Meme Coins: The Hype and The Risks

 

     Meme coins are no longer new to the  digital community. There is so much hype around meme coins everywhere around us. But today, let's go into the details on what meme coins really are and how they work.   

      A meme coin is a cryptocurrency that originated from an internet meme or has some other numerous characteristic. They are also defined as cryptocurrencies inspired by memes or jokes on the internet and social media.  It has also been observed that meme coins have recorded high market capitalizations. 

     Meme coins are highly volatile due to the influence of the social community. Thus, the hype sets in but therein lies FOMO and financial risk. It might be true that some traders become rich with meme coins but many loose money due to market volatility. So here is a brief history of meme coins. 

     In late 2013, Dogecoin was released as a joke on the Doge meme by software engineers. This sparked the creation of several subsequent meme coins. In October 2021, there were about 124 meme coins in circulation in the market. Some popular example of meme coins include: Dogecoin(DOGE) and Shiba Inu(SHIB).  Shiba Inu has a total supply of 1 quadrillion tokens while DOGE has no maximum supply and over 100 billion tokens are already in circulation. Meme coins in general do not have a coin burning mechanism and they have a massive supply so that explains relatively low prices. With just $1 USD, you can buy millions of meme tokens. 

  

Why The Hype?

     During the covid-19 pandemic, there was global expansion in the crypto market as retail investors wanted to hedge against inflation. Meme coins also boomed amidst the hype growing both  in market capitalization and variation. This hype got going after the "meme stalk" saga of Game Stop(GME) and AMC Entertainment (AMC) in late 2020 where the Reddit community pumped up the prices of these shares to as much as 100 times in few months. In January 2021, a Reddit group joked about pumping the prices as much as 100 times in a few months. In the same month, another group joked about pumping the price of DOGE to create a crypto equivalent of GME. The trend kept on progressing. But the point where meme coins gained the peak of popularity was when Tesla's CEO Elon Musk endorsed the use of dogecoin and with the influence of his tweets, DOGE's price rallied. Dogecoin reached a new all-time high of 0.73USD with an increase of over 2000% in five days. He continues to post tweets in 2022, including one in January 2022, including one in January where he stated he would eat a happy meal from McDonald's on live TV if they started accepting Dogecoins as payments.

     

     At the same time, retail investors were FOMOing into meme coins hoping to become overnight millionaires sparking yet another meme coin rally.

     Another reason why retail investors find meme coins attractive is that they only typically cost a few cents or even a fraction of a cent. Technically, the low price doesn't much due to the huge supply of these coins. Still holding millions of a certain meme coin is not the same as holding a fraction of ETH or BTC. Meme coins are inspired by popular internet memes intended to be fun and sometimes considered an "insider joke" for a community. Buying meme coins is a way of showing support for their respective community. The crypto market in 2021 was therefore flooded with community driven meme coins.

 

The Risks

     Meme coins might have seen exponential growth in 2021 but like all crypto currencies, trading and investing in meme coins carries high financial risks.

     First of all, the tokenomics of meme coins can be concerning. Let us take bitcoin foe example. It has its own blockchain, a well detailed whitepaper, an established ecosystem and a deflationary nature. We are seeing more institutional adoption of bitcoin in recent years than ever. Compared to BTC, most meme coins are inflationary with no maximum supply. Their ecosystem, use cases and fundamentals are often defined by the collective jokes of the community. Only a few meme coins were built on the technology of major cryptocurrencies. For example, DOGE's technology was derived from Litecoin(LTC) and SHIB's was built on the Ethereum blockchain.

     Another potential risk is that meme coins are heavily community driven and are more speculative than the larger market capitalization cryptocurrencies. This volatility constantly leads to unexpected pump and dump. The life cycle of meme coins is generally short lived. Their prices can rocket thousands of times from celebrity shilling or FOMO or crash unexpectedly when the community decides to move to the next meme coin.

     As the meme coin market continues to grow, you should be aware that there might be projects taking advantage of the hype to scam traders. For example, Squid Game(SQUID), a meme coin inspired by the popular Netflix show of the same name, surged over 86000% in a week. However, the development team rug-pulled suddenly and caused the price to plummet by 99%. What's worse is that holders are not allowed to sell their SQUID tokens. Therefore you should always be careful and DYOR before trading or investing in meme coins. Keep in mind that meme coins are highly volatile compared to other digital currencies. Trading or investing in cryptocurrencies involves high risks. Meme coins are largely community driven and could crash unexpectedly. So you should never invest more than you can afford to loose.