The Pros and Cons of Memecoin Investing

Ever since Satoshi Nakamoto unleashed Bitcoin in 2008, cryptocurrencies have revolutionized the worlds of both finance and technology. While major players like Bitcoin and Ethereum lead the pack in both utility and value, an entire subgenre of cryptocurrencies have made headway (and headlines) in recent years – memecoins. Inspired by Internet memes, trends, or pop culture, and often dismissed as jokes or novelties, memecoins have still managed to gain substantial traction in the crypto landscape, while also earning their fair share of notoriety. This article explores the pros and cons of memecoins, diving into their successes and failures, to provide a look at both their potential and possible pitfalls.  

PROS OF MEMECOINS 

Accessibility and Affordability 

Memecoins are generally inexpensive, allowing those who don't want to over-extend themselves take a large position in a token. This allows individuals to maintain a significant share without having to make the significant financial commitment more established coins like Bitcoin require. Dogecoin, the very first memecoin, began its life as a low-value coin so people could buy thousands of units for pennies, and this accessibility contributes to its popularity even now as its price rises. Also, memecoins are usually a layer built on top of an existing blockchain, like Solana, and are easy to swap for other tokens on the same parent blockchain.   

Community Engagement 

For many users, the most appealing aspect of memecoins is the opportunity to join enthusiastic and likeminded communities. These groups often rally around a shared sense of humor and cultural references, which fosters a sense of belonging. These communities have also affected real-life change: when the Jamaican bobsled team qualified for the 2014 Olympics in Sochi, the Dogecoin community stepped up, eventually raising over $30,000 to help the team make the trip to Russia. This community engagement also drives interest and investment, sometimes leading to a significant growth in value. In many ways memecoins put a number to a sentiment, so there is an actual monetary value behind a joke or idea. 

CONS OF MEMECOINS 

 High Volatility and Risk 

A single celebrity tweet can alter a memecoin’s value by 100% or more, like when Elon Musk said Dogecoin was his favorite crypto, vaulting what was once a niche joke into mainstream headlines. This unpredictability makes memecoins a risky investment, to put it mildly, especially for those just getting started in crypto. There are thousands of memecoins out there, and the vast majority end up failing. In fact, a recent report by Chainplay notes the average lifespan of a memecoin is only about a year.  

 Lack of Fundamental Utility 

While Bitcoin set the template for blockchain technology, and Ethereum introduced smart contracts to the crypto ecosystem, many memecoins lack similar utility. Most of them are created as jokes or to capitalize on viral cultural moments. Few memecoins attempt to solve real-world problems or provide unique functionality. Also, unlike more established cryptocurrencies like Bitcoin, many don’t feature built-in scarcity, meaning they cannot function as an inflation hedge. Many are set up as “greater fool” games, where you invest in a token expecting somebody who knows less than you to pay more for it down the line. Eventually somebody gets stuck holding the token’s majority share as the price craters.  

Market Manipulation 

The memecoin market is highly susceptible to manipulation by influencers, whales (large holders of crypto), and coordinated groups. This manipulation can lead to significant financial losses for unsuspecting investors. For example, $HAWK, inspired by “Hawk Tuah Girl” Hailey Welch, saw its value manipulated by coordinated pump-and-dump schemes, resulting in major losses.  

Regulatory and Legal Concerns 

As memecoins gain popularity, they attract the attention of regulators and legal authorities. The lack of clear regulations and the potential for fraudulent activities within the memecoin space pose legal risks for investors and creators alike. Regulatory crackdowns can lead to the delisting of memecoins from exchanges and a loss of investor confidence. The crackdown on initial coin offerings (ICOs) in 2017, which affected many memecoins, serves as a precedent for possible future regulatory actions.  

Should I Invest in Memecoins?

Memecoins represent a fascinating and unpredictable facet of the cryptocurrency world. Their accessibility, community engagement, and potential for high returns make them attractive to many investors. However, the high volatility, lack of fundamental value, susceptibility to market manipulation, and regulatory concerns highlight the risks associated with investing in memecoins. 

For those considering investing in memecoins, it is crucial to look into who developed the coin, whether most of the coin’s value is held by a small number of wallets, and then think about the coin's message and what unique dynamics shape the coin’s value in the marketplace. As with any investment, diversification and a cautious approach are essential to navigating the volatile world of memecoins successfully. CoinFlip offers Dogecoin, Shiba Inu, and Pepe for cash through our ATMs, and dozens more tokens through CoinFlip Preferred. We chose these tokens based on their past performance and the low likelihood that a rug-pull will send their price to zero - but be warned, there's no such thing as a price guarantee in crypto.   

Financial Advice Disclaimer: Nothing in this blog constitutes professional or financial advice, performance data or any recommendation that any specific cryptocurrency, portfolio, index, investment product, transaction or investment strategy is suitable for any specific person. You assume the sole responsibility of evaluating the merits and risks associated with all financial decisions and should seek the advice of a registered financial advisor when in doubt.