Why are Meme Coins so popular? Understand how they work and unveil the hype

MMeme coins have been around for a while, but they gained popularity and momentum in 2021, when celebrities like Elon Musk and Mark Cuban promoted Dogecoin, the first meme coin, which was created in 2013. Dogecoin is a benchmark to a meme known as “doge”, featuring a photo of a cute Shiba Inu dog with accompanying text in broken English meant to represent his inner thoughts.

We’ll talk more about dogecoin itself later, but for now suffice it to say that as a cryptocurrency it was not meant to be taken seriously. And yet, at one point, it reached a market cap of $70 billion, which is greater than the market cap of companies like FedEx, Marriott, Activision-Blizzard, BMW, and other big companies. Part of the reason for its extraordinary market capitalization is mainly due to the fact that it has over 132.67 billion Dogecoins in circulation, far more than any other cryptocurrency. And while its market capitalization currently sits at around $10 billion at the time of this writing, that’s still a lot of money for something that’s essentially a practical joke.

Why is there so much hype surrounding this piece and other meme pieces? And is it justified? Let’s start by understanding what meme pieces are.

What are meme coins?

Often people confuse “same coins” with “altcoins”. It is important to make the distinction that not all “altcoins” are “same coins”, but all “same coins” are “altcoins”.

An altcoin is a coin (or token) that is not bitcoin, which is virtually all cryptocurrencies except bitcoin. Ethereum is the largest altcoin and the second largest cryptocurrency by market cap, for example.

Unlike Bitcoin or Ethereum, meme coins are designed as an homage to a meme, an interesting or fun idea captured in an image, video, or other form of media. In general, meme pieces are designed to go viral and be shared, like the memes they are based on.

Dogecoin, the largest meme coin by market cap, was originally created as a joke to poke fun at Bitcoin and other mainstream cryptocurrencies. Its developers, software engineers Billy Markus and Jackson Palmer, did not intend it to have any real use. This is true for most meme coins – they have no economic or commercial use case or utility, and exist primarily to be traded.

Since 2013, other meme coins have been created, and as of March 2022, there were more than 200 such coins, where Dogecoin (DOGE) and Shiba Inu (SHIB) are the most trending meme coins and the most traded.

Why are meme pieces so popular?

It started after “meme stocks” such as GameStop (GME) and AMC Entertainment (AMC) had their prices inflated by up to 100x in a few months in late 2020 by a Reddit community called WallStreetBets. In January 2021, a Reddit group joked about raising the price of DOGE to create a crypto equivalent of GME. This idea gained momentum, accompanying the influence of tweets from Tesla CEO Elon Musk, and the price of DOGE rallied. In just five days, Dogecoin rose 2,000%, reaching a new all-time high of $0.73.

Elon Musk seems to be dictating the movement of the Dogecoin price. In May 2021, he publicly joked about DOGE on “Saturday Night Live”, calling Dogecoin a “hustle” and subsequently causing a 40% drop in DOGE’s price.

Several traders then turned to other meme coins in the market, such as Shiba Inu, often referred to as the “Dogecoin killer”. Retail investors, fearful of missing (FOMO) an opportunity, began buying meme coins in hopes of becoming millionaires overnight, sparking another rally in meme coins.

Another reason why retail investors, especially younger ones, find even coins attractive is that they usually only cost pennies or even a fraction of a penny. Thus, you don’t need to invest a lot, and everyone can participate in the hope that it will rally thousands of percentages and make a big profit.

Since these coins are very cheap, you can buy thousands or even millions of DOGE, SHIB or Akita Inu (AKITA) tokens with just a few dollars. For example, the price of SHIB is $0.000011 at the time of writing this article. Therefore, you can buy a million SHIB for just $11. With $11 you can only buy around 0.006 of an ether or 0.0003 of a bitcoin. Holding millions of a certain coin may feel different from holding a tiny fraction of ether or bitcoin.

Do meme coins have a value?

Meme coins are strongly community-focused tokens. Since they have no fundamental economic or commercial use case, their prices are usually influenced by social media and online sentiment. This often brings a lot of hype, but also FOMO and financial risk.

Bitcoin and Ethereum have economic use cases. Bitcoin is a decentralized peer-to-peer payment system, and Ethereum is a decentralized application platform (dApps) – analogous to Apple’s centralized iOS application platform. Although BTC and ETH have a fundamental economic existence, they experience significant price fluctuations, more than traditional currencies.

Meme coins, which have no real economic use other than trading, are largely determined by their virality, which takes their volatility to an entirely different level. When Elon Musk and Mark Cuban promoted Dogecoin, its value skyrocketed. But once the hype died down, it died down just as quickly. Although some traders can get rich with meme coins, others can lose all their funds due to this type of volatility.

Some countries have taken steps to regulate meme coins. In early 2021, the Thailand Securities and Exchange Commission banned meme coins as part of a digital goods crackdown without “clear purpose or substance”.

What future for the same coins?

As with any investment thesis, there must be fundamental economic substance and use for a product or service to have economic merit and value. If meme pieces continue to be solely driven by social media sentiment, with no real economic utility, it is very likely that their hype will eventually die down and they will become worthless. However, the fate of some meme pieces might be brighter due to a few trends.

The first is that more and more businesses are accepting meme coins as a form of payment. Mark Cuban, owner of the Dallas Mavericks, said in March 2021, “The Mavericks have decided to accept Dogecoin as payment for Mavs tickets and merchandise for a very important and heartbreaking reason, because we can! Because we can, we choose to do it.

Mark Cuban is not alone. There are around 10 companies, such as GameStop, Newegg, Nordstrom, Tesla, and AMC Entertainment that have already started accepting coins like Dogecoin and Shiba Inu as payments, and more companies may follow. In this case, the value of those same coins will depend on their adoption and use as a mode of exchange – the more they are adopted and used, the higher their value.

Another trend is the emergence of a new wave of meme pieces that are utilitarian meme pieces. One example is Pawthereum, which uses a small fee on each transaction to help animal charities, raising hundreds of thousands of dollars in the process. Another example is Floki Inu (FLOKI), which provides a metaverse game, NFT marketplace, and crypto education platform.

These types of meme coins will most likely be the ones that last, as they merge the entertaining meme culture that makes them so popular, with the kind of real economic benefits that cryptocurrencies can provide.

If you are considering investing in meme coins, look beyond the hype and carefully assess whether there is economic utility to support its future. If it has no economic use other than trading, be aware that its value could dissipate once the hype dies down.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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