What are memecoins?

Memecoins are a type of crypto derived from existing internet memes, popular real-world subjects, other crypto, or designed themselves as memes or jokes.

The history of memecoins dates to 2013, when two software engineers created Dogecoin (DOGE) over the course of just 3 hours. The new crypto was based on one of the most famous internet memes of the 2010s—an image of a Shiba Inu dog often paired with funny expressions written in Comic Sans font. Dogecoin was intended purely as a joke, but an eager crypto community quickly embraced it. Other memecoins have since cropped up, especially during crypto bull markets. Memecoins often contain references to internet memes (like Dogecoin or Pepe) and some have even gained mainstream recognition thanks to repeated attention from celebrities and influencers. While

Dogecoin has its own Proof-of-Work blockchain, most other memecoins are designed as tokens on a smart contract-capable blockchain like Ethereum (as ERC-20 tokens) or Solana (as SPL tokens) where the process to create a new token has become relatively simple.

Further, because memecoins are often designed without inherent utility, trading them is largely speculative. Because of this, the memecoin sub-market is notably volatile and carries more risks when compared to the rest of the market.

There are numerous categories of memecoins, but they can be both nebulous and overlapping. However, for the sake of providing a general framework for these assets, the following table breaks down the broad classifications:

Memecoins gain traction by relying on current events, social (and conventional) media attention, and the willingness of traders to speculate on their price. This differs from more established crypto like Bitcoin and Ethereum which boast use-cases directly at launch and are constantly developed through community input. However, it is important to acknowledge that some memecoins have later developed DeFi ecosystems or other use-cases.

Therefore, while other crypto assets are theoretically valued according to their utility, the true value of memecoins is less clear. This results in high price volatility, with significant swings during both bull and bear markets. Volatility is further augmented by low liquidity, as fewer traders participate in the memecoin market, and memecoins are typically underrepresented on both centralized and decentralized exchanges. Therefore, small groups buying or selling memecoins can create outsized price movement.

There are several types of crypto scams that are more prominent when trading memecoins. One of these scams is a rug pull, which occurs when founders hold a large portion of a memecoin’s supply and then sell (or “dump”) them on the market after hype has driven up its price.

The combination of limited practical use cases, difficulty in valuation, high volatility, illiquidity, and the risk of rug pulls makes memecoin trading particularly speculative.

Disclosures:

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