4 min read
Should You Jump on the Bandwagon? The Pros and Cons of Investing in Cardano Meme Coins
We look at the meme coins exploding on Cardano and ask; should you be investing?
What is a Meme coin?
Meme coins, a type of cryptocurrency that usually originate as a lighthearted joke, have gained significant attention in recent weeks. While some meme coins having experienced remarkable surges in value, especially in the past weeks, it's important to understand the risks and underlying psychology associated with these digital assets.
Meme coins are designed to mimic traditional cryptocurrencies like Bitcoin, Ethereum or Cardano, but they often lack fundamental value or unique use cases. Instead, they rely heavily on viral moments or funny ideas to generate momentum and drive their value. Their main appeal lies in the community and entertainment value they offer, rather than any tangible utility. Their gains are often attributed purely to FOMO and speculation where retail investors jump on the band wagon in the hope of making a quick return.
How are Meme coins created?
The creation process for meme coins is relatively simple, thanks to the open-source nature of blockchain technology. Creators can "fork" existing cryptocurrencies, copying and pasting the underlying blockchain, and make minimal modifications such as changing the name or logo. This low barrier to entry has contributed to the proliferation of meme coins.
However, investing in meme coins comes with significant risks. While coins like Dogecoin and Shiba Inu have achieved notable success, the vast majority have left retail investors with heavy losses. On any given day literally hundred of Memecoins are created.
Concerns with Meme coin fundamentals
- Meme coins often have high or unlimited supplies, unlike Bitcoin's capped supply of 21 million coins. This abundance can dilute their value and hinder their potential for long-term growth.
- The concentration of meme coin ownership is another concerning factor. A small group of individuals often holds large concentrations of these coins. For instance, 48% of Dogecoin is controlled by seven crypto wallets, while 69% of Shiba Inu ownership is concentrated among 15 wallets. Such high concentration leaves room for market manipulation and the potential for sudden price crashes when large holders decide to sell their holdings.
- The volatility of meme coins is another factor to consider. Prices can be extremely volatile, and meme coins are subject to more unpredictable factors compared to mainstream cryptocurrencies like Bitcoin, Ethereum and Cardano. Their values can plummet overnight, posing significant risks to investors.
- Furthermore, meme coins often face accusations of foul play and bad intentions against their creators, who are often anonymous. Some founders have been known to create new coins, control the entire supply, and focus on creating hype to unload their inventory onto unsuspecting retail participants. The influence of paid celebrity endorsements and bot-driven activity on social media can also contribute to misleading perceptions about the value and potential of meme coins.
- Finally, liquidity is always a concern. Just because you have earned some massive profits from investing early in the latest meme coin it doesn't mean that when you want to sell that coin there will be a market to buy it. To illustrate let's imagine you have 1 000 000 of the latest meme coin. A trade recently went through where 10 of the coin sold for $1. You may assume that your holding is now worth $1 000 000. But this isn't necessarily the case. For this to be true you need to have buyers willing to buy 1 000 000 tokens at that price. What often happens is there arent buyers lining up at that price instead the majority of buyers are hoping to get in at a fraction of that price say $0.10. So while you may sell some at $1 and some more at different price points most might be sold at a much lower price point affecting your return. In a worst-case scenario there may be little to no buyers available and therefore you are left holding millions of a now worthless token
Cardano and meme coins
The Cardano ecosystem has not been immune from the meme coin frenzy. In the past two weeks, we've seen the meme coin attention shift from $DEAN to $SNEK and now seems to move to $DGAF. The rapid move in attention and focus only serves as another red flag. Just when you think you found the new meme coin gem the attention can move to the next new shiny token promising big returns. Most of the trading of meme coins will happen on Minswap a popular Cardano DEX.
If you are looking to dabble in the meme coin chaos, with money you can only afford to lose, then Cardano isn't a bad place to trade. Unlike Ethereum where gas fees can often spike, usually because of the increased on-chain activity caused by the meme coin frenzy, which in turn eat up big chunks of profit. Cardano fees are usually a few cents. Making that $50 bet you want to take far more realistic. Paying $40 in Eth fees to invest $50 in a meme coin hardly makes sense.
While meme coins may offer a sense of community and entertainment value, investing in them should be approached with caution. These coins are highly speculative and lack fundamental value or utility. The risks associated with meme coins include high supply, concentration of ownership, market manipulation, and the potential for significant losses. It is crucial to conduct thorough research, understand the underlying dynamics of each meme coin, and carefully consider the risks before investing.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.