Crypto Trading 101: Memecoins

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INTRODUCTION

A Memecoin is a token that trades on attention to an underlying idea, concept, or ‘meme’ - such as DOGE, the oldest & most prominent memecoin in existence today. Memecoins don’t typically claim to have any specific function or utility - they derive value from social media hype, community engagement & often mere speculation. In this article, we’ll look at memecoins and examine what makes these high-risk assets so attractive to crypto traders.

Note: This article is not financial advice and is intended for informational and research purposes only. Arkham doesn’t endorse any of the tokens discussed. They are given as examples for illustrative purposes only.

SUMMARY

• Memecoins are highly speculative and mainly trade on the attention given to them.
• Memecoins do not typically claim to be backed by any fundamental value. They’re driven by hype & community engagement.
• They are highly volatile, high-risk investments marketed almost exclusively to retail.

WHAT IS A MEMECOIN?

Memecoins are tokens that associate themselves with an idea or concept. They do not necessarily have any underlying value or use case - and usually trade on the attention given to them. Due to this, memecoins thrive when there is a high amount of speculative interest in the crypto market, and particularly appeal to retail investors. They are highly volatile and typically high-risk.

Throughout crypto history, different ideas and concepts have been popularized among crypto traders. The different memecoins popular in different eras of the crypto market have occasionally come to represent the culture of crypto traders during that specific time period. For instance, the first memecoin, DOGE, was a fork of Litecoin and distinguished itself only by the picture of DOGE, a popular internet meme based on a Japanese Shiba Inu called Kabosu.

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By attempting to capture value through association with an idea, memecoins allow crypto traders to speculate on certain trends, individuals or even political shifts. Rather than trading coins based upon project fundamentals, or company earnings, memecoin traders buy and sell coins based upon popularity, hype and potential for virality.

Traders often treat a memecoin purchase like a lottery ticket. The chance of any specific token being picked up by a large retail wave is incredibly low - but is backed by a record of being lucrative for traders who catch the right trend.

WHY DO MEME COINS EXIST?

The original definition of a ‘memecoin’ is a token that is created as a joke, based upon an existing internet meme. More recently, ‘memecoin’ has become a catch-all term to refer to any token created that trades purely on attention. Sometimes, coins are created within hours or minutes of impactful and attention-grabbing news, to capitalize on speculative crypto users assuming the price of a closely associated token will go up.

Numerous coins have sprung up in response to news, political events & even TikTok trends, facilitated by the ease of creating new tokens on Ethereum. These new tokens frequently launch on Uniswap with a small amount of liquidity & a large supply deposited to the trading pool by the developer(s).

Tokens frequently emerge in thematic groups, or ‘metas’ - for example, Elon Musk tweeted about DOGE in 2021, spawning a “dog coin meta”, or a period in which attention (and returns) were lavished upon dog-themed memecoins like SHIB, FLOKI INU or DOGELON MARS.

PROPERTIES OF MEMECOINS

DOGE, the first memecoin, was launched in early December 2013 as a joke currency by software developers Billy Markus and Jackson Palmer. It was launched without any intention of becoming a major cryptocurrency (in fact Billy Markus sold all of his coins in 2015 to buy a Honda Civic).

On the other hand, newer launches of memecoins are slightly different. Teams will frequently attempt to use an assortment of marketing strategies to bring their token to prominence over those of competitors, their goal being the deliberate and intentional pursuit of tactics akin to those which helped DOGE grow to prominence over several years.

Often, the most powerful marketing for a memecoin will be a rapidly rising price itself. However, teams may also attempt to foster some form of cult-like holder dynamic & partnerships with prominent persons, to attract more holders & liquidity. In 2021, some prominent teams attempted different tactics like ‘buy-and-burn’ - for example, the SHIB team chose to “burn” half of the supply by sending it to Vitalik Buterin on launch (thereby attempting to a large portion from circulation & subsequently receive attention as one of Buterin’s largest holdings). These tactics were attempts to raise the token’s price. They led to Buterin holding a peak of $25B of SHIB and subsequently, the largest donation in crypto history in which he sent >$1B to the India COVID Fund.

