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Key Points

  • Meme coin is a meme-inspired cryptocurrency that tends to be more volatile than major cryptocurrencies, such as bitcoin (BTC) and ether (ETH).

  • Meme coins often become popular due to their low price, community, aggressive social media marketing, and celebrity endorsements.

  • Meme coins are risky because the tokenomics model is often inflationary, volatile, and has a high risk of capital flight.

Introduce

Meme coins are a major part of the cryptocurrency market and are known for their rapid and unpredictable price fluctuations. Meme coins are often inspired by internet memes and jokes, becoming popular on social media and online communities. In this article, we will explore what meme coins are, why they have become so popular, and the potential risks associated with them.

What are meme coins?

Meme coins are cryptocurrencies inspired by memes or jokes on the Internet and social media. The first meme coin created was Dogecoin (DOGE). A "replica" product launched in 2013, DOGE was inspired by the famous Doge meme of a Japanese Shiba Inu dog named Kabosu.

Meme coins tend to be highly volatile. They are largely community driven and can become popular overnight due to online community endorsement and FOMO. However, meme coins can also plummet in price as traders turn their attention to new meme coins.

Another characteristic of meme coins is their huge or infinite supply. For example, Shiba Inu (SHIB) has a supply of 1 quadrillion tokens, while DOGE has no maximum supply. Since meme tokens typically do not have a coin burning mechanism, their huge supply is the reason why their prices are relatively low.

During the COVID-19 pandemic, the cryptocurrency market has grown as individual investors look for ways to hedge against inflation. Amid this craze, meme coins have exploded, growing in both market capitalization and variety. The phenomenon became famous after the Reddit community hyped up “meme stocks” involving GameStop (GME) and AMC Entertainment (AMC) that caused the prices of these assets to increase significantly.

Inspired by this story, people started joking about pumping the price of Dogecoin (DOGE) to create a cryptocurrency equivalent to GME. This trend, along with endorsements from high-profile figures like Tesla CEO Elon Musk, caused the price of DOGE to increase significantly.

The excitement around meme coins grew as traders began looking into other meme coins like Shiba Inu (SHIB), hoping to replicate DOGE's success. Individual investors are drawn to meme coins because they are often very affordable, often costing just a few cents or even fractions of a cent. This allows traders to hold thousands or even millions of tokens, which feels different than holding a fraction of a major cryptocurrency like ETH or BTC.

The meme coin craze is also driven by market and community sentiment. Meme coins are inspired by popular internet memes and are intended to be humorous, often as “inside jokes” within a community. Buying meme coins can be seen as a way to show support for these communities.

The formalization of meme coins has significantly increased their popularity in 2024. A major step forward is the launch of the VanEck meme coin index that tracks the six largest meme coins by market capitalization (DOGE, SHIB, PEPE, WIF, FLOKI, and BONK as of May 2024).

VanEck's meme coin index has increased the popularity of meme coins and is serving as a benchmark in the asset management industry, encouraging other funds to experiment and outperform it. Additionally, the inclusion of meme coins on channels like Bloomberg has helped spread the word about meme coins and attract more trading activity.

What does meme coin mean for the crypto community?

Many meme coins, such as Dogecoin (DOGE), have launched with an equitable distribution model, meaning they are made available to everyone without pre-mining or pre-allocation of large amounts to the project founders. This aligns with the views of many cryptocurrency enthusiasts who value free access and community-driven growth. The decentralized nature of these launches fosters a sense of ownership and participation within the community.

However, not all projects follow this principle. Some meme coins are pre-mined, where a large amount of tokens are allocated to the coin’s creator or early investors before being distributed to the general public. This often leads to concerns about transparency and fairness, as it can allow a few individuals or groups to control a large portion of the coin’s supply. For example, coins like Shiba Inu (SHIB) have received mixed reactions due to the allocation strategy used by their creators.

Decentralized meme coins tend to be more popular with the community because they embody the principles of decentralization and community participation that are the foundation of the cryptocurrency movement. In contrast, centralized meme coins often face criticism due to potential manipulation and unfairness.

Potential risks of investing in meme coins

Tokenomics

First, the tokenomics of meme coins can be a concern. Bitcoin, for example, has a blockchain, a clear white paper, a reputable ecosystem, and is a deflationary currency.

