$PEPE is a meme coin with no intrinsic value or expectation of financial return. There is no formal team or roadmap. The coin is completely useless and for entertainment purposes only."
- Market manipulation: Memecoins can be easily manipulated by whales (large holders), pump-and-dump groups (organized schemes), or bots (automated programs) that can artificially inflate or deflate their prices for their own benefit. These actors can use social media, forums, or chat groups to spread false or misleading information, create hype or fear, or coordinate buying or selling actions that can affect market sentiment and behavior.
- Smart contract risk: Any memecoin launched on the Ethereum network will be brought into existence by deploying a Smart Contract. "Trust but verify" is appropriate for any Smart Contract execution, especially if this is a new memecoin you just heard about. We always recommend reviewing the code or relying on someone you trust to do it for you. Interact with the wrong contract, and you could put all your assets in your wallet at risk, so for memecoins, it is best to have a distinct and separate wallet to ensure segregation of funds. If you want to get started on code, review yourself, then check our 'Solidity 101' series.
- Gas fees: Smart contract users must pay gas fees to compensate network validators for processing their transactions. Gas fees are determined by supply and demand factors such as network congestion, transaction complexity, and the gas price cost paid in ETH. Gas fees can fluctuate significantly depending on market conditions. When memecoin season builds momentum, and a frenzy of risk-taking activity is seen, then gas prices can explode. For example, in the excitement over $PEPE, gas fees hit a 12-month high, and one unusual transaction saw a user pay a 64 ETH fee to execute a transaction (~$120k at the time) - yikes!
Conclusion
Memecoins are a remarkable phenomenon that illustrates the convergence of cryptocurrency and meme culture. They offer amusement and entertainment for some users but also entail significant risks that should not be overlooked. Investing in memecoins requires a strong stomach. Memecoins are highly volatile and speculative, and their prices can fluctuate wildly in a short span of time. However, memecoins have the potential to be more than just a fleeting craze. They are a cultural expression of the internet's power and creativity. Memes have a habit of replicating and spreading rapidly, and so do memecoins. They are here to stay as long as people find them amusing and entertaining. But investors should not be deceived by their cute names and images. Memecoins are the most precarious aspect of an already volatile digital assets market, so any capital allocation should heed the above health warnings judiciously.