The rise, culture, value, risks, and future prospects of Memecoin

Source: Talking Li and Talking Outside

This Monday (November 4th), Binance Research released a research report on MemeCoin titled "Understanding the Rise of Memecoins." However, I found that very few people seem to have the patience to read through the entire report, so in this sharing, we will provide a brief summary and interpretation of this report.

The original research report is as follows:

(Image source: https://public.bnbstatic.com/static/files/research/understanding-the-rise-of-memecoins.pdf)

The report mainly summarizes insights from several aspects, including Narratives, Cultural, Accessibility, Risks, and Future Predictions.

Next, let's officially start interpreting this report:

From 2022 to 2024, the total market capitalization of MemeCoin has more than doubled its share in Total3 (excluding the total market capitalization of BTC, ETH, and stablecoins), increasing from 4% to 11%. However, it is worth noting that this percentage is still lower than the peak of 12% in 2021, when the market capitalization of DOGE and SHIB reached a maximum of $80 billion and $39 billion, respectively. As shown in the figure below.

So, why have participants in the crypto market been attracted to assets of the MemeCoin category over time? Perhaps fair launches, accessibility, and transparency are some of the fundamental factors contributing to this outcome.

Of course, there are certainly other comprehensive factors involved, such as:

1. Macroeconomic Background

One way to understand and explain the behavior of market participants is to examine the macroeconomic context, as this larger backdrop drives people to speculate on MemeCoin as a non-traditional financial tool. For example, the Covid-19 crisis that erupted in 2020 led to an unprecedented increase in the supply of fiat currency by global central banks. Between 2020 and 2022, the total supply of fiat currency worldwide increased by more than 25%, from $81 trillion to $102 trillion. As shown in the figure below.

Here we can briefly explain that as the money supply expands, the prices of goods and services globally begin to rise, leading to the well-known phenomenon of inflation. For instance, in the United States, inflation reached very high levels, with a year-over-year (YoY) growth rate of 7% in 2021 and 6.5% in 2022. As shown in the figure below.

In this context, if we change our perspective, we will find that in the face of continuous depreciation of fiat currency, rational individuals will invest their assets in what they believe to be long-term valuable assets to avoid the loss of value caused by currency depreciation. One of these assets is real estate (referring to the United States), where we can clearly see that since 1963, housing prices have been on a long-term upward trend. Meanwhile, people's wages have not kept pace with rising housing prices. Over the past few decades, the average number of years of salary required to purchase a typical home has increased from 4.4 years in 1963 to 8.1 years in 2021, nearly doubling. As shown in the figure below.

Similarly, in this context, a certain type of "financial nihilism" may emerge, especially among the younger generation. The ongoing high inflation and depreciation of fiat currency may lead many to gradually lose faith in traditional beliefs, and this sentiment seems to be spreading rapidly. In the crypto market, millennials and Gen Z (those born between 1995 and 2009) account for 94% of the buyer demographic. This is understandable, as when the younger generation loses confidence in their ability to accumulate wealth, they may seek unique means to get rich quickly, and the crypto market perfectly caters to this demand. As shown in the figure below.

2. The Gamestop Legend

Those who experienced the last bull market cycle should be familiar with Gamestop. The Gamestop Short Squeeze in 2021 reflects the shift in mindset among young people, many of whom began to question traditional financial structures.

Now, the rise of MemeCoin seems to echo certain aspects of the Gamestop legend. The Gamestop phenomenon demonstrated the ability of community and cultural movements to create prices for financial assets, and this community and cultural movement phenomenon is also a major reason driving the emergence and popularity of many MemeCoins. The difference is that MemeCoins appear to be more transparent and decentralized overall, as they are shaped by blockchain technology and digital culture into a new financial system.

In terms of Memecoin, it may not generate any real value; in other words, its symbolic value is greater, rather than being driven by traditional valuation metrics, but it may resonate with like-minded investors due to its interesting narratives and culture.

In summary, the Gamestop phenomenon and the current MemeCoin phenomenon may be seen as young participants using their capital to vote against existing TradFi systems, fiat currencies, and the broader socio-economic system.

Next, let's continue to interpret the intrinsic value of MemeCoin:

1. Fairness and Transparency

Memecoin is a new type of asset based on blockchain technology and internet culture, completely unbound by traditional financial systems.

