Memecoins
Venture capitalists and hedge funds are buying meme coins like Shiba Inu and Dogwifhat. You should?
New sophisticated traders with deep portfolios are now on the scene.
Cryptocurrency meme coins like Shiba Inu (SHIB -2.84%) do not have a reputation for being the type of investment that serious institutional investors at banks and hedge funds would be interested in. It’s obvious that tokens are too useless, too speculative, too volatile, too inscrutable, and too unpredictable to be usable in any kind of complex financial strategy, right?
As it turns out, meme coins are indeed an area of growing interest for professional money managers. That doesn’t mean you should rush to buy them, but it suggests there are more opportunities in the segment than many people might think. Let’s find out which players are doing what, why they are interested, and how you might be able to participate and invest in memes too, under the right conditions.
Here’s who buys meme coins and why
So far there are a few companies known to be competing and using meme coins as part of their strategy.
Since December, Stratos, a hedge fund supported by venture capitalists like Mark Andresseen of Andresseen Horowitz, he managed a fund that he holds Dogwifhat(WIFE -1.27%) a new meme coin on the scene featuring a shiba inu dog wearing a cute knitted hat. Pantera Capital, a cryptocurrency-oriented hedge fund, also holds memes and claims that “meme coins are here to stay” while touting their huge growth potential. Other companies have touted the benefits offered by more mature cryptocurrency exchanges, which now have features that allow for the use of more sophisticated investment strategies.
The biggest advantage of investing in meme coins is that gigantic returns are possible even with a small initial capital commitment. For example, Shiba Inu is up 221% over the past three years, although investors who bought it before its massive bull run in 2021 briefly saw much higher returns. In the context of a hedge fund, investment bank or venture capital group, clients would be extremely happy to see gains of this magnitude. Yet smaller, unknown meme coins can offer even higher returns than that.
Naturally, the smaller the meme coin market capitalization, the more likely it is that it will simply go to zero or become too illiquid to transact. And virtually all meme coins are extremely risky and on average terribly volatile investments. But for a moneyed investor willing to do some research and take many small bets in the context of a well-calibrated investment strategy, these are hurdles worth bypassing in exchange for exposure to the disproportionately high returns hidden in memes.
Don’t start dabbling before you get your house in order
It goes without saying that most investors don’t have the same resources that hedge funds and similar organizations can bring to the table. This means that you shouldn’t dive into the deep end of cryptocurrency just because they’re excited to do so.
However, with the right preparations, it could be beneficial for your portfolio to get some exposure to meme coins.
The first step is to do it diversify your portfolio of stocks and other non-crypto investments so as to be more resilient to issues affecting individual sectors and regions. Warren Buffett may have been of the opinion that diversification is only for those who don’t have a total understanding of the forces and risks affecting their investments, but investing in meme coins without having the more conservative parts of your portfolio well protected is like buy a house without purchasing any insurance (don’t do this, please).
The next prerequisite to start investing in meme coins is to be serious with yourself about how much money you can really afford to lose. Most meme coins are poor choices that will burn through your money, often incredibly quickly. Until you have some experience in the industry, going much beyond investing in a more proven meme resource like Dogwifhat or Shiba Inu will involve an expensive learning curve. So don’t tie up money you’ll never need again, because disasters are inevitable and you need to be prepared to survive. Think about an allocation on the order of 1% of your portfolio.
Finally, prepare yourself emotionally. As the late great investor Charlie Munger said, “the big money is not in buying and selling, but in waiting.” With meme coins, the wait can be anywhere from inconvenient to downright anxiety-provoking, and can even last years. You will need to be prepared to stick with your high-conviction picks despite wild price swings and to take profits only when that is what is called for in your well-defined investment plan.
Once you’ve checked the right boxes, feel free to follow those hedge funds into a position in Dogwifhat or something similar. Doing your research and identifying promising investments on your own is where the greatest returns are found. If the short history of meme coins is any guide, there could be huge winners waiting in the wings to be discovered.
Alex Carchidi has positions in Shiba Inu and WIF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.