Dogecoin & SHIB: How memecoins are different from other cryptocurrencies
In this lesson we will discuss the characteristics of memecoins, what sets them apart from other cryptocurrencies, and how they derive their value.
Read our previous post on the history of memes and their relevance in our culture.
Key Takeaways
- Chasing Doge’s tail, a flurry of other dog-themed tokens emerged in 2021, all competing to be the next big memecoin.
- Memecoins differentiate themselves from regular cryptocurrencies by putting more emphasis on community and marketing rather than technical innovation.
- Memecoins compete not by who is the first to develop a new innovation but by who is the first to the punchline.
- Memecoins experience higher volatilities than regular cryptocurrencies with gains and losses regularly exceeding 1,000%.
Introduction
Sentiment turns quickly in crypto. Having the world’s richest man promote a relatively low-cap (low capitalization) joke coin as his coin of choice, while at the same time, China rolling out a very adamant ban on crypto trading and mining, dealt a one-two punch that sent the market into a tailspin that wiped $1 trillion off the market in a week.
Despite the hype, the market dragged DOGE down with it and Dogecoin’s massive gains were relatively short-lived. It has since shed around 75% of May 2021’s All-Time-High and, up until Musk’s latest bullish tweet, had fallen off of the top ten cryptocurrencies by market cap. Needless to say, sentiment around DOGE’s potential comeback has waned, even amongst the staunchest supporters.
The meteoric rise of Dogecoin opened up a whole new type of cryptocurrency. If only you could make a token funny enough, you too could cash in on gigantic gains! With token creation becoming as easy as it ever had been, self-described “memecoins” started popping up left and right, tapping into a red hot market that had just recently taken a tumble. The likes of SHIB and FLOKI were unleashed (hehe) on the world with advertising that clearly had a target demographic in sight: “Missed DOGE? Get FLOKI.” ads flooded the London underground.
How memecoins set themselves apart from other cryptocurrencies
Many of these new coins set their valuations several decimal places below 0. This is done purposefully, so as we don’t easily and intuitively visualize very small (or very large) amounts–it’s hard for our monkey brains to understand its value. If you want to test this yourself take a look at the US debt clock and try to make sense of it at a glance. This serves a double purpose of both making the coin seem very cheap and accessible while also giving the illusion that large gains are a relatively short distance away. After all, if you bought a coin at 0.00006 and it went to 0.006 you would have multiplied your original investment by 100x!
An interesting market dynamic had begun to unfold. Previously, tokens competed mostly on technical differences: proof-of-work vs proof-of-stake, small blocks vs big blocks, etc. Protocols were constantly trying to out-develop each other, gaining a competitive edge by introducing some new innovative feature that would garner them widespread adoption and support. Now we had a new type of competition on top of the technical side: the battle of the hypes. Whose supporters are the loudest, funniest, most captivating? Who has promised the highest returns? Who has perfectly timed the launch of their coin?
There has always been a law of the first mover, where whoever is first to develop or publicize something has a competitive advantage. With memecoins this has morphed into which project is quickest to the punchline.
Here are some examples:
When Musk tweeted in March 2021 that if there was ever a scandal regarding his persona to call it “Elongate” developers were quick to the draw and created the ELONGATE token. In about 3 weeks after the tweet, the token already had around 100,000 holders.
In November 2021, a DAO aptly named ConstitutionDAO, raised around $40M to bid on a rare physical copy of the U.S. constitution. Ultimately, their bid lost. However, the buzz the DAO generated with its native PEOPLE token gained traction, with some even saying it’s positioned to be the “next Shiba.”
The idea I’m getting at here is that, regardless of if a project is successful or not, if it’s popular enough, it can gain momentum. Memecoins aren’t dependent on fundamentals, but rather on how well they market themselves. Take one look at the biggest gainers/losers on Coinmarketcap and you’ll notice how some of these coins significantly outperform the market with gains that commonly break the thousand percent mark.
Conversely, when they fall they can have staggering, eye-watering losses. Once a coin has enough momentum it can quickly intensify, shifting from a rolling stone to a rocket that carries token holders to the moon… or to the ground.
