Pros and Cons of buying Memecoins
In this lesson we will evaluate the pros and cons of memecoins, what value they provide as an investment, their inherent risks, and a general overview of the ecosystem.
Read our previous post on the origins of Shiba Inu and what makes it different from other memecoins.
Disclaimer:
We would never suggest what individual readers should do with their own money. The best we can do is make an objective case for and against memecoins and let readers use their best judgement.
With that in mind, let’s talk about some of the inherent risks and benefits involved in memecoins.
Key Takeaways
- Memecoins offer potential for massive gains, but that potential comes at significant risk of massive losses.
- Memecoins offer a sense of belonging through their bustling and welcoming online communities.
- Given the lack of regulation and speed with which these projects pop up, scams are very common and there are little to no protections in place to shelter investors.
- Users are advised to proceed with extreme caution when investing in memecoins.
Pros
Welcoming environment:
In lesson 2 of this guide, we explored the nature of these projects. There, we discussed how memecoins are community-driven. This turns out to be one of the strongest pros for many involved. The sense of community is strong, becoming a token holder grants users access to an exclusive club.
For example, SHIB aficionados affectionately call themselves the SHIBArmy, and this army tends to stick together and support each other through the ups and downs. The bonds people form over investing in the same protocols are strong.
Their reddit communities and discord servers tend to be buzzing with activity, frothing with memes and always happy and enthusiastic to accept new members. If you’ve been meaning to dip your toes in the cryptocurrency world, but feel it’s too serious or too hard to understand, memecoin communities might be a good entry point.
It’s a good idea to spend some time getting acclimated to the community of any coin before committing to owning any. This way you can get a feel for what the sentiment is, what the community is focusing on and where members think it’s heading.
Charitable endeavors:
Memecoins mostly have a shared characteristic of being wholesome and have commonly rallied against the greed inherent in the crypto space. DOGE proponents claim the coin’s name doubles as an anagram for “Do Only Good Everyday.”
They’re not all bark either, there is a long list of international Dogecoin charities, spanning from bringing clean water to African regions to assisting with homelessness in New York to a “Feed the Sheep” charity where you can watch the proceeds being consumed in real time.
DOGE isn’t the only charitable endeavor, SHIB has partnered up with the Shiba Inu Rescue Association and Amazon Smile to ensure that users can donate a percent of their Amazon purchases to Shiba Inu shelters at no extra cost to them. Additionally Vitalik Buterin sent a large portion of the SHIB he was given, worth about $1.5B, to India’s Covid-19 relief fund.
Dogs & Memes:
When asked about his thoughts on Ethereum 2.0, Solana, Cardano, Polkadot and how they all compete to solve scaling, Musk tweeted his preference for Dogecoin by simply saying “Doge has dogs & memes whereas the others do not.”
The memecoin space is characterized by this sort of irreverence and silliness in the face of authority. This has been fueled by a recent populist surge in “us versus them” sentiment, mainly driven by the Gamestop hype of the past year. For those unaware, certain “meme stocks” like the video game retailer Gamestop and the movie theater chain AMC experienced immense price volatility when users across the internet rallied behind them. People from around the world gathered in a mission to pump up the stock value of these companies which they felt were massively undervalued. They felt these stock prices were being suppressed by big investment firms betting against their success.
Communities like Reddit’s ‘Wallstreetbets’ (WSB) and the crypto spinoff ‘SatoshiStreetBets’ have become a hub for retail traders to huddle together. These have become onramps for new users and places to discuss and organize, rallying behind contrarian ideals of banding together in order to take down these larger foes. In the case of WSB that is fighting against hedge funds and venture capitalists, for memecoins it’s competing against each other for market cap dominance.
Potential upside:
Memecoins are highly volatile. In an already volatile field memecoins set themselves apart by the sheer power of hype. This obviously comes with significant risk of losing it all. However, if you’re lucky and are able to time your purchase correctly, you face the possibility of truly spectacular gains.
Elon Musk recently doubled down on his assessment of Dogecoin as a preferred method of exchange over Bitcoin, so maybe there is something to these dog themed coins after all.
Cons
Potential scams:
As the title would suggest, there are cons not only in the sense of contrary points, but rather outright scams, which are rife in the memecoin world. Here is a very useful guide on how to detect and avoid scams.
No matter how new or sophisticated of an investor you are, many new coins lure you in with promises they can’t (and never intended to) keep. Even Mark Cuban, the billionaire Shark Tank star and owner of the Dallas Mavericks, was recently the victim of a “rug pull.” The term comes from the world of cartoons, where one character would swiftly pull the rug from under the other character’s feet, leaving them suspended in the air for a second before they fall.
There is so much heightened demand for the “next big thing” that malicious developers capitalize on that FOMO (Fear Of Missing Out) by promoting their project, gaining massive support and funding, and then selling all their tokens at a huge gain while abandoning the project and leaving regular people behind in the dust. Here’s a guide on what rug pulls are and how to avoid them.
Scams and schemes are unfortunately so common amongst memecoins that the SEC has issued a warning about cryptocurrency ponzi schemes. A recent study by Chainalysis estimates the total losses of DeFi “rug pull” scams in 2021 at $2.8B, accounting for 37% of all scam revenue (up from 1% in 2020).
Centralization:
Many of these tokens are highly centralized, with a handful of people controlling most of the supply. This was particularly highlighted when Vitalik Buterin received 50% of the total supply of SHIB without his consent. He has since asked developers to not give him that sort of power. Shortly after, his offloading of the tokens via burning and donating sent the price of SHIB tumbling.
Another example of this is how closely Dogecoin follows one single person’s sentiment. Elon Musk wields the power to make the price of several assets rise or fall depending on the tone of his tweets. If Elon Musk tweets something positive, the price rockets. However, putting your life savings at the mercy of the sentiment of one eccentric billionaire is not exactly the safest strategy.
Potential Downside:
Needless to say potential gains come with equal and opposite potential losses. The bigger they are, the harder they fall. Celebrities have been piling in, clamoring into the space to try their hand at the memecoin casino and promoting their coins of choice to their millions of followers.
Here is one study where a reddit user found that most of those celebrity-shilled memecoins are almost universally down. Projects like EthereumMAX (EMAX), promoted by Kim Kardashian and Floyd Mayweather are down about 95% while SouljaBoy’s pick Safemars (SAFEMARS) is down 96% from its ATH. Most influencer-touted cryptocurrency projects have ended up being worthless, scams or both.
Longevity:
It is still uncertain the role memecoins will play in the macro cryptocurrency environment in the years to come. A healthy dose of skepticism is recommended when considering whether the jokes and fads of 2021 (or arguably of 2013) will still be relevant and profitable in the medium to long term.
It is important to understand that investing in a random memecoin because someone has been talking about it positively, without doing your own research on the project is inherently no different than going to a casino and betting all your money on a game of roulette.
There is nothing wrong with gambling, as long as you know what you’re getting into. Caution is always advised.
Read our three previous posts on Memecoins:
