Meme Coins

Feb 1, 2023 • 9 Min Read

Key Takeaways

  • Meme coins are cryptocurrencies that are created around memes and are supported by an online community.
  • Key drivers of meme coin performance include FOMO, virality, reflexivity, unit bias, and community.
  • Despite being highly volatile, meme coins have proven to be top performers in crypto bull markets. Buying meme coins in a bear market can be viewed as cheap OTM calls that market froth returns.

What is a Meme?

A meme is defined by Webster’s New World College Dictionary as “a concept, belief, or practice conceived as a unit of cultural information that may be passed on from person to person, subject to influences in a way analogous to natural selection.” Memes have always existed but have grown rapidly in popularity due to the internet and social media. Sites such as Twitter and TikTok are flooded with memes, with common ones circulating like a virus and evolving through small changes. They are possibly the most effective way to quickly and efficiently distribute an idea or joke to large groups of people. As Elon Musk tweeted, “Who controls the memes controls the universe.”

Memes in Traditional Markets

While crypto tokens and NFTs may amplify memes, they still exist in traditional markets. For example, stocks such as Gamestop, AMC Theatres, and Bed Bath and Beyond have been dubbed “meme stocks”. These stocks saw shocking rallies in 2020 when retail investors coordinated on message boards such as Wall Street Bets and bought the stocks in an effort to squeeze short positions of large hedge funds. Meme stocks have risen to such prevalence that even the CFA Institute has published about them, stating that they are “traded mostly by retail investors in search of the next big thing and with little regard for valuation models and the business’s underlying fundamentals.”

What Are Meme Coins?

Meme coins are cryptocurrencies that are created around memes and are supported by an online community. These coins rarely have any underlying utility and are often satirical, extremely volatile, and speculative. The “blue chip” of meme coins that brought them into the public consciousness is Dogecoin, which was originally created as a parody of bitcoin. Ironically, Dogecoin actually saw some utility in its early days. Beginning in 2014, it was used as a tipping currency on popular sites such as Reddit and Twitch through “DogeTipBot” . DogeTipBot was discontinued in 2017 after the creator declared bankruptcy.

On-chain memes extend beyond simply tokens; many memes have been turned into NFTs, including Dogecoin, which had a Doge NFT sell for $4.4 million. This points to people believing that some memes can have a monetary value, as they are essentially investing in culture.

Meme Coins

Historical Performance

To most people, meme coins are among the most perplexing things about crypto. Why would so many people buy something that seemingly has no intrinsic value? How are these coins hitting billion-dollar valuations? Despite skepticism from most, over the past few years, meme coins have proven to be among the best-performing “assets” of all time. Here are the numbers to back it up:

Doge has outperformed Bitcoin and Ethereum by a huge margin over the last cycle, with a 41x return from 2017’s all-time high and 472x from the COVID low. $10,000 invested in Dogecoin in March 2020 would’ve been worth $4.7 million at the top. Not bad.

Meme Coins
Source: Fundstrat, Yahoo Finance
Meme Coins
Source: Fundstrat, Yahoo Finance

Another interesting thing about meme coins is how consistently their cycles have played out. Dogecoin for example, is three for three on outperforming Bitcoin in each crypto boom-bust cycle. The DOGE/BTC chart below demonstrates that Dogecoin moves in a very repetitive manner, having prolonged periods of accumulation before appreciating rapidly relative to Bitcoin during crypto bull markets. A strategy that has worked very well in the past is to accumulate dogecoin and other meme coins when retail investors have entirely left the market and then hold until they return.

Meme Coins
Source: Fundstrat, Tradingview

While DOGE had the spotlight in 2021, the real winner with the highest returns in 2021 was Shiba Inu. One investor in particular, turned an $8,000 investment in SHIB into $5.4 billion on paper at the top in what some have referred to as the greatest trade of all time. It’s worth noting that although Shiba Inu’s liquidity is high for a meme coin, there isn’t enough to fully realize those $5.4 billion dollars.


Contrary to what most would have expected, meme coins such as DOGE and SHIB have managed to maintain relatively high valuations despite the downturn we saw across nearly all markets in 2022. While they drew down significantly from their highs (80-90%), the valuations of meme coins such as Dogecoin stayed significantly higher than at the 2017 cycle top (something that cannot be said for BTC and ETH).

Meme Coins as a Percentage of Crypto Market Cap

Meme coins currently comprise about 2% ($17.8 billion) of the top 15 cryptocurrencies by market cap. This is up from zero percent of the top 15 in January 2020.

Meme Coins
Source: Fundstrat, Coinmarketcap

Meme Coin Drivers

The question then becomes, how are these meme coins possibly performing so well, and why are they still around? Here are what we believe to be the five main drivers behind the success of meme coins over the past few years:

FOMO

Meme Coins

Arguably the strongest driver of meme coins’ insane runs is FOMO or “Fear of Missing Out”. FOMO is a term that refers to the impatience, fear, or envy someone may have when a popular investment they do not own is rapidly appreciating in value. When the price goes up, and seemingly everyone is making money around you, it’s common to act irrationally and buy so that you have a least a little exposure if the price continues to rise. Because of how much attention meme coins get when they are in their mania phase, this FOMO can be very hard to ignore. Another way to experience FOMO is if you sell early and continue to see the price rise. This is something anyone who owned DOGE before 2020 has experienced. There is theoretically no ceiling to how high DOGE can go, so it can be painful to watch it rise if you previously had a large position, causing you to irrationally buy back in. Fun fact – the creator of Dogecoin sold all of his Dogecoinin 2015 to purchase a Honda Civic.