In 2017, the ICO boom led to a surge of new teams and projects emerging like mushrooms after rain. Many projects claimed to be building the next revolutionary product on the blockchain to attract more retail attention and participation.

However, many projects at that time sold investors more of a narrative or idea, often without corresponding products, and could start raising funds from retail investors with just a simple PPT. This also led to many scams at that time, although some people did make their first pot of gold during that boom.

Today, the ICO boom has become history, as ICOs later faced dissatisfaction from global regulatory bodies. Gradually, some ICO projects began to shift to private venture capital rounds to continue raising funds. Especially in recent years, this venture capital financing approach has seen significant growth, leading to the entire crypto project being shrouded in the issue and shadow of "low liquidity, high FDV." Many new altcoins face a large supply release in the coming years, making retail investors the ones left holding the bag for early venture capitalists.

In this context, retail investors have gradually become aware of this issue, leading them to move away from "low liquidity, high FDV" VC projects and turn to seemingly fairer and more transparent MemeCoins.

Therefore, if this trend continues, MemeCoin may continue to grow and remain popular among retail investors, potentially leading to a new outcome where some institutions also begin to participate in MemeCoin, as institutions need to go where the retail investors are.

2. More Understandable Narratives

Compared to some altcoin projects supported by complex products, MemeCoin seems to be more easily accepted by new retail investors or those without mature investment methods. Even a cute avatar and a group of people's CX can attract more newcomers to join and buy in. For example, compared to complex concepts and projects like Layer2 and DeFi that are difficult for new users to understand, MemeCoin is much easier for new users to accept and understand.

In other words, the user conversion time for MemeCoin is much faster than that for technical altcoins. This could allow MemeCoin narratives to spread faster and wider, quickly attracting more retail buyers and building communities to further drive speculation.

On the other hand, this can also lead to extremely fast-paced market dynamics and new product adoption rates, with capital flowing into new MemeCoins faster than ever before. For instance, WIF went from $0 to a market cap of $1 billion in just 104 days. In contrast, SHIB took 279 days, and DOGE took 8 years to achieve the same.

At the same time, the speed of creating new MemeCoins is faster than ever, with over 75% of all MemeCoins on-chain created in the past year. As shown in the figure below.

Next, let's interpret the risks involved:

1. Low Survival Rate of Projects

From the data above, we know that over 75% of MemeCoins were born in 2023 and 2024. However, from another dimension of data, we can clearly see that currently, 97% of MemeCoins have gone to zero (or have trading volumes close to $0).

While some MemeCoins have proven to withstand the test of time, such as the well-known DOGE existing for 10 years and SHIB for 4 years, it is undeniable that the survival rate of the vast majority of MemeCoins is very low.

In short, the rapid growth and speculative effect have made MemeCoin a very popular investment tool with huge return potential, but this effect heavily relies on market sentiment, making it nearly impossible to assess or evaluate their value through any fundamental assessment methods, resulting in MemeCoin being a high-risk asset class with a high risk of loss.

2. MemeCoin Cabals

Although the core value proposition of MemeCoin mainly lies in its fair launch, accessibility, and transparency, we cannot deny that even so, retail investors are still vulnerable to being ruthlessly exploited.

Some cabal groups (also known as conspiracy groups), including some KOLs, are creating various MemeCoins for speculation to seek and exploit retail investors to enter and take the bag. Although on-chain transaction records are publicly transparent and traceable, allowing retail investors to use some on-chain tools or browsers to see specific token holding addresses and transaction data, the so-called "the higher the road, the higher the devil," cabal groups still have ways to evade detection by retail investors through special means.

At the same time, cabal groups may collaborate with certain KOLs to promote designated tokens, triggering speculation and FOMO emotions on social media, creating a false appearance of prosperous trading to lure more retail investors to join and take the bag.

3. Lack of Technological Progress and Innovation

Currently, capital and attention in the crypto industry are overly concentrated in the MemeCoin sector, largely neglecting the advancement and innovation of technology. The current MemeCoin narrative, while giving rise to a plethora of projects and many so-called derivative products, has not significantly differed from the past in many aspects of speculation.