In contrast, most meme coins are inflationary and have no maximum supply. The ecosystem, utility, and fundamentals of a memecoin are often determined by common in-community jokes.

Volatility

Meme coins are highly community driven and tend to be more volatile than larger market cap cryptocurrencies. Meme coin prices can spike due to celebrity endorsements or FOMO, or crash when the community decides to move on to the next meme coin.

Withdraw capital and flee

Runaway funding is a significant risk in the meme coin market, where a developer abandons a project and disappears with investors’ money. Unfortunately, this scam is very common and has happened many times over the years.

Examples of runaway capital flows of meme coin projects

Here are some examples of runaway capital flows from meme coin projects.

  • SQUID: a meme coin launched in 2021 inspired by the popular Netflix series of the same name, which unexpectedly gained attention due to the popularity of the series. However, the development team withdrew funds and fled the project, causing users to lose money.

  • BALD: In July 2023, the meme coin BALD experienced a massive run on liquidity when the developer withdrew all liquidity from the coin on Coinbase's Base Layer 2 network, sending the token's value plummeting to zero.

  • MetaSwap: In early 2024, the MetaSwap token experienced a massive run on liquidity, resulting in significant losses for investors. The developer abruptly withdrew liquidity, leaving investors with worthless tokens.

  • URF: In March 2024, the team behind the meme coin URF disappeared after a $450,000 presale, leaving investors with worthless tokens. Promoted by boxer and social media influencer Bryce Hall, the project team disappeared within 24 hours of its launch.

How to reduce risk when investing in meme coin?

Investing in meme coins is speculative and highly risky due to their volatile and community-driven nature. However, there are some strategies you can use to mitigate these risks:

  1. Do Your Own Research (DYOR): Before investing in a meme coin, it is important to research the project. Whenever possible, check out the team behind the project, its goals, whitepaper, roadmap, and general community sentiment.

  2. Understand tokenomics: Pay close attention to the supply dynamics of meme coins. Coins with unlimited or extremely high supplies may face inflationary pressures, potentially leading to devaluation. Understanding token distribution and any mechanisms like burning or staking can also provide insight into the long-term viability of the coin.

  3. Diversify your portfolio: Avoid putting all your money into a single meme coin. Spreading your risk can help spread it across different assets. Consider balancing your portfolio with older cryptocurrencies, such as bitcoin (BTC), ether (ETH), SOL, and BNB.

  4. Stay informed: Meme coins are heavily influenced by social media trends and news. Keep track of the latest developments and updates related to your investment. You can use tools like Google Alerts, join relevant social media groups, and follow crypto influencers.

  5. Place a stop loss order: Consider using a stop loss order to automatically sell meme coin in case the meme coin price drops below a specific level. A stop loss order can protect you from significant losses.

  6. Avoid impulse decisions: Only invest money you can afford to lose and avoid emotional impulse decisions like FOMO (fear of missing out). The hype around meme coins can lead to impulsive buying decisions. Stop and evaluate whether the investment is sound based on your research, rather than getting caught up in the excitement.

How to avoid the runaway capital of meme coin projects?

  1. Check liquidity: A strong liquidity pool is essential for the stability of any cryptocurrency. Make sure the meme coin you are interested in has a liquidity lock, meaning the developer cannot easily withdraw funds. You can use services like Unicrypt to check the liquidity lock status.

  2. Check the smart contract: If you have technical knowledge, review the project's smart contract. Look for red flags, such as features that allow developers to mint unlimited tokens or transfer large amounts of money. Additionally, you can look for third-party audits from reputable security firms like CertiK or Hacken.

  3. Check the project team: An anonymous project team can be a red flag. While anonymity is common in the cryptocurrency world, scammers can also use it to disappear without a trace. Look for projects with transparent and trustworthy teams with verifiable industry expertise.

  4. Assess Community Engagement: A strong and vibrant community can be a sign of a legitimate project. Interact with the project’s community on platforms like Discord, Telegram, or Twitter to gauge their sentiment and activity. Be wary of projects with fake followers or unusual hype.

  5. Check the project roadmap: Legitimate projects usually have a detailed development roadmap that outlines development goals and milestones. Compare the roadmap to the project’s actual progress to see if the project is delivering on its promises. Be suspicious of projects that make unrealistic promises or frequently delay important milestones.