Virality

Meme Coins

The impact of FOMO is intensified when combined with the virality present today in social media. Sites like Twitter, Instagram and, especially TikTok, have supercharged meme coins’ ability to spread throughout the internet. It is not uncommon for viral TikToks to get millions or tens of millions of views. To put this into perspective, traditional finance media such as CNBC and Fox Business average around ~200,000 viewers during business day hours of 9:30am-5pm ET. During the 2021 bull market, TikTok videos were getting millions of views daily that promoted meme coins such as Dogecoin and showed off returns. Elon Musk is also notorious for promoting Dogecoin on Twitter to his 100 million+ followers. This is essentially free advertising for meme coins and, in a bull market, leads to many investors buying irrespective of how overextended or overpriced the price may be.

Meme Coins

Reflexivity

Meme Coins
Source: Fundstrat

George Soros came up with the theory of reflexivity, which is the theory that there is a self-fulfilling cycle in which traders’ perceptions of an asset influence the fundamentals of the asset, which in turn influences other traders’ perceptions. For example, when the value of something like DOGE rises, it garners more attention, stirs more FOMO, and inevitably causes more people to buy and the price to go higher. Once the market cap reaches a certain threshold, it is given some degree of legitimacy which actually appears to improve the coin’s “fundamentals”.

Once the price is high enough, a coin will be listed on crypto exchanges, then on traditional trading platforms (like Robinhood), then it might be given attention in the media and, finally, it is integrated into daily life (in DOGE’s case, it is now accepted as a payment method at Tesla). Reflexivity is prevalent across all asset classes, but it is particularly relevant for crypto due to its global user base and 24/7 market hours. It’s important to note that this reflexivity works to the downside as well. When DOGE’s price starts to fall, it becomes a feedback loop of investors selling, leaving the community and other investors panicking to get out.

Unit Bias

Unit bias refers to investors’ bias to buy assets or coins that seem “cheap” as defined by their unit price. For example, DOGE at $0.08 feels “cheaper” than buying Bitcoin at $21,000. When new investors download Coinbase and are looking for what coin will maximize their return, they may be put off by the large unit price of coins such as Bitcoin, and drawn to coins that are a fraction of a penny which they can buy millions of. This intuitively makes sense—it does feel better to own one million of something than 0.0002 of something. Of course, what unit price fails to take into account is market cap. The creators of meme coins are aware of this bias, so they make the total supply of the coin extremely high so that the price per coin is a fraction of a penny. So, while Shiba Inu may have a price of 0.00011 cents, it has a market cap of $5.5 billion. Investors may feel like they are buying in “early” or low due to the price only being 0.00011 cents. A common thought process of investors in crypto when they buy these low-unit-cost coins is the following: “If Shib goes to one dollar, I’ll be a millionaire!” Yes. But if SHIB goes to one dollar, it will be valued at $50 trillion dollars. That is twenty-five times the value of Apple.

Community

Meme Coins

One of the tailwinds a meme coin has is its community. This is what allows a meme coin to hold its value and grow over time. The key is for it to be enjoyable enough to be part of this community so that holders of the coin will buy to join the community and not be concerned with selling for a quick profit. Social media and messaging apps have made it possible for these communities to rapidly form and connect. The most fervent communities will create and spread memes of the coin throughout social media and may even begin to have in-person events. It’s easy to underestimate how effectively this can generate attention and value for the coin. Attracting a community is something that Dogecoin did very well in 2021, to the point where numerous celebrities joined and interacted with other holders of the coin on social media.


This inclusive and fun community aspect of meme coins may explain why so many young people who aren’t interested in finance purchased Dogecoin or Shiba Inu as their first “investment.” Investing in stocks can be intimidating for young people who don’t have a background in finance. Despite lacking fundamental value accrual mechanisms, meme coins appeal to a different demographic of people who aren’t interested in getting into the weeds of finance.


Some meme coin or meme stock communities may have a common goal or value that brings them together. For example, the Gamestop (GME) community that formed on Wall Street Bets united around an anti-establishment goal of squeezing hedge funds to drive the price higher. These shared values can create a tribal effect that makes the holders especially passionate and less likely to sell.

Conclusion

Meme coins are a highly risky but fun way to get involved in crypto. In many ways, they can be viewed as cheap OTM call options on a crypto bull market. These tokens have defied critics’ wildest expectations over the past 5 years with their performance, and are still around after multiple crypto bear markets. While it’s important to exercise risk management when buying meme coins, there are reasons why these coins have stuck around since the beginning of crypto and why they will continue to exist going forward.

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