Memecoins: Riding Into the Crypto Wild West
|By Jurica Dujmovic|
Recently, memecoins have once again been generating buzz in the world of cryptocurrencies, dominating headlines and sparking debates about their legitimacy as investments.
To better understand this phenomenon, I have interviewed six experts in the field to discuss the potential risks and rewards of memecoins and whether the average investor should pay attention to them.
The first expert joining us today is Ruadhan, lead developer at Seasonal Tokens. He defines memecoins as “cryptocurrencies that attempt to use the popularity of a meme to gain market share, usually without providing any real functionality.”
However, he notes that Dogecoin (DOGE, “B-”) — the original memecoin — is an exception with its own blockchain and proof-of-work mining system. In fact, its market cap is nearly $11 billion!
Michel Caspers from Unity Network has a slightly different definition, saying that memecoins are crypto tokens that are essentially created for fun or to mock something.
But both Ruadhan and Caspers agree that they have no real function compared to the classic cryptocurrencies.
This is because traditional cryptocurrencies — like Bitcoin (BTC, “A-”) and Ethereum — have clear goals such as fast, secure payments or storing value … whereas memecoins typically do not.
Meanwhile, our third expert, Alexander Wermescher — founding partner and CEO of CLC & Partners — goes deeper to categorize memecoins into three types:
1. Memecoins based on internet memes, like DOGE and SHIB.
2. Celebrity coins leveraging fame.
3. Pump-and-dump schemes involving artificial value inflation for profit.
Personally, I believe Alexander makes an excellent point here. This distinction is important because it sheds light on the various motivations behind the creation of these digital assets … and thus the unique risks tied to them.
You see, coins based on internet memes typically draw their appeal from the cultural phenomenon of memes. These tokens harness the power of virality to gain traction and often generate significant interest from the public.
For instance, Dogecoin started as a joke. But it has since gained a massive following and a multibillion-dollar market cap.
However, it is crucial to remember the success of these memecoins relies heavily on the continued popularity of the associated meme, making their value inherently volatile and speculative. That’s one level of risk.
On the other hand, celebrity coins capitalize on the fame and influence of popular figures to attract investors. These tokens often serve as endorsements or marketing tools for the celebrities involved who may actively promote the coins on social media and other platforms.
While this strategy can generate substantial buzz and drive up the value of the coin, it is essential to recognize that the success of these tokens is tied to the reputation and continued popularity of the associated celebrity.
The risk here is mostly the same as with a coin based on an internet meme, as fame is fickle.
Investors should be aware of this connection and exercise caution when investing in celebrity coins. Any negative developments concerning the celebrity may have a negative impact on the token's value.
The pump-and-dump scheme coins comprise a darker side of the memecoin market, however. These schemes involve artificially inflating the value of a token — often through coordinated efforts and misleading promotions — only to sell off large amounts of the asset once the price has spiked.
This practice leaves unsuspecting investors with devalued tokens and potentially significant losses.
Although pump-and-dump schemes are not exclusive to memecoins, the hype and speculation surrounding these tokens make them particularly susceptible to such manipulation.
Overall, memecoins can present quite an investment risk to an inexperienced investor.
And experts like Stefania Barbaglio — CEO of Cassiopeia Services and founder of the Crypto Circle — tend to agree.
She explains, "Memecoins offer the potential for both sky-high returns and significant risk. Their value is often based on hype or speculation, rather than any real-world use case."
Ruadhan also zeroed in on the speculative nature of memecoins, warning, “Investors who buy them are essentially gambling on the future popularity of a meme. Dramatic price increases can yield enormous returns for those who sell before the bubble bursts, but many investors end up making massive losses."
This sentiment is echoed by Nick Ranga, senior forex analyst at ForexTraders.com. He advises investors to approach trading memecoins with extreme caution because of their high volatility and speculative nature.
As we continue exploring the realm of memecoins, it’s essential to consider their impact on the average investor.
So, if you are looking to venture into this unpredictable market, here are some valuable insights and guidance for you.
Our last expert, Marie Tatibouet, CMO at Tacans Labs, suggests that memecoins can offer beginners an entry point into the world of cryptocurrencies.
She explains that some memecoins, like Shiba Inu, have expanded their utility beyond digital currency by introducing non-fungible tokens and DeFi platforms. This makes them more than just a simple token.
However, she emphasizes that memecoins are generally more speculative and volatile than established cryptocurrencies like Bitcoin and Ethereum.
Additionally, she warns that new investors should be aware of these risks and carefully consider their investment strategy before diving into memecoins.
Nick Ranga also urges average investors to approach memecoins with caution: "These coins are highly speculative and can experience massive price swings in a short amount of time. It's crucial for investors to be prepared for potential losses and not invest more than they can afford to lose."
Echoing this sentiment is Alexander Wermescher. He recognizes that memecoins can provide a thrilling ride and potentially significant profits, but they should not be the cornerstone of a well-balanced investment portfolio.
Alexander recommends allocating only a small portion of funds to memecoins and ensuring a diverse mix of assets for a wiser investing decision.
After all, diversification is key in managing risks and maintaining a healthy portfolio.
So, it is essential to strike a balance between high-risk, high-reward assets like memecoins and more stable investments.
There you have it. Memecoins are an exciting and dynamic part of the cryptocurrency landscape, but they come with inherent risks.
For those willing to take on these risks, memecoins can offer a unique opportunity to participate in the ever-evolving world of digital assets.
However, it's essential to remember that with great potential returns comes great responsibility.
Investors must exercise due diligence, manage their expectations and adhere to sound investment principles if they wish to enter this turbulent market.