MEMECOINS: How a Dog Changed the World of Cryptocurrency

#crypto #memecoins

“Such Wow!” “Much big!” – These or similar statements filled viral memes on social media over a decade ago, and they are still frequently used today. This trend, in which a Shiba Inu dog played a central role, did not stop short of the crypto world and paved the way for so-called memecoins. On one hand, these coins have a loyal and powerful following, but they also attract a lot of criticism. Anyone involved in the crypto space inevitably encounters memecoins. So, we asked ourselves, “Who let the Doge out?” and have traced the origins and main characteristics of memecoins for you below.

In the broader public, cryptocurrencies continue to be seen primarily as highly speculative investments – which is a fair assessment. Beyond that, however, there is an inherent skepticism in large parts of the population, which also rubs off on the underlying blockchain technology. Those who are not well-versed in the concepts and terminology surrounding these topics can easily be influenced by this skepticism and may be inclined to dismiss them altogether.

Critics of cryptocurrencies often point to memecoins and cite the hype-driven price movements in this market segment as evidence that other cryptocurrencies are also overvalued and unsuitable as serious investments. Additionally, the memecoin space is particularly prone to widespread scams, which significantly damage the reputation and trust in cryptocurrencies in general.

Just earlier this year, memecoins drew attention again after recording the highest returns in the crypto world in the first quarter of 2024, with an average of 1312.6% across major memecoins. In this article, we aim to take a closer look at memecoins and understand this market, which began with Dogecoin in 2013 and currently has a market capitalization of around $40 billion – with a daily trading volume of nearly $5 billion (as of 20.08.2024).

How It All Began – The Dogecoin

What initially started as a joke unexpectedly went viral in no time, developing a large community, and pushing a cryptocurrency that to this day holds the highest market capitalization within the segment of memecoins: Dogecoin.

In December 2013, software developers Billy Markus and Jackson Palmer created Dogecoin as a parody of the cryptocurrency boom. Technically speaking it is a fork of Luckycoin, which in turn is a fork of Litecoin. Forks occur when a blockchain splits based on a change in its basic set of rules. Litecoin is based on the Bitcoin protocol but uses the Scrypt algorithm for mining. In March 2014, the initially set random reward schedule was changed to a consistent reward schedule, thus aligning with the system already known from Bitcoin and other altcoins. The original choice of a random reward schedule for mining was intended to emphasize the parody nature of Dogecoin – as was the alternative term for mining, which is referred to as “digging” in the context of Dogecoin.

Despite its humorous origin, Dogecoin quickly developed into a serious cryptocurrency, supported by an enthusiastic community and obtaining an image as “the crypto for the people.” Popular comments on Reddit could even be rewarded with Dogecoin. The hype around Dogecoin spread rapidly, and just one month after the coin’s launch, its volume briefly exceeded the trading volume of all other cryptocurrencies combined, including Bitcoin, in January 2014.

Another hype occurred in 2021 when Elon Musk continuously promoted Dogecoin on Twitter for several weeks. During this time, the coin reached its peak value of $0.7316. Although its value has since dropped to a much lower level, Dogecoin still plays a significant role, currently holding the highest market capitalization among memecoins (USD 15.1 billion as of 20.08.2024). The number of memecoin projects is steadily growing and currently stands at around 2,000, with about half being liquid, meaning they are actively traded. Recently, another dog-based memecoin called Dogwifhat caught the attention of the cryptoworld.

Memecoins Compared to Conventional Cryptocurrencies

Now, putting jokes (and criticism) aside: Can memecoins be equated to other cryptocurrencies or are they inherently different? What are the advantages and disadvantages for interested investors? We have outlined the key differences for you below.

As already evident, memecoins cannot simply be compared to conventional cryptocurrencies like Bitcoin, Ethereum, Solana, etc. Cryptocurrencies in general vary greatly. We discuss the differences between these two distinct groups of coins along four dimensions:

1. Origin and Fundamental Value

Conventional cryptocurrencies are usually developed to solve specific problems or offer technological innovations, such as decentralized finance solutions, smart contracts, data protection, or fast and cost-effective transactions. They arise from thought-out technological or economic considerations with clearly defined goals and use cases, which give them a fundamental value. This fundamental value provides them with the potential to remain viable in the long term and be accepted as a mainstream investment vehicle.

In contrast, memecoins often originate from viral internet phenomena. They are usually not designed with serious technological innovations or practical applications in mind but are primarily developed for entertainment purposes. A fundamental value is not discernible, and the price is driven largely by hype and herd movements in the strong online community. This lack of fundamental value is the crucial point where memecoins differ from conventional cryptocurrencies, and the other aspects listed below are closely related to this.

