In recent years, the biggest cryptocurrencies like Bitcoin and Ethereum had to start sharing the spotlight with a type of token that represents one of the most peculiar investments options for these days: meme coins. Defining meme coins is challenging due to their evolving nature, but they generally share some key characteristics.
Here is a summary of the key characteristics of these assets:
- meme coins are typically based on internet memes, trends, and pop culture phenomena (e.g., a cartoon dog, a comic frog character, or a real-life squirrel);
- they are commonly surrounded by a passionate online community of people that have a certain connection to the meme these coins are based on;
- the intention behind them is to provide light-hearted fun instead of true utility; and
- trading-wise, they are characterized by very high volatility and little to no fundamentals.
All this makes it sound like meme coins are very small, insignificant assets, and while most of the millions of projects are negligible in size, a few of them reached market capitalizations in the range of billions of dollars.
What makes meme coins popular and risky
Despite lacking traditional financial utility, meme coins have gained significant traction due to their strong online presence, cultural appeal, and the influence of social media trends. The main reasons for their popularity can be summarized as follows:
- Community: meme coins allow like-minded people to connect over their passion for the same pieces of pop culture (e.g., comic books, TV shows), or meme figures;
- Hype: when a certain coin reaches prominence and becomes a regular feature of the comment section of social media sites, others gain interest and invest small amounts; and
- Speculation: the few highly publicized cases of skyrocketing meme coins attract retail investors looking to generate outsized profits quickly.
The latter point is also a great danger associated with this area. Of the millions of launched meme coins, only a handful have reached significant market caps, while the vast majority have failed to maintain long-term value, often leading to financial losses for retail investors.
Scams are also prevalent in this segment, with bad actors often aiming to capitalize on the passion of investors for a certain popular character, and subsequently selling all their tokens, once their price has been inflated beyond reasonableness. This type of fraud, referred to as a rug pull, has been observed in widely reported cases like the Squid Game token, the Hawk Tuah coin, or the Libra coin heavily promoted by Argentinian president Javier Milei. While most meme coins are harmless projects aiming to provide a platform for people with similar interests, these cases evidently hurt the image of the entire space.
The leaders aim to address shaky fundamentals
Surely, if we are to find any meme coins with strong fundamentals, we should look at the ones with the biggest market capitalization. Thus, let’s take a close look at the five meme coins whose market cap is above $1bn at the time of writing this article:
- Dogecoin: Launched over a decade ago, Dogecoin is inspired by a popular dog meme and gained traction due to loud support from Elon Musk and the wider internet culture. It is often used for payments and tipping and is accepted by Tesla for certain merchandise purchases. However, having limited utility and an uncapped supply, it might be difficult to justify Dogecoin’s $25bn+ market cap.
- Shiba Inu: Shiba was intended as a competitor for Dogecoin. In addition to being usable for payments, its ecosystem has a decentralized exchange, and the tokens can be used for staking. Still, it is a largely speculative asset.
- Pepe: Inspired by the Pepe the Frog meme, this coin is aiming to build utility through NFT integrations and enabling DeFi applications. Pepe, however, is still primarily used for community-driven speculation.
- Official Trump: This recently launched coin associated with President Trump currently has limited utility, though it is accepted on official merchandise websites. Its future value may depend on whether it gains broader adoption within its community.
The above list illustrates an important point about the meme coin phenomenon. While most of these projects start with purely community-driven, speculative assets, the issuing teams behind the meme coins that reach sizeable capitalizations eventually try to create real utility for their token holders. These experiments enjoy varying degrees of success, and ultimately, the market decides if their efforts are proven worthwhile.
Meme coins continue to divide the wider investor community
These days, almost everyone with an interest in the crypto sector has an opinion on meme coins. On one side of the debate are the proponents who claim that the community-centric approach of these assets is also their biggest strength, giving them a core investor base that will not be deterred by crashes and the resulting big losses.
They associate increasing utility with the larger meme coins introduced above and often use them for payments purposes. While even these investors admit the extreme volatility of meme coins is not for everyone, they find the opportunity to connect with like-minded enthusiasts and the chance to earn outsized returns enticing.
Others are not so easily convinced and remain skeptical about meme coins despite being bullish on other segments of the crypto market (e.g., stablecoins, or DeFi). Recurring criticisms include the speculative nature or limited utility of meme coins, and the existence of better alternatives for conducting blockchain-based payments and other financial operations like lending and trading.
It is, however, difficult to ignore assets that display market caps and weekly trading volumes in the range of billions of dollars. In 2024 trading with Dogecoin even reached a weekly volume of $34 billion.
Even the Reddit-fueled rise of Dogecoin in 2021 (similar to the GameStop rally of the same period), demonstrated the power of retail investors in driving meme assets to unprecedented heights. These rallies naturally have big winners and losers as most investors taking part in them took excessive risks in the hope of securing returns that would take years to achieve in other asset classes. It is an interesting phenomenon, but a general investor would likely wonder; could meme coins have a place in my traditional portfolio?
The place of meme coins in a traditional portfolio
For investors considering meme coins as part of a broader portfolio, the key is understanding the risks and potential rewards. Although some of these assets have already generated massive short-term gains, the asset class is characterized by extreme volatility and market downturns.
The data across market cycles suggests that meme coins tend to outperform during bull markets, sometimes outpacing even Bitcoin and Ethereum, but they also suffer severe declines in bear markets.
Liquidity is another concern, as many meme coins have limited trading volume. This can make exiting a position difficult, particularly during market downturns when finding buyers becomes challenging. Furthermore, external factors (such as a single tweet from a high-profile figure) can significantly impact prices, as seen with Dogecoin and Elon Musk’s influence.
In their current form, meme coins blur the line between speculation, community-driven investing, and digital culture. These assets have captured the imagination of millions, largely due to their high-risk, high-reward potential. The best approach is to monitor this evolving space, understand the associated risks and opportunities, and proceed with a healthy dose of caution.
Sources: Coinbase, CoinMarketCap, Business Insider, Financial Times Author: Péter Kanti, Botond Bátorfi
