Psychology of Memecoins

So why did people flock to memecoins, even before they were known for their insane price swings? The answer lies in the name itself–it’s all about the MEMES! See, memes aren’t just funny pictures or videos; they’re a form of expression. Think about your favorite meme. Maybe fans of the “Distracted Boyfriend” meme relate to being torn between different temptations. Those who love the “This is Fine” meme often find themselves in stressful situations but try to keep calm and carry on. Fans of the “One Does Not Simply (walk into Mordor)” meme probably face difficult tasks, or they just really like Lord of the Rings! 

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The point is, everyone has a different reason for liking, sharing, and engaging with a meme. Regardless of the reason, memes are a reflection of one’s identity. The expressiveness packed into a simple meme can say so much about who a person is. Naturally, the same logic applies to memecoins!

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Dabbling in memecoins is, in itself, a statement. In the early days of crypto, investors who were focused on intrinsic value typically only bought Bitcoin and Ethereum. They could read whitepapers, attend conferences, and participate in network development. But DOGE didn’t have an inherent use case or technical innovation–it was simply a meme. So, for those who didn’t want to take crypto so seriously,  DOGE became a way to experiment and have fun in space. Back then, it was all about “the vibes” and the community. 

Even Elon Musk understood this when he got involved with Dogecoin. Memes are much more relatable to the common Joe than terms like “digital gold” or “a smart contract hub”. Memecoins allow people to express themselves just like regular memes. For instance, even before the 2024 U.S. presidential election, crypto users were purchasing memecoins like Jeo Boden (BODEN) and Doland Tremp (TREMP) as a way of showing political support. It's not just about investing–it's about making a statement.

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While memecoins are often seen as speculative assets, they offer several potential rewards. Here’s why people are drawn to them:

• Speculation and the "Get Rich Quick" Appeal

Memecoins are infamous for their high volatility. Unlike traditional investments, which typically yield returns over months or years, memecoins can experience dramatic price swings within days—or even hours. Investors might see their portfolios multiply by 2x, 10x, or even more in a single day if they’re lucky. For short-term traders and early investors, these rapid shifts present opportunities for significant profits.

• Example: In 2021, Dogecoin surged over 12,000% in just a few months, turning casual investors into overnight millionaires.

• Community Involvement
  Memecoins often foster tight-knit communities built around shared interests or internet culture. By investing in a memecoin, people feel like they’re supporting a community or participating in a collective social movement. Plus, with celebrities and influencers also engaging in memecoin communities, fans have a chance to interact with their idols in a fun, casual way. 
• Accessibility for Beginners
  Since most memecoins don’t have an inherent use case, they do not require advanced technical knowledge to understand. They’re simple to purchase and trade, making them appealing to newcomers who are still learning the ropes of cryptocurrencies (e.g. DeFi, NFTs). 
• The Fun Factor
  Let’s face it—investing can be boring. Not everyone wants to spend their days studying whitepapers or analyzing charts like a pro trader. Memecoins make investing feel more approachable and entertaining through laughs and vibes. They make finance more FUN. 
• Financial Nihilism
  Some investors turn to memecoins as a form of financial rebellion. Financial nihilism–the belief that traditional financial systems lack value or meaning)–leads some to reject conventional investments in favor of something unconventional such as memecoins. It's an act of defiance against the old guard of finance.

At the end of the day, investing in memecoins isn’t just about making money–it’s about fun, connection, and sometimes even rebellion.

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As tempting as memecoins may be, they come with significant risks. Understanding these pitfalls is crucial for any investor. 

One of the most prevalent dangers comes from pump-and-dump schemes and rug pulls. Due to the ease of creating and promoting new coins, the memecoin space has become a breeding ground for scams. Pump-and-dump schemes rely on artificially inflating the value of a coin through coordinated hype, only for creators or early adopters to sell their holdings at the peak, leaving latecomers with heavy losses. Rug pulls occur when developers abruptly abandon a project after amassing substantial funds, rendering the coin worthless. A notorious example is the Squid Game Token, which saw its value surge before crashing to zero when developers vanished with millions.

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Another challenge with memecoins is their inherent lack of utility. Most memecoins get their value from social media trends and hype rather than functional use cases. This makes them highly vulnerable to shifts in public sentiment. Unlike functional cryptocurrencies with strong networks and ongoing development, memecoins risk becoming irrelevant when the excitement wanes. A non-viral meme coin might as well be as good as a dead one.

Compounding this issue is the bandwagon effect, or FOMO (fear of missing out). Seeing others profit or noticing high-profile endorsements can tempt investors to jump into the market. Despite not doing any prior research or buying when price has already significantly rallied, the fear of missing out can cause people to get caught up in the hype and make bad financial decisions. FOMO can come from close friends/family, other investors, or even famous influencers endorsing a coin. Celebrities like Elon Musk, Snoop Dogg, Mark Cuban, and even Donald Trump have amplified this phenomenon, as a single tweet or mention from them can ignite investment frenzies. However, entering too late or choosing a lackluster project can lead to substantial losses.

