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

Source: Talking Li, Talking Outside

This Monday (November 4th), Binance Research released a research report on MemeCoins titled "Understanding the Rise of Memecoins." However, I found that very few people seem to have the patience to read through the entire report. Therefore, in this issue, 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 MemeCoins has more than doubled its share in Total3 (excluding BTC, ETH, and stablecoins) 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 the category of assets known as MemeCoins 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 MemeCoins 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 had reached a very high level, 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 faced with the continuous devaluation 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 devaluation. One such asset is real estate (referring to the United States here), 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 the rise in 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, certain special types of "financial nihilism" may see growth, especially among the younger generation. The ongoing high inflation and devaluation 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 (referring to those born between 1995 and 2009) account for 94% of the buyer demographic. This is understandable; 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 just happens to cater 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 reflected a shift in the mindset of many young people, who began to question traditional financial structures.

Now, the rise of MemeCoins 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 MemeCoins, they may not generate any real value themselves, meaning their symbolic value is greater, rather than being driven by traditional valuation metrics. However, they may resonate with like-minded investors due to interesting narratives and culture.

In summary, the Gamestop phenomenon, as well as the current MemeCoin phenomenon, may be seen as a way for the younger generation of participants to vote with their capital against existing TradFi systems, fiat currencies, and the broader socio-economic system.

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

1. Fairness and Transparency

MemeCoins are 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, with many claiming to build 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 made their first pot of gold during that boom.

Today, the ICO boom has become history, as ICOs later faced dissatisfaction from global regulators. Gradually, some ICO projects began to shift towards 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 issues and shadows of "low liquidity, high FDV." Many new altcoins face a massive supply release in the coming years, turning retail investors into the bag holders of early venture capitalists.

In this context, retail investors gradually became aware of this issue and began to steer clear of "low liquidity, high FDV" VC projects, turning instead to play with MemeCoins that appear to be relatively fair and transparent.

Therefore, if this trend continues, MemeCoins may continue to grow and remain popular among retail investors. A possible new outcome of this is that some institutions may also start to participate in MemeCoins, as wherever there are a large number of retail investors, institutions will need to go there to harvest profits.

2. More Understandable Narratives

Compared to some altcoin projects supported by complex products, MemeCoins seem to be more easily accepted by new retail investors or immature (without mature investment strategies) retail investors. Sometimes, just 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 hard for new users to understand, MemeCoins are much easier for new users to accept and comprehend.

In other words, the user conversion time for MemeCoins is much faster than for technical altcoins. This could allow the narrative of MemeCoins to spread more quickly and widely, rapidly 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 the adoption rate of new products, 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 comparison, SHIB took 279 days, while DOGE took 8 years to achieve the same.

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

Next, let's interpret some risks:

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 effects have made MemeCoins a very popular investment tool with huge return potential, but this effect heavily relies on market sentiment. People can hardly measure or evaluate their value through any fundamental assessment methods, making MemeCoins extremely risky and a category of assets with high loss potential.

2. MemeCoin Cabals

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

Some cabal groups (also referred to as conspiratorial groups), including certain KOLs, are engaging in speculation by creating various MemeCoins to seek and exploit retail investors. Although on-chain transaction records are publicly transparent and traceable, allowing retail investors to see specific token holding addresses and transaction data through some on-chain tools or browsers, the saying "where there is a will, there is a way" holds true, and cabals still have methods to evade detection by retail investors.

At the same time, cabals 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 over.

3. Lack of Technological Progress and Innovation

Currently, capital and attention in the crypto industry are overly concentrated in the MemeCoin space, largely neglecting the push for technological development and innovation. The current MemeCoin narrative, while spawning a massive number of projects and so-called derivative products, has not seen much meaningful differentiation or innovation compared to the past.

Reflecting back to the DeFi Summer of 2020, as the Uniswap model exploded, various DEXs emerged on different chains, and the corresponding DEX tokens were used for farming. Ultimately, when market sentiment shifted, they were all seen as bearish and faced sell-offs. In the later stages of that period, there was almost no meaningful differentiation or innovation, as many DEXs were simply forks redesigned based on Uniswap V2.

This situation seems to be repeating itself in the current MemeCoin space. Although new MemeCoins can bring some new creative themes and narratives, the large number of similar tokens may lead the market to gradually become saturated. Taking dog-themed MemeCoins as an example, with the rapid occurrence of new ideas and iterations, whether it’s a dog wearing a sweater at first or a dog wearing sunglasses later, the marginal effect of this iteration 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 MemeCoins:

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. In contrast, those investing in MemeCoins may care more about 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 creating and sustaining useful, sufficiently differentiated products that truly fit the market. The success of MemeCoins may require creating and sustaining 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 MemeCoins is an exciting new trend that at least demonstrates that blockchain technology can unite people globally.

However, in the short term, retail investors may be more concerned with how to make money using MemeCoins. Based on the research report from Binance Research, here’s a brief summary:

- Understand and Research Market Sentiment

MemeCoins are more about speculation based on community and market sentiment. We can utilize some on-chain tools introduced in previous articles in the MemeCoin series by Talking Li, such as DexScreener, GMGN, Bullx, DEXTools, 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 use some channels or on-chain tools to find and analyze tokens with high transparency. For example, tokens issued directly on DEXs often lack transparency and may have many snipers, insiders, and VCs waiting to sell after retail investors take over. 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 above, the survival rate of MemeCoins is very low. Therefore, 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 might 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. We need to stay ahead in this regard. 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 scheme, especially under the influence of KOLs. Do not be overly trusting of KOL recommendations; focus only on those you deem trustworthy. At the same time, try to use some on-chain tools for data analysis to avoid participating in tokens with overly concentrated supplies and signs of wash trading. As for specific identification tools and methods, previous articles in the MemeCoin series by Talking Li have provided some relevant insights; interested readers can search and review those historical articles.

- Prioritize Liquidity Issues

Focus on tokens with good liquidity across major platforms, as this can significantly reduce the risk of buying scam tokens. Also, pay attention to whether liquidity is locked or burned. If your risk tolerance 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 members in the group reported buying a PiXiu coin in the OKX Web3 market trading volume rankings.

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