Hype behind Memecoins and Associated Risks

6 min read

Understand the hype around memecoins and the risks associated with investing in them.

The cryptocurrency space encompasses a wide range of assets, each with distinct features and use cases. Among these varied assets, one particularly unique category stands out: memecoins. These cryptocurrencies are inspired by memes, internet culture, and are often created just for fun. Despite their lack of practical purpose, memecoins have garnered significant attention and enthusiasm from crypto users.

So, why all the hype? Is investing in memecoins really safe? In this blog, we’ll dive into what memecoins are, how they came into existence, why they’re gaining so much traction, and the risks associated with investing in them.

What Are Memecoins?#

Memecoins are a unique category of cryptocurrency that get their identity from internet memes, pop culture, trends, characters, or humorous ideas. They are created as light-hearted jokes, for entertainment purposes or community engagement. Memecoins, unlike mainstream currencies like Bitcoin or Ethereum, lack specific use cases and intrinsic value.

Memecoins are generally traded for speculative purposes or as a means to be part of a community. Their value is largely driven by social media momentum and public interest rather than fundamental technological advancements or practical applications.

The primary allure of memecoins lies in their viral potential. These cryptocurrencies often gain traction through enthusiastic online communities that enjoy the humor or novelty associated with the meme. Despite their playful origins, some memecoins have surged in popularity and market value, even reaching multibillion-dollar market caps and attracting celebrity endorsements.

For instance, Dogecoin (DOGE), the first and most famous memecoin, was created to mock the growing hype around Bitcoin. Yet, it has since amassed a large following and significant market value.

While memecoins can be entertaining and sometimes profitable for early users and investors, they are highly risky investments due to their volatility and the speculative nature of their value.

Dogecoin: How Memecoins Started#

The most well-known memecoin is Dogecoin (DOGE), which was launched in 2013 by software engineers Billy Markus and Jackson Palmer as a satire of the growing cryptocurrency market.

Dogecoin quickly gained popularity, particularly on social media platforms like Reddit, where it became a fun and accessible entry point into the world of cryptocurrencies. Unlike Bitcoin, Dogecoin does not have a capped supply, making it more inflationary. The coin's value saw massive spikes, when endorsed by high-profile celebrities such as Elon Musk, Mark Cuban, and Snoop Dogg. This celebrity attention contributed to Dogecoin's soaring value, at times increasing by over 800% in just 24 hours.

Following Dogecoin's success, many other memecoins emerged, including Shiba Inu, Pepe, dogwifhat, FLOKI, Bonk, Pepe, and so on, which also gained substantial market capitalization.

As of now (June 2024), Dogecoin has the highest share of marketcap among memecoins, with over $22 billion. Shiba Inu, Pepe, dogwifhat, and Floki are behind with $14 billion, $6 billion, $3 billion, and $2.5 billion, respectively.

Reasons Why Memecoins Are Hyped#

Memecoins have gained significant attention and hype for several reasons, driven largely by their unique and engaging characteristics:

Community and Social Media Influence#

Memecoins thrive on the enthusiasm of online communities. Platforms like Twitter, Reddit, and TikTok play a crucial role in promoting these coins, with viral posts and memes creating a buzz that attracts new investors. The sense of belonging to a fun and active community adds to their appeal.

Celebrity Endorsements#

High-profile endorsements from celebrities and influencers can dramatically boost the popularity of a memecoin. When public figures with massive followings show interest or support, it creates a ripple effect, drawing more attention and investment.

Low Entry Barrier#

Memecoins often have very low prices per coin, making them accessible to a wide range of investors. This low entry barrier allows people to buy large quantities with minimal financial risk, fostering a sense of excitement and the potential for high returns.

Humor and Novelty#

The humorous and novel nature of memecoins makes them stand out in the crowded cryptocurrency market. They are often associated with fun and entertainment, which can be more appealing than the serious tone of traditional financial investments.

Speculative Potential#

The rapid price surges seen in some memecoins create a sense of FOMO among investors. The potential for quick, substantial gains, even if speculative, drives many to invest in the hopes of catching the next big wave.

Media Coverage#

Frequent media coverage of memecoins, especially during price spikes, keeps them in the public eye. This continuous exposure contributes to ongoing interest and investment.

Risks Associated with Memecoins#

Investing in memecoins involves several risks that potential investors should be aware of. One of the biggest issues is high volatility. Memecoins can experience rapid price swings, leading to significant financial losses for those who buy at the peak and sell at the low.

Another major risk is the lack of intrinsic value. Unlike established cryptocurrencies, memecoins often rely on popularity and social media buzz, making their value highly unpredictable and risky.

Memecoins are also prone to market manipulation. Their low market cap and high volatility make them easy targets for influential figures or groups to artificially inflate prices, only to dump them off later and cause significant losses for other investors.

Additionally, memecoins usually lack practical utility beyond speculative trading. They are not widely accepted for transactions, which could be limiting their long-term sustainability.

The hype around memecoins can lead to impulsive investment decisions driven by FOMO, leading to poor financial choices. Scammers can abuse this thrill in users by creating fake memecoins or fraudulent schemes, deceiving investors, and causing financial losses.

Security concerns are also prevalent. Memecoins, like any cryptocurrency, are vulnerable to hacks, cyber attacks, rug pulls, and smart contract vulnerabilities. Because memecoins are carried by a hype, at times users and investors neglect the security aspects of them. They might be audited, but might not by a credible security audit firm.

Take the example of an exploit on NORMIE, a memecoin on the Base network, that caused the loss of over $880K. The exploit was caused due to a flawed logic in the smart contract that allowed bypassing critical security checks.

The Condom token, a memecoin on the Solana network, executed a rug pull after raising SOL tokens worth $906K in presale, disappearing before the official launch. Similarly, users of the memecoin project BALD on the Base network fell victim to a rug pull when the token deployer withdrew 11,137 ETH, that amounts to over $25 million, just days before the launch.

Another notable risk arises when bogus memecoin tokens share names with legitimate projects, tricking users into investing. Many of these tokens later turn out to be scams or rug pulls.

To protect your assets from these threats, due diligence is crucial. Investors can use publicly available contract scanners to inspect smart contracts if there's any suspicion. Additionally, verify the authenticity of the team behind the token and ensure the coin aligns with its stated mission and vision.

You can stay vigilant by visiting our hack database and searching for "Rug Pull" to see all available rug pull projects. You can explore the details and identify common patterns in rug pull memecoin schemes.

About Neptune Mutual#

Memecoins are a blend of internet culture and Web3, making them fun and engaging investments. While their low entry barriers and viral factor can make them appealing, investors should approach memecoins with caution. These highly volatile coins can be easily manipulated, leading to potential financial losses. Additionally, security issues like hacking and scams are common threats to memecoin holders.

One of the best protections against the financial risks of crypto assets is DeFi insurance. Neptune Mutual is one of the DeFi insurance solutions providing coverage to users who wish to cover their assets.

We offer a marketplace where projects can create their own cover pools from which their community users can purchase policies. All types of projects, including memecoins, can launch their own cover pools. We are available on the EthereumArbitrum, and BNB Smart Chain networks, so choose any network you want to create your cover pool on.

To learn more about Neptune Mutual, follow us on X and join our Discord community.