Key Insights
Memecoins are a special kind of cryptocurrency. They lack real-world utility but are capable of rapid growth.
This asset class is still favored by many investors because of its fun and simple nature.
They lack real-world utility, though and can be highly volatile with an especially high risk of being scams.
Investors should never neglect due diligence and proper sentiment analysis before jumping into the memecoin world.
Cryptocurrencies come in all shapes and sizes. However, one class of this asset type stands out as unusual—we'll explain what we mean by "unusual" soon.
These coins, often inspired by internet memes, have gained considerable attention for their playful nature.
They are highly volatile (prices change quickly) and grow rapidly.
Should you invest in these strange cryptocurrencies?
In this article, we will cover what memecoins are. We will cover the advantages and disadvantages of investing in them, as well as the research you need to do before making any decisions.
Let’s get to it.
What Are Memecoins?
As mentioned earlier, memecoins are a type of cryptocurrency.
However, what makes them different is that they derive their identity from internet culture, jokes or memes.
Unlike regular coins like Bitcoin or Ethereum, memecoins don’t always have a serious purpose or real-world use case.
But—investors love them regardless because of their fun and viral appeal.
Take Dogecoin as an example.
Dogecoin was the first memecoin ever created. This cryptocurrency came to light in 2013 and was created entirely as a joke—a mockery of sorts, at Bitcoin's popularity.
The memecoin’s mascot was modeled after a Shiba Inu dog named Kabosu.
However, what was created as a joke soon gathered momentum over the years when prominent figures like Elon Musk began promoting it.
Today, Dogecoin has exploded in value and rank. It is now the 8th largest cryptocurrency in the world, with a market cap of more than $16 billion.
Dominating the memecoin space
Source: CoinMarketCap
Other notable memecoins include Shiba Inu, Pepe and newer entries like Bonk and DogWifHat.
Advantages of Investing in Memecoins
As shown above, memecoins don't need any real-world use case to attract investors.
Here’s why they’re so popular.
1. High Growth Potential
One of the biggest appeals of memecoins is their ability to grow rapidly. Dogecoin for example, was created in 2013. However it only took about two years (between 2020 to 2021) to cross the $1 billion market cap mark sixteen times over.
Since many memecoins start with extremely low prices, even a small investment can lead to big returns if the coin takes off.
Early Dogecoin investors saw (literally) hundreds of times their initial investment when the coin took off.
2. Strong Community Support
Memecoins also often have strong and active communities that help spread the word.
This momentum can help accelerate growth when more people get on board.
These communities tend to be filled with passionate investors on platforms like Twitter, Reddit and Discord.
3. Fun and Accessible
Memecoins are seen as more lighthearted than traditional cryptocurrencies. This means that they are more accessible and aren’t hard to understand:
Because there is nothing much to understand.
Many first-time investors have a fun way to dip their toes into crypto via memecoins, without feeling overwhelmed by technical jargon.
Disadvantages of Investing in Memecoins
This is where things get serious.
While memecoins have massive growth potential, they also come with major risks that cannot be ignored.
Here are a few things to keep in mind before investing anything.
1. Lack of Utility
As illustrated, most memecoins have little to no real-world use.
They are often driven purely by hype and are highly volatile. Their lack of a solid use case means that if an investor jumps in at the wrong time, they could lose everything.
Sometimes, the memecoin market provides no warning before this happens.
2. High Volatility
Memecoins also have extreme price swings sometimes. Prices can go up very quickly, but they can also come down before investors can react.
There is a high chance of multiplying any investment with memecoins. However, there is an equally high chance of ending up empty-handed.
3. Risk of Scams and Rug Pulls
The hype-based nature of memecoins is great. However it is also highly attractive to scammers who pull scams known as rug-pulls.
In this kind of scam, the bad actors hype up a memecoin and get investors to buy. Unknowing to these investors the developers behind the memecoin hold unreasonably large amounts of the token’s supply.
When enough investors have bought, the scammers simply sell all of their holdings and pocket the profits.
This causes a price crash and many investors end up devastated.
A key tip to avoid this is to be wary of projects that seem too good to be true.
How Should You Research Before Investing in Memecoins?
Before diving into any memecoin investment, here are some ways to reduce risk:
1. Study the Project’s Background
This might take some time, but it’s worth the wait.
While many memecoins are created as jokes, it is still important to investigate the project’s background.
Look into who the developers are: Find out whether the project has a roadmap and if the project has a purpose, figure it out.
A coin backed by a legitimate and non-anonymous team is less likely to be a scam.
2. Check the Community
A strong and engaged community is also one of the major signs of a valid project.
Go through the coin’s presence on social media and see how active its supporters are.
Do supporters (and critics) have things to say on Telegram, Twitter or Reddit?
While a passionate community doesn’t guarantee success, it shows that the coin has some staying power.
3. Monitor Market Sentiment
How does the community feel about the project? Memecoins are heavily influenced by market sentiment and trends.
Try staying up to date with news and social media chatter.
Avoid making decisions solely based on hype and make sure you balance sentiment analysis with cold, hard realism.
Be frank with yourself. “Does this project seem legitimate, or am I simply following the crowd?”
4. Understand the Risks
While following all of the above steps is great, understand that there are no guarantees.
Understand the risks: An investor can do it all right, and still lose everything.
Never invest money you cannot afford to lose, be prepared for volatility and know when to buy or sell.
Avoid greed and take profits after hitting certain targets. This helps to prevent emotional decisions during price swings.
Overall, memecoins can be a fun and lucrative way to invest in the market.
But remember: Investing in memecoins is more like gambling than actual investing. Approach with caution and make sure you're prepared for the ride.
Happy investing!