2. Technology

Conventional cryptocurrencies regularly develop their own blockchain protocols or innovate existing ones to enable new functions. Improvements in scalability, security/privacy, and energy efficiency are often pursued through technological advancements.

Memecoins often use existing blockchain platforms and standards without significant technological innovations. The most well-known blockchains for memecoins are Ethereum (currently the basis for about 45% of memecoins) and Binance Smart Chain. Dogecoin, as mentioned earlier, is based on the Bitcoin blockchain. Solana and Arbitrum also play a significant role in memecoins. Particularly important factors for choosing the underlying technology for memecoins are low transaction costs and fast transaction times.

3. Volatility

Relatively high volatility is an inherent feature of the cryptocurrency market, even with conventional cryptocurrencies. While hype and speculation can also play a significant role here (and have regularly done so in the past), long-term price movements are principally based on fundamental developments and technological progress. The volatility of conventional cryptocurrencies also impacts memecoins, as the latter often rely on the same technologies with little modification.

The high correlation in the price movements of these two types of cryptocurrencies should thus come as no surprise. However, it can be observed that memecoins are even more susceptible to rapid price fluctuations. The influence of online communities and social media trends can lead to extreme price swings, creating both opportunities and risks for investors. The case of Dogecoin and Elon Musk’s tweets illustrates this clearly. Overall, the memecoin market is also more liquid, which fuels higher volatility as well: this is especially apparent in the turnover rate – the ratio of trading volume to market capitalization – which in March 2024 was 77% for memecoins, compared to just 1.8% for Bitcoin.

4. Investment Behavior and Motives

Despite their volatile nature, many investors hold conventional cryptocurrencies like Bitcoin as a store of value and a hedge against inflation. Ethereum, with its smart contract functionality, enables the creation of decentralized applications, which can generate sustainable real-world use cases, suggesting potential long-term value appreciation if the established technology becomes a standard. Therefore, conventional cryptocurrencies – which are also marketed much more professionally than memecoins – are a popular vehicle for long-term investments.

In contrast, the memecoin scene is characterized by short holding periods and high trading frequency, which also affects the lifecycle of memecoin projects. Overall, most memecoin investors aim to luck out with their niche investments and make quick profits. Many of these projects fail within a few days, and trading comes to a halt. Estimates suggest that only about 2% of the tokens newly issued daily make it to a recognized exchange. The widespread scamming with memecoins also significantly contributes to this situation. However, there are positive examples, again with Dogecoin leading the charge. Back in 2014, the Dogecoin Foundation made the news with a fundraising campaign organized to finance the Jamaican bobsled team’s participation in the 2014 Winter Olympics. Another Dogecoin-organized fundraising effort supported water projects in Kenya. Other memecoins have also occasionally been involved in charitable initiatives since then.

CONCLUSION

Reaching a final verdict on memecoins is anything but straightforward. On one hand, they represent a market with highly speculative instruments without inherent value, heavily influenced by hype and easily exploited by scammers. Additionally, any money tied up in memecoins reduces liquidity from other conventional cryptocurrencies that aim to advance DeFi projects and the blockchain technology.

On the other hand, it can be argued that the money currently invested in memecoins might not necessarily be available for conventional cryptocurrencies. The humorous origin and subsequent success of memecoins can also be seen as an expression of a community that places great value on the occasionally global sense of unity triggered by internet phenomena. Through this, investors who might not initially feel drawn to conventional cryptocurrencies due to their professional and typically very technical image may see memecoins as a light-hearted introduction to cryptocurrencies and blockchain technology.

In the end, it must be noted, despite all the justified skepticism and criticism of memecoins, that these should not be directly equated to conventional cryptocurrencies. The main difference lies in the fundamental value. Investors should be aware of the differences and risks before investing in memecoins or conventional cryptocurrencies. While memecoins can be an entertaining and potentially lucrative addition to a diversified portfolio, conventional cryptocurrencies offer a more stable and technologically grounded investment opportunity.

P.S.: The famous meme dog “Kabosu” really did exist; he passed away this year.

Disclaimer: This report is for information and knowledge transfer purposes only and is not an investment recommendation.


Contact the author

Julia Knolle
E-Mail: julia.knolle@horn-company.de

Contact the author

Martin Rupprecht
E-Mail: martin.rupprecht@horn-company.de


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