What Are Meme Coins?

What Are Meme Coins?

A meme coin is a cryptocurrency that is based on a popular online meme, or that includes a humorous element, rather than focusing on a specific use case or technology.

Meme: 1. an element of a culture or system of behaviour passed from one individual to another by imitation or other non-genetic means. 2. an image, video, piece of text, etc., typically humorous in nature, that is copied and spread rapidly by internet users, often with slight variations.

Meme coins have been around for almost a decade, but became popular over the last two years as Dogecoin soared in popularity, prompting numerous copies, including Shiba Inu.

Meme coins rely heavily on their communities, and since they do not have specific utility their market prices are extremely vulnerable to sentiment, meaning they can be highly volatile – even by the standards of the crypto markets.

Dogecoin

The first meme coin was Dogecoin, which was launched in 2013. Dogecoin was based on Litecoin’s code, and had no technical innovation over other coins at the time. Instead of attracting users as ‘censorship-resistant money’ or ‘digital gold’, like Bitcoin, or as a faster and more egalitarian means of transacting, like Litecoin itself, Dogecoin was intended to appeal to internet users who shared an interest in the popular Doge meme, based on images of a Shiba Inu dog.

Dogecoin was explicitly created as a joke. It gained some traction, with a large community of followers, but remained a relatively limited project for many years. That changed early in 2021, as the community grew during the pandemic. Tesla founder Elon Musk – the richest man in the world – began to express an interest in it following Tesla’s investment in bitcoin, tweeting multiple times and discussing its advantages as a payment method over bitcoin due to its low fees.

Dogecoin achieved global awareness and its price rocketed from a fraction of a cent at the end of 2019 to a high of $0.74 in early May 2021, though it has since fallen back to single digits. As a direct result of Dogecoin’s success, a large number of other meme coins have been launched, mostly themed around dogs, cashing in on the phenomenon.

The value of memes

Dogecoin’s popularity, and the rise of meme coins more widely, took place at a time when the power of memes and online community was becoming a force to be reckoned with in the financial world.

Many traditional financial assets can be valued on their fundamentals. Stocks often use earnings per share, bonds have regular interest payments, and so on. Assets like bitcoin are harder to value, because they don’t have earnings; they are more like gold in that respect. New ways of valuing crypto have been developed, many of which use on-chain metrics. Ultimately, though, the value of crypto comes down to network effect – how many people know about it and have invested in it. Memes have become a kind of shortcut to establishing large communities by piggybacking on another popular theme, like the Doge meme.

Some people are highly critical of meme coins, claiming they are backed by nothing at all. They produce nothing, they earn nothing – they are based only on a joke. While this is true in one sense, all financial assets are reliant on network effect to gain and maintain their value. Gold is only worth what it is because billions of people around the world have collectively agreed that it is an effective store of value. Without that consensus – that ‘meme’, in the original sense of the word – gold would be worth far less, with its value set perhaps by its limited industrial uses. Gold is, in other words, the ultimate meme asset.

The financial clout of large communities

Meme coins arguably simply take this principle of community and network effect to its logical conclusion.

There is no denying that large online communities have huge financial power. This was seen in 2020, when the idea of ‘meme stocks’ first came to mainstream attention. The WallStreetBets (WSB) community, a reddit-based group who shared trading ideas and strategies, realised there was an opportunity because hedge funds were heavily short-selling GameStop (GME), a video game retailer that, the ‘experts’ believed, had no future because sales had shifted so much online.

By organising together and each buying small amounts of GME, the large online community were able to push the price of GME up far enough to cause a ‘short squeeze’, forcing the hedge funds to buy back GME when their bets that it would fall went against them. The result was that GME rose by a factor of a hundred in a few months and the hedge funds lost billions of dollars, with one almost going out of business.

Dogecoin’s rise not long after this is also partly attributable to WSB, who considered doing the same to the meme coin – catching the attention of Musk in the process.

Characteristics of meme coins

There are lots of meme coins (and stocks), but they often share similar broad characteristics. Many of these make the coins more attractive to their communities for one reason or another.

  • High supply. While bitcoin has just 21 million units, there are 133 billion DOGE and 549 trillion SHIB. This enables holders to own millions of coins, giving a greater sense of wealth. This also helps contribute to their success in other ways; in the early days of DOGE, the community were happy to give away millions of DOGE, making each other ‘dogenaires’, because they had practically no value, building network effect.
  • Inflation. Bitcoin has made a feature of its limited issuance. Meme coins often (but not always) have new emissions that will continue indefinitely. For example, DOGE started with a supply of 100 billion, with 5 billion new DOGE mined every year.
  • High valuation compared to fundamentals. Meme coins typically offer little technical innovation or unique use cases, meaning that – functionally at least – they could be replaced by any other coin.
  • Volatility. The price of a meme coin is determined entirely by the size and enthusiasm of its community. This can change rapidly, meaning prices can soar and crash overnight.

Some scam meme coins have been created specifically to take advantage of particular communities – Squid Game (SQUID) being a notable example. Other meme coins focus on price growth via dubious means; in 2021 Floki Inu conducted a large marketing campaign across the London Underground, leading to investigations by the UK’s Advertising Standards Authority. The financial authorities in some countries, such as Thailand, have banned meme coins due to their risks and their perceived lack of utility.

Popular meme coins

Dogecoin’s success has spawned a large number of other meme coins including:

  • Dogecoin
  • Shiba Inu
  • Dogelon Mars
  • Baby Doge Coin
  • MonaCoin (based on the ASCII art Mona Lisa meme)

CoinMarketCap lists over 300 further meme coins.