Money is little more than a promise. U.S. dollars are technically Federal Reserve “notes”—that’s legal speak for a loan contract—backed by the federal government. The value of “money” lies in the issuer’s creditworthiness. In the case of the federal government, that’s its ability to tax people and make good on its debts.
But what about cryptocurrencies?
Bitcoin and other cryptocurrencies aren’t “notes” – they’re simply entries on a digital ledger. They derive their value from supply and demand economics, popularity, utility, and an underlying asset rather than the issuer’s creditworthiness.
But while Bitcoin relies on deflation, Ethereum leans on its smart contract ecosystem, and stablecoins have assets backing them, memecoins typically rely exclusively on popularity. And, as any celebrity knows, popularity can be fleeting!
In this article, we’ll look at the rise of memecoins and explore their role within the broader crypto ecosystem.
What is a Memecoin?
A memecoin is a cryptocurrency originating from an Internet meme or having some other humorous characteristic. But more than just being funny, the meteoric rise of Dogecoin ($DOGE), Shiba Inu ($SHIB), and PEPE ($PEPE) has transformed memecoins from a playful parody to a multi-billion dollar digital asset class overnight.
Under the hood, memecoins leverage the same technologies as many other cryptocurrencies—but with a few twists. For example, many memecoins use a proof-of-work consensus mechanism that increases supply over time. However, they may not have an upper limit on the number of possible coins, creating less common inflationary economics.
Most memecoins also have much lower prices than mainstream crypto assets. These low prices purposely attract novice investors, who are more likely to believe that lower prices translate to more upside potential. For example, $PEPE trades for just $0.000008015, and $DOGE – despite its meteoric ascent – still trades for just $0.21.
Dogecoin was the first broadly recognized memecoin. In late 2013, a handful of software engineers created the cryptocurrency as a parody of the Doge meme. Elon Musk’s subsequent promotion of the cryptocurrency in April 2019 brought it into the limelight – a $100 investment just after the tweet would be worth $8,386 today!
Dogecoin prices have been a rollercoaster ride, to say the least. Source: CoinMarketCap
In 2020, an anonymous person or group known as Ryoshi launched Shiba Inu ($SHIB) as a Dogecoin competitor. The memecoin made headlines a year later when Vitalik Buterin donated over 50 trillion $SHIB to the India COVID-Crypto Relief Fund. Since then, Shiba Inu has become the second largest memecoin after Dogecoin.
According to CoinMarketCap, there are now roughly 2,000 memecoins with a combined market capitalization of $67.5 billion. Dogecoin remains the most popular, with a $30.7 billion market capitalization. Still, six coins have market caps north of $1 billion, and countless more have valuations in the tens or hundreds of millions.
Most Popular Memecoins
| Name | Ticker | Market Capitalization |
| Dogecoin | DOGE | $29,287,301,228 |
| Shiba Inu | SHIB | $17,808,975,385 |
| Dogwifihat | WIF | $4,335,667,930 |
| Pepe | PEPE | $3,612,907,086 |
| Floki | FLOKI | $2,429,732,352 |
| Bonk | BONK | 2,429,732,352 |
Source: CoinMarketCap (as of 3/30/24)
Should You Invest?
Memecoins are known among traders and investors for their volatility.
Many short-term traders seek out this kind of volatility. When prices move quickly, you can generate more profit with less leverage. And the involvement of unsophisticated buyers tends to create even more opportunities for profit from market inefficiencies.
On the other hand, many long-term investors shy away from memecoins. Unlike Bitcoin and other bellwether cryptocurrencies, memecoins lack the deflationary economics that create scarcity and rely on increasing popularity to drive prices higher. And, naturally, they don’t have any other underlying value like a stablecoin or utility coin.
That said, if you’re interested in trading or investing in memecoins, you should understand their economics before purchasing.
Some due diligence tips include:
- Verify Tokenomics. Some memecoins limit supply and support prices by burning tokens regularly (e.g., sending them to wallets with no private keys). If that’s the case, you should verify that these burn addresses actually exist.
- Third-Party Audits. Look for third-party audits of memecoin projects to assess their security, functionality, and the integrity of their codebase. These efforts can help ensure that their smart contracts don’t contain any vulnerabilities.
- Ownership. Confirm that nobody owns more than 5% of the total supply. If someone does own a large portion of the available tokens, they could manipulate the market by suddenly selling off (dumping) a significant number of tokens.
Impact of Memecoins
That said, memecoins do have a real economic impact on the crypto ecosystem. In a recent research report, Franklin Templeton analysts reported that memecoins can strongly influence native networks. For example, the rise of Solana’s memecoin, $BONK, led to a 75% increase in Solana’s network activity – and a rise in $SOL.
There are also parallels with meme stocks. While meme stock valuations defy gravity, institutional investors have learned the hard way that large groups of small traders and investors are a force to reckon with. Many funds have lost large sums of money attempting to short-sell these stocks, and they remain oddly priced equities.
Beyond Investments
Some crypto enthusiasts and investors feel that memecoins represent more than just humor or irony. For instance, the Avalanche Foundation began investing in “community coins,” including memecoins, NFTs, and similar community-driven creations. The fund believes that these coins have a real, long-term cultural value.
Memecoins are also vital to expanding the Web3 ecosystem. While Ethereum smart contracts might seem foreign to most people, buying a memecoin is a much lighter decision that could encourage mainstream consumers to take their first steps into the Web3 frontier and understand the underlying mechanics.
Potential Risks
Dogecoin and other memecoins have minted overnight millionaires, but it’s never easy to pick the winners. Most memecoins fade in and out of popularity, leaving their creators and promoters much wealthier than their investors. It’s best to consider them a hobby or highly speculative gamble rather than an investment opportunity.
Unfortunately, the volatility of memecoins might also reinforce the general public’s conception that all cryptocurrencies are scams. Those already skeptical of cryptocurrencies could become much more skeptical if they lose significant money overnight, which ultimately hurts the entire crypto ecosystem.
And finally, regulators are increasingly targeting memecoins. The IRS views all cryptocurrencies as “property” subject to capital gain taxes. So, you will owe taxes on any memecoin gains. Meanwhile, the SEC continues to crack down on memecoins that it views as unregistered securities, causing some to lose value overnight.
If you buy or sell memecoins, you should consider these risk factors to avoid surprises.
The Bottom Line
Memecoins have become tremendously popular since Dogecoin’s rise to fame in 2019. While they may post spectacular gains, most investors avoid them due to their speculative nature. On the other hand, active traders might appreciate the volatility as a way to generate more profits without leverage.
If you trade memecoins or other cryptocurrencies, ZenLedger can help you organize your finances for tax time. Our platform aggregates transactions across wallets and exchanges computes your capital gain or loss, and generates the tax forms you need to file.
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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