Looking back at the DeFi Summer of 2020, as the Uniswap model exploded, various DEXs emerged on various chains, and the corresponding DEX tokens were used for farming, ultimately being sold off as market sentiment turned bearish. In the later stages of that period, there was hardly any meaningful differentiation or innovation, as many DEXs were simply forks redesigned based on Uniswap V2.

This situation seems to be repeating in the current MemeCoin sector. While new MemeCoins can bring some new creative themes and narratives, the large number of similar tokens may lead the market to gradually become saturated. For example, with dog-themed MemeCoins, as new ideas and iterations occur rapidly, whether it's a dog wearing a sweater at first or a dog wearing sunglasses later, the marginal effect of such iterations will significantly diminish. The direct result of this is that, in the absence of innovative technology or ideological progress, MemeCoins will inevitably lead to sustained inefficiency.

At the end of the article, let's look ahead and predict the future of MemeCoin:

Altcoins and MemeCoins have different levels and angles of appeal, targeting different types of investors (or speculators).

For those investing in altcoins, they may be more focused on purchasing some form of value or representing the development potential and vision of the corresponding project. For those investing in MemeCoins, they may be more concerned with purchasing those that can be transformed into some form of ideology, narrative, or social movement.

From a longer-term perspective, the success of altcoins requires the creation and continuation of useful, sufficiently differentiated products that truly fit the market. The success of MemeCoins may require the creation and continuation of differentiated, unique narratives and stories that have long-term appeal to a sufficient number of groups.

Summary:

In general, the core principles of Web3 are: transparency, fairness, and decentralization. The rise of MemeCoin is an exciting new trend, at least proving that blockchain technology can unite everyone globally.

However, in the short term, retail investors may be more concerned with how to make money using MemeCoins. Here, we provide a brief summary based on the Binance Research report:

- Understand and Research Market Sentiment

MemeCoin is more about speculation based on community and market sentiment. We can utilize some on-chain tools introduced in previous articles of Talking Li and Talking Outside, such as DexScreener, GMGN, Bullx, Dexx, etc., to conduct necessary on-chain filtering and mining work.

- Seek Tokens with High Transparency

Fairness may sometimes just be a slogan. We need to do our best to use some channels or on-chain tools to find and analyze those tokens with high transparency. For example, tokens issued directly on DEXs often lack transparency and may have many snipers, insiders, and venture capitalists waiting to sell after retail investors take the bag. We should pay more attention to tokens that are fairly launched and listed on DEXs through platforms like PumpFun (of course, this is not absolute, just relatively better).

- Appropriate Diversification

As mentioned earlier, the survival rate of MemeCoins is very low, so we need to diversify appropriately to avoid severe losses due to overly concentrated investments. In other words, even when gambling, never put all your bets on a single coin, as MemeCoins are highly volatile, and you could lose everything in the blink of an eye.

- Pay Attention to Unique Narratives

Generally speaking, MemeCoins with unique narratives (such as the recent concept of AI + Memes) may attract more user attention and quickly form loyal communities, which we need to keep an eye on. Moreover, the more easily understood concepts or stories are by the majority, the higher the chances of success.

- Try to Guard Against Cabals

Typically, a sudden price change in a token may indicate that someone is organizing a pump and dump behind the scenes, especially under the influence of KOLs. Do not be overly trusting of some KOLs' calls and recommendations; only pay attention to those you consider trustworthy. At the same time, try to use some on-chain tools for data analysis to avoid participating in tokens with overly concentrated supply and signs of wash trading. As for specific identification tools and methods, previous articles in the MemeCoin series by Talking Li and Talking Outside have also provided some relevant summaries. Interested friends can search and review historical articles.

- Prioritize Liquidity Issues

Focus on tokens with good liquidity on major platforms, which can significantly help avoid buying scam tokens. Also, pay attention to whether liquidity is locked or burned. If your risk appetite is low, you might consider buying MemeCoins that are already listed on major CEXs, as these tokens often have better liquidity and credibility. However, it is also important to note that some MemeCoins in certain wallet markets may have inflated trading volumes. For example, some friends in the group reported buying PiXiu coins on the OKX Web3 market trading volume leaderboard.

Finally, always remember the two fundamental principles of trading: first, protect your principal; second, do not touch what you do not understand. Before deciding to purchase any project, make sure to manage your positions and conduct DYOR (Do Your Own Research).