What are Meme Coins and How Do They Work?

Introduction

Memecoins frenzy is a common occurrence in the crypto sector. This article is about meme coins and how they work.

What is a Meme Coin?

Memecoins are cryptocurrencies that are based on internet memes. Memes are images with clever captions, characters, and images that are popularized for their funny implications. Memes poke fun at a person or instance. Dogecoin is largely touted as the first ever meme currency.

The core infrastructure of Dogecoin was adopted from Bitcoin. It was debuted in 2013 as a satirical representation of blockchains. Doge is a meme that consist Shiba Inu dog with comic captions.

How do Meme Coins Work?

Meme coins are not projects that are created with an intention to offer a particular utility. The main purpose of meme coin is to represent the speculation and volatility of cryptocurrency markets. Meme coins usually rise to mainstream popularity on account of endorsements from their communities and FOMO.

However, their prices can quickly decline when investors start flocking around a new meme coin. Meme coins can have a native blockchain but the underlying code is copied or referenced from an existing blockchain project.

Should You Invest in Meme Coins?

Meme coins have a small per unit price and their supply is usually unlimited. Therefore, investors tend to acquire them at the beginning and earn profits once their prices improve later onwards. Since meme coins have unlimited or a considerable massive total token amount, they are also inflationary.

The unit price of the token is likely to decline on account of increasing supply over time. Some meme coin projects such as Shiba Inu have incorporated supply control features such as burn addresses.

It means that total supply of token is reduced by sending it to burn address and retain the per unit value. Meanwhile, meme coin projects such as Dogecoin retain low price overtime since it does not have burning mechanism in place.

Meme coins are also popular among Day Traders who have a goal to generate massive profits by investing massive amount of cryptocurrency. This technique is called HFT or high frequency trading. Since meme coins have a low per unit price, they are accessible to more investors.

Why are Meme Coins So Popular?

Meme coins become popular in the wake of GameStop showdown in 2020. The trading community on Reddit started to accumulate meme-fied stocks of the company that resulted in 100x price appreciation of these stocks within a few months.

In the same bid, Reddit community pumped Dogecoin sending it on the same tangent as GME stocks. The trend became more popular with social media personalities joining the regime. Following various mentions, Dogecoin the first-born meme currency became started to trend in the crypto circles.

The prices of DOGE reached $0.7 within 5 days following a 2,000% appreciation. Meme coins are more accessible to retail investors on account of their small per unit prices. In this manner, investors may be able to purchase a considerable amount of meme currency with a relatively small investment.

At the same time, meme coins remain hyped and trending topics on account of the support from their respective communities. Investment enthusiasts created a Reddit group called SatoshiStreetBets to wage war against mainstream cryptocurrencies that took the markets by storm in 2021.

Risks Associated with Meme Coins

Meme coins do not have a specified use case. They are generated for comic effect and later onwards they refrain from incorporating any real use case into the project.

Meme coins are typically inflationary currencies meaning that their prices may decline with time. However, meme currencies can incorporate burning mechanisms to control the maximum supply.

Meme coins depend on speculation and community support. Their value depends on how much investors are interested in them. In the wake of a new coin trend and other occurrences, meme coins can lose their value in a matter of short-duration.

Meme coins inflows are rapid fueled by FOMO and it can fizzle out even faster on account of FUD or crash.

Conclusion

Trained investors can generate income from meme currency by reading and analyzing the sentiment and fundamentals. However, investors should beware of rug pulls and conduct research to prevent losses.