  6. Look for warning signs: Be wary of projects that rely heavily on hype and celebrity endorsements without providing substantive information about the technology or its uses. Pressure tactics, such as limited-time offers or guaranteed returns, are often signs of a scam.

By following the above guidelines and always maintaining a healthy skepticism, you can explore meme coins more effectively and avoid potential scams like “runaway capital”. Always remember that investing in cryptocurrencies, especially meme coins, comes with significant risk and it is important to only invest money that you are willing to lose.

As of June 2024, the total market capitalization of meme coins is around $63 billion. The top 6 meme coins include DOGE, SHIB, PEPE, WIF, BONK, and FLOKI – according to CoinMarketCap data.

Dogecoin (DOGE)

Dogecoin (DOGE) was created by software engineers Billy Markus and Jackson Palmer in 2013. The coin was inspired by a meme of a Shiba Inu dog and was created as a joke to attract the attention of the community. As a fork of Litecoin (LTC), DOGE also applies the Proof of Work (PoW) mechanism and has no maximum supply.

For a more comprehensive overview of DOGE, see What is Dogecoin Cryptocurrency?

Shiba Inu (SHIB)

Shiba Inus (SHIB) is a rival to DOGE and is often referred to as the “Dogecoin killer”. SHIB is also named after a Japanese dog breed. This token was created by an anonymous developer named Ryoshi in August 2020. The biggest difference between DOGE and SHIB is that SHIB has a limited supply of 1 quadrillion tokens, of which 50% has been burned and donated to charity. SHIB’s ecosystem also includes a decentralized exchange, NFT art incubator, NFTs, and NFT games.

To learn more about SHIB and its token ecosystem, see What is Shiba Inu (SHIB)?

Pepper (PEPPER)

Pepe (PEPE) is a meme coin inspired by the popular internet meme character Pepe the Frog. Launched in April 2023, PEPE has quickly gained popularity due to its humorous and nostalgic appeal to internet culture enthusiasts. PEPE has a circulating supply of 420 trillion tokens.

Dogwifhat (WIF)

Dogwifhat (WIF) is a meme coin that has gained significant attention since its launch in late 2023. Unlike some utility-oriented meme coins, Dogwifhat remains a purely meme-focused token.

FLOKI (FLOKI)

FLOKI (FLOKI) is a meme coin inspired by Elon Musk's Shiba Inu dog. Launched with the vision of merging memes with real-world utility, FLOKI has grown into a project with an ecosystem that includes an NFT marketplace, NFT collectibles, and staking.

Bonk (BONK)

Bonk (BONK) is a dog-themed meme coin on the Solana blockchain. Launched in 2022, BONK gained attention after 50% of its token supply was airdropped to the Solana community.

Milady Meme Coin (LADYS)

Milady Meme Coin (LADYS) launched in May 2023. Inspired by the Milady NFT collection, LADYS aims to combine meme coins with the growing popularity of NFTs. LADYS token supply is 888 trillion tokens.

How to buy meme coin

You can buy popular meme coins like DOGE, SHIB, PEPE, and WIF on cryptocurrency exchanges like Binance. For less popular meme coins, you can access decentralized exchanges. Let's take DOGE as an example.

1. Log in to your Binance account. Then, go to [Trade] on the top bar to select the Spot Market page.

2. On the right side of the screen, type “DOGE” in the search bar and you will see the available trading pairs. We will take the DOGE/FDUSD pair as an example. Click on “DOGE/FDUSD" to open the trading page.

3. Scroll down to the [Spot] box and select your preferred order type. In this example, we will use a market order. Enter the amount of DOGE you want to buy and click [Buy DOGE] to confirm the order. Once the order is matched, you will see the purchased DOGE in your Binance Spot Wallet.

summary

With new meme coins entering the market every day and traders hoping to make profits like with DOGE and SHIB, it is important to DYOR before buying any meme coin. Remember that meme coins are more volatile than other cryptocurrencies. Trading or investing in cryptocurrencies involves high risk. Meme coins are largely community driven and can crash unexpectedly. Therefore, you should never invest money that you cannot afford to lose.

Read more:

  • What is Dogecoin?

  • What is Shiba Inu (SHIB)?

  • What is coin burning?

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