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Navigating the Memecoin Minefield: Unveiling the Psychology Behind These Novel Currencies

Written by Gideon Ng Published on   5 mins read

Memecoins are looking to expand beyond their hype into something of intrinsic value.

In the Web3 landscape, memecoins have emerged as a captivating phenomenon, as demonstrated by the remarkable combined market cap of USD 15 billion for both Dogecoin and the Shiba Inu coin. Among these, Pepecoin recently took the world by storm, with a trader reaping an astonishing 5,000,000% profit from an initial investment of just USD 263.

In this article, we’ll be exploring the factors that fuel the substantial growth of these coins and highlight the potential positive impacts they can have.

How memecoins were born

Memecoins, as implied in the name, are created based on a meme, which is a shared cultural reference that captures a moment that is instantly recognizable and can connect different parts of the world.

The very first meme coin was Dogecoin, inspired by the meme of a Shiba Inu dog that was popularized due to its two-word phrases like “much wow” or “so scare”. Software engineers Billy Markus and Jackson Palmer created it as a joke to make fun of Bitcoin and other cryptocurrencies back in 2013.

This memecoin started gaining momentum in May 2021 when it caught the attention of users on the SatoshiStreetBets subreddit. Inspired by the GameStop short squeeze, these users rallied together to drive up the price of Dogecoin, aiming to capitalize on its upward trajectory and maximize their potential profits. Tesla CEO Elon Musk created even more hype after he tweeted that “Dogecoin is the people’s crypto.” Even though this cryptocurrency is hyperinflationary with an uncapped supply, it achieved a market cap of USD 73 billion.

The success of Dogecoin resulted in an onslaught of dog-themed memecoins that jumped on the hype bandwagon, including Shiba Inu Coin, Floki Inu, Dogelon Mars, and Baby Dogecoin.

Why do memecoins rise in price?

Memecoins do not have much inherent value compared to other cryptocurrencies like Bitcoin and Ethereum, and the price surges are primarily driven by the passionate communities behind them.

These communities leverage social media platforms like Reddit or Twitter to generate hype around the coin. The key to success for a memecoin lies in its ability to go viral, with highly engaged communities propelling its popularity.

For example, the hype around Pepecoin started with the founding team and community members — known as the “PEPE Army” — posting frog-theme memes on Twitter. This helped to drive awareness of the new token, and as Pepe the Frog was a popular internet meme character, it instantly resonated with meme enthusiasts, attracting a growing number of investors and supporters.

Memecoins that enjoy an explosion in popularity are the ones that catch the eye of influencers and celebrities, which fuels further hype. The endorsement of Dogecoin by prominent figures like Elon Musk and Mark Cuban has significantly contributed to its widespread recognition and added a sense of legitimacy to the cryptocurrency.

Centralized exchanges also have a crucial role in enhancing the accessibility of purchasing memecoins. Initially, Pepecoin traded on the decentralized exchange Uniswap and was limited to the Ethereum network, which has expensive transaction fees. This limited its reach, as average cryptocurrency users may lack the necessary expertise to acquire the token.

Later, the listing of Pepecoin on Binance and other centralized exchanges expanded its reach to a broader investor base. This increased accessibility has led to a surge in demand for the cryptocurrency, subsequently driving up its price even further.

Moreover, certain memecoins employ psychological tricks by setting their prices with multiple decimal places. For example, one SHIB token may be priced at approximately USD 0.000008783, while one PEPE may cost USD 0.000001453.

This creates the impression that the cryptocurrency is very affordable, allowing investors to acquire a substantial number of tokens with a modest capital investment. Investors may be enticed by the notion that if the token were to increase in value to USD 1, they could potentially yield significant profits from their holdings.

A cautionary tale when investing in memecoins

Investing in memecoins, which lack intrinsic value other than representing membership in a community, carries significant risk. For example, Pepecoin’s website stated that “the coin is completely useless and for entertainment purposes only.”

Without any significant use cases, the price of the token is based purely on speculation. These cryptocurrencies will be, without a doubt, the first to be sold off during bear market conditions due to a lack of fundamentals.

“Watching from afar, it’s easy to believe in the idea of putting money into memecoins,” commented John Wang, Head of Neo Ecosystem Growth. “Tales of prices soaring overnight and market caps reaching billions can appear attractive but, when we take a step back, we see valuations tanking in a little time. Volatility is the name of the game.”

Most of the top memecoins have struggled to retain their value and rely on nothing more than optimistic speculation to generate short-term price surges. For example, when Twitter replaced its logo with an image of the Doge Shiba Inu, this drove up the price of Dogecoin as investors expected the platform to start accepting payments in this memecoin. However, no such development materialized, and the price started to crash after Twitter reverted to its original logo.

Moreover, some of these memecoins could just be scams that prey on unsuspecting investors. They are attracted by the significant profits of early investors, so they are on the lookout for the next Dogecoin or Pepecoin.

Scammers may exploit this situation by generating hype over a token with the intention of performing a rug pull, where they abruptly shut down the project and steal all of the investors’ funds. One of the more famous examples include the Squid Game Token which capitalized on the popularity of the Netflix drama and made off with an estimated USD 3.3 million.

Positive impacts of memecoins

While memecoins may not be the best investments for conservative investors, they do provide some benefits. Dogecoin, for instance, was initially designed as a “fun and friendly internet currency,” primarily intended to be a medium of exchange. Operating on its own blockchain, Dogecoin necessitates the creation of a non-custodial wallet to store and transfer funds to other wallets. With a low unit price of around USD 0.07, Dogecoin lowers the entry barrier compared to Bitcoin or Ethereum which are priced at approximately USD 28,000 and USD 1,900 respectively.

New users can take advantage of the friendly Dogecoin community to ask beginner questions, which could foster a sense of belonging and help them become more familiar with navigating the Web3 ecosystem.

Meanwhile, the Shiba Inu token has expanded beyond its utility as a medium of exchange and is looking to develop a full-fledged ecosystem. The ShibaSwap platform allows users to swap tokens, trade non-fungible tokens (NFTs), and stake the platform’s BONE token to participate in their Decentralized Autonomous Organization (DAO).

Furthermore, the developers behind SHIB are looking to launch the Shibarium Layer 2 network that is built on top of Ethereum. Additionally, they aim to establish a Shib Metaverse that provides users with a platform for social interaction and engagement.

The verdict for memecoins is still yet to be determined. While they were initially created as a joke, many investors viewed them as a way to ‘get rich quick’,  resulting in inflated valuations that were difficult to sustain. Nevertheless, there have been significant developments with some of these ​​memecoins that have the potential to reshape their image and transform them into entities with substantial inherent value.


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