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Other teams attempted to reward holders of a token by placing a tax on all token transfers, buys and sells. Safemoon is a prominent example of this - the developers instituted a 10% tax on every transfer of the token, with 5% distributed to all Safemoon holders & 5% directed to increasing the liquidity of Safemoon trading pools. It’s worth noting however, that the Safemoon team were arrested in November 2023 for fraud & the improper usage of investor funds, so purported rewards to holders may not have been real.

In Summer 2020, the YAM token catalyzed a trend of food themed coins that crypto traders could “farm” - in other words, receive token emissions for depositing crypto-assets (such as ETH, USDC, etc) into a token’s related protocol. Despite many of these ‘farms’ being basically devoid of innovation, rife with scams and plagued with smart-contract risk, ‘food-farming’ became a popular and lucrative endeavor for early users of DeFi, thanks to the development of a strong pro-DeFi narrative among traders seeking yield.

THE RISKS OF TRADING MEMECOINS

Memecoins are highly volatile and especially prone to large price swings. Retail-driven runups are often seen as especially hazardous for new investors who may not understand the positioning of other market participants. This is true for any asset, but especially true for memecoins, which to an extent encourage and even aim to replicate this kind of price action.

Information asymmetry, or the situation whereby certain traders have more information than others, can be purposefully exploited by savvy traders to enter a new meme coin early, build hype, & then sell this on to less informed traders drawn in by hype at a later stage - with those early & savvy traders knowing full well that the hype train is close to an end.

At other times, information asymmetry can be understood and purposefully exploited by certain market participants in order to mitigate organic selling by traders. During their August 2020 launch, the SHIB development team purposefully eschewed the traditional model of a team token allocation, marketing SHIB as the first crypto project with a 100% community allocation. Of course, there was no restriction on insiders buying up a significant percentage of their token from Uniswap after the launch, as part of the “community”. This led to a number of “community member” wallets making remarkably impressive trades, including one wallet that spent $20K in 2020 to acquire a sum of SHIB that, by May 2021, was worth over $1B.

Additionally, there is an ever present risk of smart contract bugs or proneness to hacks, especially in hastily deployed code which hasn’t been audited. There is a risk of a ‘rug pull’, whereby a developer takes all of the liquidity deployed in a pool of tokens or trading platform - effectively taking the money deposited by users.

TOP 5 MEME TOKENS BY MARKET CAPITALIZATION

Many popular memecoins compete with top cryptocurrencies for market cap dominance - with the two most prominent, Dogecoin and Shiba Inu, holding strong with both having circulating market caps of over $1B. Here are the top 5:

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TOOLS FOR ANALYZING MEMECOINS

Memecoins, as well as other early-stage or low-cap tokens, will often launch on platforms such as Uniswap, with a large amount of supply instantly available to purchase directly from a liquidity pool. Thanks to this, early wallets and token snipers will often be able to secure large amounts of supply for a relatively low investment - meaning that memecoin runups are frequently accompanied by progressively early market participants realizing the appreciation of their crypto-assets.

Arkham allows traders to monitor the specific holdings and activities of on-chain wallets, which can be useful for linking wallets that are likely to be owned by the same entity or individual. This is particularly important to memecoin traders, as understanding the dynamics of supply concentrations as well as the entries and exits of active on-chain traders can help inform a trader’s decision to open or close a position.

Dexscreener provides traders with charts across multiple different chains and decentralized exchange (DEX) protocols - which frequently host trading pairs of low-cap tokens and early-stage memecoins. It should be noted that while Dexscreener will provide price information of any Uniswap trading pair, it should not be assumed that all tokens shown are safe to trade. Uniswap is completely permissionless - and therefore tokens can be deployed containing code that either a) makes them unable to be sold back into the pool, b) allows certain admin addresses to mint extra tokens in perpetuity, or c) allows certain addresses to remove liquidity outright from the Uniswap pool. While Dexscreener contains some checking features to provide some security, due diligence is always necessary when reviewing tokens.

