What are Memecoins? How do they work?

Key points

• Meme coins are high-risk investments with few real-world use cases.
• The low barrier to entry provides the market with meme coins, making it difficult for anyone to stand out.
• Anyone can create a meme coin, flooding the market with contenders, most of which fail.

Meme coins are cryptocurrencies inspired by Internet jokes and trends. Just as memes spread quickly online, these coins can experience a surge in value due to community hype. However, unlike established cryptocurrencies, most meme coins offer little real-world utility and have questionable long-term value.

While some, like Dogecoin, have reached high market capitalizations, investing in meme coins is generally risky. They are highly volatile and could be real scams.

The original meme coin

Dogecoin (DOGE), the pioneer of meme coins, was created in 2013 by software engineers Billy Markus and Jackson Palmer. Inspired by the popular Shiba Inu dog meme, they created DOGE as a parody of Bitcoin.

Dogecoin has become surprisingly popular online, with fans acting almost like a dedicated group. This community grew in 2014 when it crowdfunded the Jamaican bobsled team’s trip to the Winter Olympics. Positive media attention and celebrity endorsements, particularly from Tesla CEO Elon Musk, have boosted DOGE. In May 2021, fueled by Musk’s “Dogefather” antics on Saturday Night Live, Dogecoin reached a market capitalization of $88 billion. However, the fame of meme coins may be short-lived. Today, Dogecoin has a market capitalization ten times smaller than its peak, a reality check for meme coin investors.

Other popular meme coins

Dogecoin, the first famous meme coin featuring a Shiba Inu dog, started a whole new trend. Over 200 copycat coins have popped up, hoping to be just as popular.

One example is Shiba Inu (SHIB), launched in 2020 and aimed at defeating Dogecoin. It even used a Shiba Inu-like theme. Like Dogecoin, SHIB has surged, reaching a high value in October 2021. But meme coins’ fame may be short-lived. This year, many meme coins, including Dogecoin and Shiba Inu, have lost a lot of value. Even worse, some smaller meme coins have become worthless and investors have abandoned them.

How do Memecoins work?

Creating a meme coin is simple. Since most cryptocurrencies are based on open source blockchain technology, creators can simply copy an existing coin and modify it slightly (think new name, logo). This low barrier to entry has flooded the market with over 200 meme coins, all hoping to be the next Dogecoin.

So how do they increase in value? The hype on social media. Creators use these platforms to build community and get people excited. If that community becomes strong, the price could follow.

This year’s cryptocurrency market crash has highlighted the weakness of meme coins. Many smaller securities have completely collapsed in value, while even established ones like Dogecoin and Shiba Inu have collapsed.

Should you invest in Memecoin?

Meme coins are a bet, not an investment. While some like Dogecoin and Shiba Inu have seen extraordinary success, most have faded away, leaving investors with nothing. Here because:

• Easy creation: Anyone can create a meme coin by copying existing code. This low barrier to entry oversupplies the market with hundreds of contenders.
• Hype-driven growth: Social media inflates meme coin prices, but this excitement rarely translates into long-term value.
• Unlimited Supply: Unlike Bitcoin, many meme coins have a constantly increasing supply, potentially diluting their value.
• Accident Prone: Meme coins lack real-world utility and are vulnerable to market downturns. Dogecoin is down 91% from its peak, while Shiba Inu is down 84%.

Are Memecoins safe?

Meme coins might seem fun and lighthearted, but investing in them can be a risk. Here because:

• Extreme Volatility: Meme coin prices are volatile: one minute they’re skyrocketing, the next minute they’ve plummeted 99% or even vanished entirely.
• Potential scams: Anonymous creators can manipulate the market by holding onto a large chunk of the coins and then advertising them before dumping them on unsuspecting investors.
• Whale Control: Due to ownership concentration, a small group of large investors (whales) can easily manipulate the price.
• Hype about the substance: Unlike established cryptocurrencies, meme coins often lack real-world value or practical use cases. Their value is based solely on Internet hype, which can quickly fade.

Final thoughts

While meme coins offer the temptation of quick profits thanks to internet hype, the bottom line is: proceed with caution. These high-risk, low-utility investments often lack real-world utility and are overshadowed by the number of contenders in the market. Their value is based solely on trends and celebrity endorsements, making them prone to collapses. Dogecoin’s success story is a rare exception, with most meme coins leaving investors empty-handed. If you’re looking to invest in cryptocurrencies, focus on established projects with real value rather than chasing the next viral meme coin.

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