Memecoins are also notorious for their extreme volatility. While this volatility can produce massive gains, it equally poses the risk of significant losses, especially for those using leverage. The same hype that propels memecoins to dizzying heights can cause abrupt crashes, erasing wealth in moments. These downturns can leave people with little to none of initial capital, depending on how reckless they were. For example, Dogecoin (DOGE) experienced a value drop of over 70% just months after reaching its peak in May 2021. This volatility requires investors to have a high risk tolerance, sound risk management, and the ability to remain calm during rapid market swings.

Market saturation further complicates the landscape, with thousands of memecoins competing for investor attention. The sheer volume of projects dilutes resources and makes it challenging to identify promising coins amid a sea of mediocrity. 

Lastly, regulatory uncertainty adds another layer of risk. On one side, the lack of clear crypto regulations has allowed scams to proliferate, leading to significant investor losses. On the other, increasing scrutiny from authorities has made it more difficult for legitimate projects to gain traction. Platforms like Pump.fun, which gained notoriety for controversial practices, have highlighted how unregulated environments can also lead to abuse.

Understanding these risks is crucial for anyone considering investing in memecoins.

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Pump.fun 2024 Controversy: Pump.fun, a Solana-based cryptocurrency launchpad, enabled the easy creation, trading, and listing of tokens on Raydium, a popular decentralized exchange (DEX) on the Solana network. This led to the launch of thousands of memecoins, however many of these projects turned out to be harmful.  

A particularly controversial feature was its unregulated livestream option, where users would engage in questionable and even illegal activities to generate hype around their tokens. For example, beyond the usual pump-and-dump schemes and rug pulls, some users went as far as threatening to self-harm, harm animals, or even harm other people on live stream should their token not reach a certain market capitalization. 

Pump.fun eventually removed the livestreaming feature, in response to growing public and regulatory backlash. This issue highlights the urgent need for better regulation in the memecoin space.

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Investing in memecoins is inherently risky, but there are strategies to minimize potential losses:

• Research the Project and Community: "Do Your Own Research" (DYOR) is a mantra in the cryptocurrency space. Before investing in a memecoin, assess the project’s team, community activity, and long-term vision. A strong, engaged community can indicate a memecoin’s potential stability. Always read the whitepaper, if it has one. And don’t buy based on hype alone. 
• Learn to Identify Scams: Watch for red flags such as anonymous developers, unrealistic promises, and lack of transparency about tokenomics. Be cautious of coins that rely solely on marketing without offering tangible value or purpose. Check on-chain data and look for overly concentrated token supply in a few wallets. That smells like a rug pull from a mile away!
• Understand Market Cycles and Timing
  Memecoins often follow boom-and-bust cycles linked to social media trends. Recognizing these patterns can help investors buy at optimal times and avoid getting caught in market crashes. Given the high-risk nature of memecoins, it is generally best to avoid them when they aren’t performing well. Holding a losing memecoin could quickly drain 50-90% of your portfolio. On the flip side, entering at the right moment can yield quick returns. 
• Diversify your Portfolio
  Don’t put all your eggs in one basket. There are thousands of memecoins, and you can’t predict which one will take off. You can’t just buy one or two memecoins and expect to make 100x. Moreover, don’t just buy memecoins or even just cryptocurrency. Exposure to different asset classes helps protect oneself from an underperforming sector. Try out memecoins but also consider buying established assets like Bitcoin, Ethereum, or even stocks, bonds, or commodities. 
• Only Invest What You Can Afford to Lose
  Given the speculative nature of memecoins, it’s crucial to treat them as high-risk investments. Never invest money that could jeopardize your financial stability. Limit memecoin exposure to a small portion of your portfolio and only invest funds you can afford to lose, especially in memecoins. They could quite literally lose their entire investment. 
• Stick to your Plan
  Whether trading or investing in any asset, always have a plan and stick to it. No one will get every call right, so ensure you have backup strategies in place. Use stop losses, take-profit points, and price levels where you start tranching in (dollar-cost-averaging) and tranching out. 
• Secure your Assets
  Cryptocurrency is a prime target for phishing scams, malicious links, and even just plain negligence that can cost you everything. Use strong passwords, enable two-factor authentication (2FA), and never share your private keys. Write them down physically and make sure not to keep them online. Moreover, avoid clicking on suspicious links and try to limit browsing random websites on the same device you store your crypto in. Consider investing in a cold wallet as well for the extra security.

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Now, we know more about the psychology behind memecoins, as well as the benefits, risks and how to guard against them. 

Finally, let’s take a look at where memecoins can go in the future!

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