Investing in Meme Coins? 3 Things Every Crypto Trader Should Know
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The concept of meme coins has become one of the most talked-about investment opportunities in the crypto space, with shiba inu’s 50,000,000% price gain in the last 12 months serving as a reminder of the potential profitability of these internet trend-inspired coins.
And while the huge upside potential of these assets and their seemingly innocent animal-centric mascots are hard to ignore, it’s important to note that investing in meme coins is an incredibly risky venture and can often result in massive losses through fraud, hacks and exploitation. Not to mention, the usual losses incurred by jumping on the bandwagon due to fear of missing out and watching your new investment plummet as the meme mob moves onto other shiny objects are also concerns.
So, the question is, how do you safely invest in these tokens?
1. Learn how to spot credible and fake meme coins
Before we start detailing the key features to look out for in a credible meme coin, let us first define the concept of meme coin itself. Introduced in 2013, meme coins are usually crypto projects built around meme-worthy themes and animals. For instance, dogecoin (DOGE), the first-ever meme coin, was inspired by the Shiba Inu (a breed of hunting dog developed in Japan) meme sensation (a picture of a presumably smiling Shiba Inu dog) that swept the internet in the early 2010s.
Notably, the success of dogecoin birthed a horde of other dog-themed coins, including the self-proclaimed doge killer (shiba inu coin or SHIB) which briefly surpassed the former in terms of market capitalization earlier this year. Unlike traditional cryptocurrencies, meme coins are not usually judged based on the utility they provide to users. Instead, more emphasis is placed on the coin’s capability to attract high community engagement. In essence, virality is the single most important factor required to gauge the success of meme coins. With this in mind, what then can you do to identify credible and fake meme coins?
The project’s goal
Although emphasis is not placed on utility, it is a good sign when the community backing the meme coin project shares something in common, apart from the desire to generate profits. It is a red flag when the entire community’s goal is to pump the value of the coin by encouraging new investors to buy the token hoping that it will drive the price even higher. For instance, SHIB’s community members collectively share the love for Shiba Inu dogs such that part of their goal is to raise funds to rescue strays. Moreover, the project has gone a step further to implement a decentralized exchange called ShibaSwap, in a bid to provide a bit more utility for token holders.
As such, it is critical to research the long-term focus of the project in question and how the project team plans to keep community members engaged with the network. You can do this by perusing the project’s whitepaper, its roadmap (if available) and following updates on the official social network accounts.
The track record of the development team
Those familiar with the crypto industry know that reputation is a vital factor to consider when determining the viability of a product or platform. Hence, it is advisable to unravel the identities of the core contributors of the project and their track records. Note that it may be impossible to find information about the members of the development team due to their decision to remain anonymous. In such cases, you can base your research on the design decisions of the team, especially tokenomics.
Tokenomics refers to the token distribution of cryptocurrencies. Be wary of meme coins where a single entity controls a significant portion of the token’s total supply. Such digital assets are prone to experience a price slump if the major token holder decides to dump (sell off) their coins. Therefore, it is advisable to go for a meme coin whose circulating supply is not concentrated among a handful of investors.
2. How to safely invest in meme coins
There are now over 250 meme coins all vying for the attention of crypto investors. A hundred of which contain the word “inu” in their name. While many may look legitimate, a majority of meme-inspired cryptocurrencies are simply scam projects designed to capitalize on the growing meme coin trend. You can reduce the risks involved by ensuring that the project is not prone to rug pull scams.
For those unfamiliar with the term, a rug pull occurs when the development teams suddenly sell off all their coins after driving the prices up. Investors are the ones with the rug pulled out from under them, leaving them flat broke as the price of that coin falls abruptly to zero. Squid token and snow dog are two of the most recent examples of meme coins that ended in an alleged rug pull.
Here are some precautions you need to take to avoid this type of scam:
Avoid coins where developers hold most of the tokens
As mentioned earlier, meme coins concentrated in the hands of a few investors or the development team are risky ventures. Therefore, ensure that no single entity controls over 5% of the token’s supply.
Verify the validity of the liquidity pools
In most cases, meme coins are distributed via automated market makers (AMM). This means when a token first launches, the development team creates a new liquidity pool for investors to use to purchase the token. Liquidity pools are smart contracts that allow investors to swap cryptocurrencies without the need for a third-party order book or counterparty. For example, an investor would likely exchange ETH for a new Ethereum-based coin on liquidity pools. To achieve this, the development team must provide liquidity. This is done by depositing both ETH and an amount of the meme coin in a liquidity pool. It is this liquidity that inventors would trade against to get their hands on the newly launched coin.
The problem however is that the liquidity provider, which in this case is the development team, can withdraw liquidity if the appropriate safety system is not put into place. When such incidents occur, the investors are left with no means of exchanging a coin that is fast losing its value. In light of this, it is vital that you only engage with pools held by burn addresses (any wallet address starting with oxoooo), which signals that the liquidity has been permanently locked.
Check the transparency and audit status of meme projects
When it comes to digital assets, development teams need to promote an open and transparent ecosystem. More importantly, the underlying code of the cryptocurrency needs to be audited by a reputable third-party software auditing firm such as Certik or Hacken, to ensure that the development team has not implemented back doors that might allow them to initiate an exit scam. Completed audits are usually shared across social media and can be easily found by a quick internet search.
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3. How to trade meme coins
When you find a viable meme coin, the next thing you need to consider is how to correctly trade this type of volatile asset. Remember that speculation fuels the prices of meme coins. Hence, you will likely have to contend with high volatility. With this in mind, here are some of the ways to invest in meme coins:
- Diversify your investment: Try as much as possible not to put all of your eggs in one basket. In other words, avoid investing all your funds into any single meme coin. Instead, adopt a more measured investment strategy. A share of your portfolio should be allocated to one or multiple meme coins, while the remaining can be distributed among more established and stable cryptocurrencies. A good trade allocation is around 5% of your entire portfolio. So if your portfolio is valued at around $10,000, the maximum you should invest in a single meme coin is $500.
- “Hodl” on for dear life: If you are sure of the viability of a meme coin, you can decide to opt for a long-term investment plan whereby you hold your position regardless of short-term price swings. In the instance of shiba inu coin and dogecoin, both cryptocurrencies took a number of years before they soared in value.
- Track community sentiment on social media: Do not forget that virality triggers the success of meme coins. Hence, it is advisable to track community engagement and gauge market sentiment to predict price movements. You can do this by visiting Reddit, Discord and Twitter and seeing firsthand what sort of community is building around the project and how many mentions it’s getting. Other tools for measuring sentiment include using subscription services provided by companies such as Intotheblock or The Tie, or “freemium-based” platforms such as Santiment and LunarCrush.
- Do not get sucked in by FOMO: When investing or trading meme coins, it is crucial to avoid emotion-based decisions fueled by the fear of missing out (FOMO) or greed. Be as objective as possible when dealing with cryptocurrencies, especially meme coins. Are you buying the meme coin at the top of a rally, or at a more suitable entry point? These are the questions you need to ask.
Read more: 15 Ways to Stay Sane Trading Crypto
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