What are Meme Coins and Should You Invest in Them?

This article explores what meme coins are, the potential risks of investing in them, how to discern between fake and credible meme coins, and how to safely invest in them.


Key Takeaways

  • Meme coins are a new type of digital currency that is based on memes.

  • They are characterized by a vast amount of coin supply in the market, making them affordable.

  • Meme coins are more speculative than major cryptocurrencies like BTC.

  • Before investing in meme coins, investors should look into the project's goal and the team's track record to discern a project's credibility.

what is meme coins and how to invest in them

Meme coins are gaining more and more popularity with time. 2021 was a remarkable year for meme coins like Dogecoin and Shiba Inu that sparked the internet and saw a massive increase in prices and acceptance. Meme coins are generally more volatile than major cryptocurrencies like Bitcoin and ETH. This is probably because meme coins are largely community-based tokens. Their values are typically driven by social media opinions and online community support. This often generates a lot of interest, but it also creates FOMO and financial risk.

What are Meme Coins?

Memes are images or videos that go viral on social media, with thousands of people sharing them all over the world. Meme coins take advantage of this trend by basing their entire value on memes. As the popularity of a meme increases, so does the demand for that particular coin. This can result in some impressive price movements and huge profits for anyone who gets in early.

Meme coins are a new type of digital currency that is based on memes; designed to be fun and some have also been invented as a joke. Meme coins have been around since 2013, with the Dogecoin being one of the first to make a splash.

Meme coins may have also gained popularity due to their vast amount of coin supply in the market that makes them affordable. For a dollar, an investor may acquire thousands or millions of meme coins. Investors find it attractive to hold more meme coins than to hold a fraction of major cryptos like BTC or ETH.

crypto chart

The Risks of Investing in Meme Coins

Meme coins may have seen massive growth in 2021, but like all cryptocurrencies, there are risks associated with trading and investing meme coins. The most obvious risk is that the price drops.

The tokenomics of meme coins may be perplexing. Bitcoin and ETH, for example, have well-written white papers, functioning ecosystems, and deflationary nature that set them apart. Most meme coins are inflationary and have an unlimited supply. The community's jokes usually define their ecosystem, use cases, and fundamentals.

A further danger is that meme coins are more speculative than major cryptocurrencies like BTC. The volatility often leads to unpredictable "pump and dump", and usually has a shorter lifespan. The prices of meme coins can rapidly appreciate due to FOMO or high-profile figure promotion or plummet suddenly when the community decides to move on to the next meme currency.

As the meme coin market continues to expand, investors should be conscious of possible scams as a result of the hype. A good example is the SQUID coin that was overhyped and led to a rug pull. Before trading or investing in meme coins, users should always research carefully.

The credibility of Meme Coins

Meme coins are an excellent way for investors, who may have been scared off by traditional cryptocurrencies like Bitcoin, to get involved in the crypto world without having to spend a ton of money upfront. However, they pose certain risks that need consideration before investing. Before investing in meme coins, investors should look into the project's goal and the team's track record to discern a project's credibility.

1. The Project's objectives

When the entire community's objective is to promote the value of a coin in order to entice new investors to buy it, that's a red flag. The SQUID coin was one example. Despite the fact that utility isn't emphasized, it's an excellent indication when the meme coin project's community members have something in common besides the desire to make money.

As a result, it's critical to investigate the project's long-term goal and how the team intends to keep network participants engaged. This can be done by examining the whitepaper, project's roadmap, their Github, social media presence and credibility.

2. The development team's background

Reputation is a key consideration when assessing the viability of a product or platform in the crypto world. As a result, it's critical to unmask the project's main contributors and their histories. It's worth noting that because the members of the development team have chosen to be anonymous, it may be difficult to discover information about them. Users can rely on design choices made by the team, especially tokenomics, in such situations.

Tokenomics is the distribution of crypto tokens. Investors should avoid investing in meme coins controlled by a single individual or entity since such digital assets are vulnerable to a price drop if the major token holder sells off their coins. As a result, it's better to invest in a meme coin with a decentralized circulation supply.

meme coins investing tips

Safely Investing in Meme Coins

It's important to remember that like any other crypto, it involves risks. Here are some tips to help invest safely and securely:

1) Avoid projects in which the developers control the majority of the tokens.

Risks are inherent in meme coins that have been concentrated in the hands of a few investors or the development team. As a result, no individual or group should control more than 5% of the token's supply.

2) Validate the liquidity pools' legitimacy

When a token is first released, the development team creates a new liquidity pool (LP) so that investors can use it to buy the tokens. This makes it easier for investors to trade the token since they have a pool of liquidity to use. The development team must deposit both major cryptocurrencies and an equivalent amount of meme coin into the LP to provide investors with access to the newly launched cryptocurrency.

However, the problem is that if a sufficient safety mechanism isn't put in place, the liquidity provider (the developers in this case), can withdraw funds. When these situations arise, investors are left without a way to exchange a coin that is quickly losing its value.

3) Validate a project's transparency and audit status

Development teams must create an open and transparent ecosystem for digital assets. Moreover, a respected third-party auditor should verify the crypto's code to ensure there are no backdoors or bugs to rule out possibilities of scam. When completed, audits are usually published on social media for the public.

4) Only invest money that you are willing to lose.

These investments can be volatile. Investors should ensure they're not putting all their eggs in one basket.

No real use-cases

The most significant cause of future meme token price hikes appears to be the activities of influencers like Elon Musk and other big names. Something that began as a joke may now be seen in a different light. In terms of investing in meme tokens, there is often a higher degree of danger due to the lack of long-term technical infrastructure or solid tokenomics support. Moreover, there are no strong fundamentals supporting any real tech innovation or use-cases behind meme coins.