Meme Coins: Quick Money or Scam Central?

Cryptocurrency has been gaining notoriety since Bitcoin launched in 2009. And in the past thirteen years, it wasn’t always easy for cryptocurrencies and their respective communities to be taken seriously by both retail and institutional investors. For a long period of time, swings of volatility, poor use cases, and doubts of viability plagued the industry, even while it grew dramatically and welcomed a slew of new coins and tokens into the space. Then finally, in 2017, Bitcoin’s price eclipsed the $1,000 mark, and a wider audience began to take notice. With still more periods of volatility since then, we have now seen the price of Bitcoin reach heights of over $68,000, and other coins, such as Ethereum, gain momentum and introduce new use cases that validate the true potential of the space. But not all cryptocurrencies have been taken seriously over the years. And being that many have been created jokingly, it is hard to argue that they should be taken seriously.

PCMag.com defines a meme coin as “a cryptocurrency that is associated with some theme, often as a joke rather than a serious product.” In 2013, an early example of a meme coin, and one of today’s more popular names in cryptocurrency, Dogecoin, was created by Billy Markus and Jackson Palmer. The two decided to create a “joke” payment system to satirize the speculation over cryptocurrencies at the time. Unlike Bitcoin, there is no cap on its supply, meaning that there is no real argument for use as an inflation hedge. Yet somehow, Dogecoin, acknowledged even by its creators as a “joke,” has seen a price jump of massive proportion since its inception. It has avid celebrity fans such as Elon Musk, Snoop Dogg, Gene Simmons, and the Netflix series Tiger King’s very own Carole Baskin. The coin is listed on multiple exchanges such as Robinhood and Coinbase, accepted as payment by the Dallas Mavericks, and has sponsored the English Premier League soccer club, Watford. The coin is constantly featured on CNBC when the network speaks about popular cryptocurrencies. These factors have culminated in a market value of over $20 Billion.

You may be asking yourself how any of this makes sense, and you would not be alone. The website CoinMarketCap.com currently shows that there are thousands of meme coins in existence today, and the number continues to grow. Meme coins are generally not regarded in nearly the same class as other cryptocurrencies such as Bitcoin and Ethereum, and that argument often boils down to utility. While these major cryptocurrencies are marketed primarily as being able to solve real-world problems or help innovate technology in one capacity or another, meme coins seemingly serve no real purpose. Most were created by developers as a joke or to make quick money (sometimes both).

In 2020, a crypto wallet reportedly purchased $8,000 worth of Shiba Inu and never sold. In November 2021, that same position was estimated to be worth over $5 Billion. Now, seeing the returns of some meme coins such as Shiba Inu, Dogecoin, or even Dogelon Mars (yes, that is an actual coin), one might be tempted to take a gamble on it. To be fair, all speculation is a gamble, but with no real fundamentals, supply caps, or use cases, these meme coins have proven themselves some of the riskier examples out there. There is always the possibility of buying at precisely the right time and selling at precisely the right time, but a popular strategy amongst crypto-investors is to hold no matter the volatility. And, while some certainly have made fortunes investing in crypto, many others have suffered deep losses. Shiba Inu, for example, after posting record highs on October 27th of this year, the Shiba Inu coin price recently crashed by over 50%.

Source: Crypto.com

Then consider the recent Squid Game coin, which traded under SQUID. SQUID reportedly had no relation to the rightsholders behind the popular Netflix series it was named after. Yet, the coin was able to take advantage of the massive hype surrounding Squid Games without seeking the proper licensing or affiliation rights to use the name. CNBC, Business Insider, Yahoo! News, and other major publications all ran stories about the massive increase in price over such a short period of time, helping fuel even more fervor. And then, after all of the price appreciation and new investors continuing to pile in, the price rose to $2,856 and subsequently dropped to $0.0007926 in under an hour’s time, devastating investors who had bought into the craze late.

To help understand what is keeping some meme coins so popular today, we must familiarize ourselves with the concept of FOMO, or Fear of Missing Out. Many of us have experienced the feeling of dread as we watch something that we did not participate in, and it seems to be a significant success; consider a time you decided to stay home only to see your friends post photos of a great party that you missed due to your decision, or the feeling of missing out on investing in a company like Amazon or Apple in its earliest days. Understandably, we don’t want to feel this again, so we attend the next party or pile into investments we believe could be the “next big thing.”

During the lockdown months of the COVID-19 pandemic, many investors turned to cryptocurrencies as a means to hedge against inflation. As a result of the hype surrounding the crypto industry, meme coins boomed as well, growing in market value and in the number of new coins available for investment. Hype, or mania, is a perfect euphemism for FOMO and describes a likely best guess as to the popularity of meme coins.

Humans have fallen prey to these feelings time and time again. Even in the face of knowingly making frivolous investments, some investors will chase after profits in the hopes of not “missing out.” A historical example of this FOMO feeling is the Dutch Tulip Bubble during the 1600s, where tulips eventually began selling for rather outrageous sums. The people of Holland knew that the prices were insane, but most were only after profits, not flower bulbs themselves. Of course, the bubble eventually popped after excessive growth, mainly causing pain to latecomers in the market. Here is where we find ourselves with meme coins. If there is an understanding of the “joke” aspect of them and the lack of utility, why then are we bidding up prices and purchasing these items? Why are these coins so popular? Speculation is likely part of the answer; meme coins represent a new possibility for investors to cash in on market mania.

There is an opportunity to sell the tulip at the high, but there is a risk of holding on to the tulip as the price begins to represent its actual usability and utility better. You may not be getting in at the top, and you may even capture some returns, but at the end of the day, you are still simply holding a tulip bulb. It is a dangerous concept, and many investors are often left holding the bag. And while non-fungible tokens (NFTs) are experiencing their time in the sun, they are not immune (or any asset for that matter) from the potential effects of speculation that is seemingly happening with Meme Coins.

There is no doubt that it is possible to make money by trading meme coins, but there is also an incredible risk of losing money. However, cryptocurrencies, including meme coins, are relatively brand-new technologies and are forming into an emerging industry whose future is still undetermined. While we can look at past examples and make other market comparisons to help educate us about this space, it is impossible to predict with reasonable certainty how any cryptocurrency will perform, and past performance is not indicative of future results.

This should not be seen as an indictment on the entire industry but as a commentary on the recent events surrounding some of the more flippant coins and tokens increasing with popularity. There is so much potential for cryptocurrency to grow and be utilized as technology advances. Still, this piece simply wants to remind readers that there is also potential for risk within the space as popularity comes and goes for certain assets like meme coins.

And there is increased discussion of enhancing regulation for cryptocurrencies, which would be aimed at providing more stability and investor protections for crypto traders. Nevertheless, trading a hype cycle might be a legitimate and effective method of speculating within these kinds of assets for some, but those types of strategies can be risky and not suitable for all investors.

Investing responsibly should always be a cornerstone of one’s approach, regardless of the investment. This is why institutional managers focused on the crypto opportunity set are worth consideration.

Sources:
PCMag.com
CoinMarketCap
Crypto.com
Barrons, May 2021. “Dogecoin Started as a Joke. Now It’s Too Important to Laugh Off.”
The Motley Fool, June 2021. “What Are Meme Coins and Can They Make You Rich?”
MoneyWeek, November 2021. “Meme coins can be a laugh or make you money – but they’re also scam central.”
Binance, November 2021. “What are Meme Coins?”