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The Life Cycle of Meme Coins: From Rise to Fall, Explained

2023-05-25
The Life Cycle of Meme Coins: From Rise to Fall, Explained image 0

Recently, meme coins have garnered substantial attention within the cryptocurrency domain, captivating investors with their whimsical and idiosyncratic characteristics, alongside the enticing prospect of generating substantial profits. Notably, during the year 2021, two meme coins that commanded significant prominence were Shiba Inu (SHIB) and Dogecoin (DOGE), both of which experienced remarkable surges in value amidst a period of market exuberance commonly referred to as a bull run. Nevertheless, as the broader cryptocurrency market underwent a subsequent downturn, a prevailing sense of uncertainty permeated among investors, raising questions about the future trajectory of these meme coins.

Meme Coins: Beginnings

The phenomenon began with the emergence of "meme stocks," exemplified by GameStop (GME) and AMC Entertainment (AMC), whose prices experienced extraordinary surges of up to a hundredfold within a few months towards the end of 2020. These price hikes were largely facilitated by an online community on Reddit known as WallStreetBets. In January 2021, a Reddit group playfully discussed the notion of inflating the price of Dogecoin (DOGE) to create a cryptocurrency equivalent of the GameStop phenomenon. This idea gained traction, fueled by the influential tweets of Elon Musk, the CEO of Tesla, and resulted in a surge in the value of Dogecoin. In a mere span of five days, Dogecoin witnessed a staggering increase of 2,000%, reaching an unprecedented all-time high of $0.73

Elon Musk's influence on the movement of Dogecoin price has been apparent. In May 2021, during an appearance on the television show "Saturday Night Live," Musk jokingly referred to Dogecoin as a "hustle." This casual remark subsequently led to a 40% decline in the value of Dogecoin.

Following these developments, numerous traders redirected their attention to other meme coins available in the market, such as Shiba Inu, often touted as the "Dogecoin killer." Retail investors, driven by the fear of missing out on a lucrative opportunity, began purchasing meme coins in the hope of amassing significant wealth overnight, thereby igniting another wave of fervor surrounding meme coins.

One factor contributing to the allure of meme coins, particularly among younger retail investors, is their typically low cost, often amounting to a few cents or even fractions of a cent. Consequently, individuals do not need to invest substantial sums, enabling broad participation with the expectation of achieving substantial profits through the potential for astronomical percentage increases.

Due to the notably low prices of these coins, it becomes feasible to acquire thousands or even millions of tokens, such as DOGE, SHIB, or Akita Inu (AKITA), with only a few dollars. For instance, as of the time of writing, the price of SHIB stands at $0.000011. Consequently, one can purchase a million SHIB tokens for a mere $11. In contrast, with the same amount, only approximately 0.006 ether or 0.0003 Bitcoin could be obtained. Owning millions of a specific meme coin can create a distinct sense of investment compared to holding a minuscule fraction of ether or Bitcoin.

The Rise of Meme Coins in 2023

In April 2023, a novel cryptocurrency called Pepe Coin ($PEPE) was introduced to the market, aiming to establish itself as a competitor to established memecoins like Dogecoin and Shiba Inu. In this particular case, $PEPE draws inspiration from a cartooned frog that frequently appears in internet memes, with its facial expressions tailored to encapsulate relatable sentiments commonly associated with memes.

$PEPE operates on the Ethereum blockchain and was officially launched into the cryptocurrency market on April 16, 2023. Interestingly, its introduction into the market was relatively low-key, lacking the fanfare typically associated with influencer endorsements or orchestrated distribution of free PEPE tokens through social media contests.

Yet it was evident that the meteoric rise of $PEPE was reflected by a dip in Bitcoin prices during the period of its launch, as evidenced below:

The Life Cycle of Meme Coins: From Rise to Fall, Explained image 1
Chart: CoinMarketCap

The above chart reflects the growth spike in $PEPE during the period of 6 May 2023, rising as much as 6,300% between April 18 and its zenith on May 5, after being listed on a number of major exchanges.

Similarly, meme tokens across the market also experienced a meteoric rise in prices, as data from Dune indicates:

The Life Cycle of Meme Coins: From Rise to Fall, Explained image 2
Chart: Dune

However, a comparative look at Bitcoin's chart during the same period indicates a price dip:

The Life Cycle of Meme Coins: From Rise to Fall, Explained image 3
Chart: CoinMarketCap

This indicates that $PEPE in this case, had liquidity funneled into them that was derived from other assets, such as Bitcoin. Liquidity was also channeled into $PEPE from various other sources as well, such as top-tier NFT projects such as BAYC for instance:

The Life Cycle of Meme Coins: From Rise to Fall, Explained image 4
Chart: CoinGecko

While the dip in Bitcoin's price in early May could also be attributed to the surge in transaction fees which escalated to new highs not seen in the last two years at an astounding $3.57 million, it is still undeniable that the rise of $PEPE (which also runs on the BRC-20 chain), fits the curvature of Bitcoin's downward curvature almost perfectly.

What these examples suggest, is that the overwhelming and explosive growth of $PEPE at its zenith could be attributed to investors selling off their existing high-value assets in order to get in on the $PEPE hype train.

The Fall of Meme Coins

However, meme coins have exhibited a proclivity for losing momentum and depreciating in value due to their inherent deficiency in possessing practical attributes as a medium of exchange. This trend is also evident in the case of $PEPE, which has experienced a substantial decline of 50% from its peak value, commonly referred to as the All Time High (ATH). This decline in value has been accompanied by a notable reduction in its market capitalization, which has plummeted below the $1 billion threshold within a remarkably short span of one week.

