The Investor’s Guide to Memecoins

11.05.2024

The year was 2013: the first big crypto boom.

Bitcoin started the year around $13, and skyrocketed to $1,100 by December. In response, many entrepreneurs began launching alternatives to bitcoin — Litecoin, Ripple, Peercoin — with their “altcoins” quickly making millions.

In the midst of this madness, two guys launched the world’s most valuable joke.

Billy Markus was an IBM software engineer, and Jackson Palmer was a developer at Adobe. Since all these new altcoins were based on open-source code, it was a simple matter for the duo launch their own version of Litecoin, tweak a few variables, and call it Dogecoin.

It was a parody of everything happening in crypto: a token with no good use, with the ridiculous Doge meme as a mascot.

But the joke was on them: people started to buy DOGE, running the near-worthless token from $0.00026 to $0.00095. Billions of Dogecoins were being traded each day: a month after it launched, Dogecoin was briefly traded more than all other cryptocurrencies combined.

Today, their parody coin has a very real market capitalization of $21 billion, which must make it the most valuable joke in the world.

Two Words: Stay Away

Today, of course, there are half a million memecoins, all trying to replicate Dogecoin’s success. Usually these start out, like Dogecoin, trading at a fraction of a penny. Even for sophisticated investors, it is tempting to buy a fat stack of meme-themed coins.

But our investing strategy can be summed up in two words: stay away.

Memecoins are like penny stocks: even a small price movement can make you feel rich. “All I need is for the price to double.” Memecoins are fueled by:

The Fear of Missing Out: When you see the latest memecoin bull run — like this year’s surge on Solana — it is tempting to make a quick buck.
The Lure of Nostalgia: Memes are hardwired to our brains (that’s what makes them memes). If you see a familiar or funny meme, it puts a user-friendly face on an essentially worthless token.
The Attraction of Community: Memecoins must have online communities to proliferate, and those forums can become echo chambers that delude you into thinking the coin has real value.
The Thrill of Gambling: It’s exciting to know your investment could not just double or triple, but 1000x. A lot of time and money gets wasted this way.

Do people make money in memecoins? All the time. But people also make money in gambling parlors. Investing in memecoins is gambling.

Stay away.

Memecoins Create No Value

Our investing approach: cryptos are like companies, and tokens are like stocks. (Read more here.)

We invest in companies that are providing some useful product or service. Tesla makes cars; Apple makes computers; Starbucks makes coffee. These companies produce value that moves society forward (transportation, productivity, and caffeine).

We invest in things that create value.

We even call it “value investing”: finding valuable companies, then holding onto their stock for the long term. (Crypto value investing works the same way, except we buy and hold the token.)

Memecoins create no value. There’s no product, no service. They’re not trying to make something useful, or change the world in a meaningful way. They’re not trying to do anything … except make a quick buck.

Some argue that memecoins provide entertainment, just as the gambling industry argues it provides entertainment. Which just proves the point: memecoins = gambling.

Investing, on the other hand, is fundamentally different from gambling:

Gambling is throwing away our money on a game that is rigged for us to lose over the long term.
Investing is putting our money behind valuable enterprises that we believe will win over the long term.

Memecoins are gambling casinos, cleverly disguised as cute and funny mascots. Stay away.

Memecoins Fund Blockchains

So while memecoins have no place in the intelligent investor’s portfolio, they do serve one useful role, and that is to move money.

Take Solana, which is faster and cheaper than Ethereum: memecoins have exploded on that chain in 2024. Someone even created a project to allow users to easily spin up their own memecoin with just a few clicks, resulting in half a million new memecoins this year.

All this money moving into Solana has positive benefits for the blockchain itself. The increased network activity leads to higher transaction fees, and improved network security.

It also gives Solana enhanced visibility. More users leads to more developers, which leads to more useful projects. And there are certainly more news articles about Solana.

So while we can say that memecoins are bad for individual investors, they could be good for moving the “dumb money” into a place where it can be used for smart projects.

But do you really want your blockchain built on gambling?

The Stink of Memecoins

When the gambling industry is trying to move into a new town, they always use the same argument: gambling creates jobs.

It’s true: all those gamblers need food, lodging, and nightclubs. And the casinos themselves need cocktail waitresses and pit bosses. Gambling does create jobs, just like memecoins do build blockchains.

But once the stink of gambling has been introduced to a community, it never really comes off. The same, I believe, is true of blockchains built on memecoins.

Because your initial userbase is there to gamble – not to create value – it is difficult to pivot to creating real value. The community and culture is already built around the casino.

So while memecoins are tempting not just for investors, but for blockchains themselves, it is the same devil’s bargain as communities trying to kickstart growth by bringing in the gambling houses. Ultimately, what kind of citizen are you trying to attract?

It’s hard to wash off the stink of wet dog.

Two Words: Stay Away

Memecoins are tempting, because they burrow into the monkey part of our brain. Dogs and cats, inside jokes, and the thrill of gambling: it’s a potent cocktail for losing money.

We always say “this isn’t investing advice,” but this is the rare case where this is investing advice: stay away from memecoins.