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For a complete list of useful tools for your analysis, see Arkham’s guide to the 12 leading analysis tools for traders which speaks through the range of tools users can use to examine memecoins, as well as other tokens.

HOW TO ANALYZE A MEME COIN?

The way in which you’ll need to analyze a meme coin depends on the life cycle, stage at which you’re buying & ultimately - your target for exiting a position. Accordingly, this means that different levels of diligence are required when attempting to analyze a meme coin.

NEWLY LAUNCHED TOKENS:

A large amount of tokens that launch on Uniswap either contain scam code or are simply never burned or locked by the address that deployed the trading pair - this means that the entire liquidity can be removed from Uniswap’s platform at any time by the creator - which could result in a rugpull.

Memecoins in the early stages of their lifespan need to be checked for legitimacy or scam elements - plenty of contract checking tools exist, such as the PIRBview Telegram bot or the website Honeypot.is, to help traders quickly examine and identify malicious elements in a token’s contract deployment. Analysis tools however, are not infallible - and a savvy developer may find ways around them.

EXISTING TOKENS:

Later-stage memecoins can be analyzed through holder analysis and by traders examining on-chain fund flows. Both Arkham and Dexscreener provide methods for memecoin traders to check the entry points and exit points of competing traders, while Arkham can also be configured to alert a trader to large movements or trades of a certain memecoin.

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HOW TO FIND MEME COINS EARLY

Memecoins can be found across multiple chains, multiple platforms and DEXes, and are frequently circulated around different private groups, social circles & communities in crypto.

Memecoin runups are often accompanied by attempts by traders to find the early holders, so they can gain further alpha through tracking & following these “smart money” wallets which are early to successful token projects. Many of these traders will spin up discussion groups in order to track on-chain movements and find ‘the next big memecoin’ - yet this is not quite as simple as it may initially seem.

A large number of memecoin launches have a lifespan of under 24 hours. Many bot users who automatically purchase new token launches find that their balances are quickly drained by users deploying scam contracts or removing liquidity.

More often than not, memecoin buyers will decide to make a tradeoff between being “early” and filtering out scams or doomed launches - or sacrificing being early in order to increase their hit rate of purchasing surviving projects.

Using Arkham, you can track some of these wallets which are typically early to successful token launches. By looking up a large cap token like PEPE, users can look for the recipients of the earliest transactions and add these to a custom watchlist on an Arkham Dashboard, to monitor whether these or closely associated addresses are making purchases of other newly launched tokens. Traders typically do this with the assumption that an insider to a previously successful memecoin launch is likely to have access to/knowledge about future token launches.

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WHICH MEMECOIN CAN REACH $1

Memecoin development teams have realized that people psychologically anchor themselves to certain numbers. This is especially true of immature markets with unsophisticated traders. It became a common mantra in 2021 of traders expecting “DOGE to reach $1”, or similar round-number price targets among the proponents of smaller coins.

This is known as unit bias. Unit bias is often taken advantage of by professional traders, allowing them to benefit from significant retail traders at predictable points. In the case of DOGE, there were large amounts of retail traders who had set sell-orders at $1 - anticipating a rise following Elon Musk’s appearance on SNL. Unfortunately for them, this provided sophisticated traders the opportunity to sell between 60-70c, before the large retail flows could be sold.

CONCLUSION

Memecoins are high-risk speculative investments. They’re typically traded by and marketed toward retail investors, who create and engage with the attention that fuels the popularity of these assets. Using a tool like Arkham, we can look into the on-chain activity surrounding these specific tokens e.g. the top holders, latest transactions, as well as price & asset fundamentals, to analyze whether a token might present a solid trade, or appears to be a high risk play prone to a rugpull.

>> Track Pepe on Arkham: PEPE token page

>> Track Shiba Inu on Arkham: SHIB token page