The market for meme coins exhibits a certain ingenuity. It is not solely characterized by peculiar and juvenile names or the presence of manipulative pump-and-dump schemes; rather, every aspect of these coins is strategically designed to evoke a profound fear of missing out (FOMO) and to offer the allure of immense wealth. One noteworthy aspect is the staggering abundance of meme coins in circulation. While conventional cryptocurrencies adhere to a supply-and-demand economic model, wherein the number of available coins in the market is limited (as exemplified by the approximately 18 million Bitcoins currently in existence), meme coins take a contrasting approach by flooding the market with a multitude of coins generated by their algorithms.

For instance, consider the case of $PEPE, which has witnessed the creation of an astonishingly vast supply of tokens. The Pepe Coin market boasts an astronomical quantity of 420,690,000,000,000 $PEPE tokens, a figure not to be misconstrued as a jest. Intriguingly, despite the profusion of $PEPE tokens, each individual coin holds a current valuation of approximately $0.00000154.

Meme Coins: A Transient Bloom

From a psychological perspective, individuals are enticed by the notion of owning billions of $PEPE tokens for a modest sum of around $100, harboring the belief that a single token may potentially appreciate to $1 in the future (it is worth clarifying that such an outcome is highly unlikely for $PEPE tokens). Consequently, the appeal of these meme coins parallels that of advertisements for luxury lifestyle brands, enticing individuals with the prospect of attaining great wealth if they seize the opportunity at the opportune moment and acquire a substantial quantity of these coins.

While some individuals draw parallels between the multitude of meme coins and penny stocks, which are essentially low-priced shares of small public companies, there exists a crucial distinction: most meme coins are often conceived without a genuine business model or underlying purpose in mind. Consequently, they aptly earn the label of "shit coins."

This deliberate sense of absurdity and frivolity is an inherent characteristic of meme coins. Their fundamental premise revolves around capitalizing on people's anxieties and manipulating various facets of the coin in question. In essence, the entire digital landscape functions as a stage, with every social media platform, messaging application, and meme serving as tools employed by actors seeking to artificially inflate the value of a specific coin. The ultimate objective for these actors is to generate personal profit and subsequently abscond with the gains, leaving unsuspecting investors to realize they have been deceived by an unscrupulous group of rogue individuals.

However, it is essential to recognize that the lifespan of meme coins is expected to be relatively short-lived. The transient nature of these coins is rooted in their lack of substantive value and purpose beyond their initial hype and speculative frenzy. As the hype surrounding meme coins dissipates and investors become increasingly discerning, the sustainability and long-term viability of such coins are brought into question. Consequently, it is foreseeable that the meme coin phenomenon will gradually wane, revealing the inherent transience and inherent risks associated with these speculative assets.

Meme Coin Decline: The Start of a Bear Market?

When considering the long-term outlook, numerous traders and investors hold the belief that digital assets characterized by robust fundamentals, practical use cases, and a dedicated user base are likely to exhibit greater resilience during bear markets. Conversely, tokens with limited utility and highly inflationary tokenomics may encounter significant challenges during such periods.

The rationale behind this perspective becomes evident when examining memecoins, which tend to possess minimal or nonexistent current utility, incorporate built-in transaction taxes, and feature high inflation rates. Under these circumstances, it becomes apparent that sell pressure could potentially surpass buy pressure in a bear market, consequently driving down the price of these memecoins.

This leads to a pertinent question: What fate awaits the most prominent memecoins in a genuine bear market?

Unfortunately, large-cap memecoins are a relatively recent phenomenon, and in this regard, Dogecoin stands as a notable benchmark due to its distinction as one of the earliest and most recognizable memecoins.

The year 2018 emerged as an exceptionally challenging period for investors who had entered the cryptocurrency space during the 2017 bull run. Across the board, a substantial majority of digital assets experienced profound losses during this timeframe, with the average cryptocurrency witnessing a staggering decline of 88% in value. In practical terms, this meant that for every $1,000 initially invested at the peak, individuals faced an approximate loss of $880.

Remarkably, Dogecoin closely mirrored the average anticipated outcome throughout 2018, as the renowned memecoin endured an 88.5% decline from its peak to the trough of that year. This striking similarity highlights the susceptibility of memecoins to the prevailing market conditions during bearish periods.

It is only natural for investors to turn towards assets that demonstrate stability and sustainable tokenomics during trying periods, which therefore suggest that the current decline of meme coins can very well signal the end of this periodic bull run, reflecting a shift of investor sentiments towards more stable and less volatile assets.

Closing

Despite their widely recognized high volatility, meme coins can still present potential investment opportunities for individuals seeking short-term profits. In Q1 of 2023, many of these coins have exhibited remarkable price surges, and there is a strong possibility that this trend will persist as long as the coins continue to enjoy popularity among investors. For instance, consider the case of Shiba Inu, where investors who purchased the coin for $1 in March 2021 witnessed its value skyrocket to nearly $8000 per coin within a matter of months. If one had entered the market in March and subsequently sold at a later date, they would have realized a substantial and impressive profit.

However, it is important to recognize that meme coins derive their value primarily from short-term hype and speculative fervor. Consequently, the likelihood of these coins retaining any significant value over the long term is relatively low. Meme coins typically exhibit remarkably short life cycles, and their popularity tends to wane relatively quickly. Therefore, it is prudent to approach meme coins as short-term investments that are best bought and sold during periods of peak popularity.

While the potential for short-term gains may be enticing, it is crucial for investors to exercise caution and conduct thorough research before engaging in meme coin investments. The speculative nature and inherent volatility of these assets require individuals to stay informed, monitor market trends, and make well-informed decisions based on their risk tolerance and investment goals.

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