After an already substantial outperformance of memecoins in this cycle, the launch of memecoins by the new US President and his wife highlighted the sector further. Despite their lack of fundamental value, the memecoin cycle is likely to remain in progress and disproportionately benefit blockchains with a high market share in memecoin issuance and trading.
Performance of the Sygnum Memecoin Index versus the S&P Broad Crypto Market Index and Bitcoin
Source: CoinMarketCap, Sygnum Bank, S&P Global
Since the beginning of last year, memecoins have outperformed the rest of the market substantially.
Their outperformance has been fuelled by a combination of social trends, crypto regulation and the influence of key opinion leaders.
With a widening wealth disparity in major Western countries, many – especially young people – increasingly see gambling as their only path to financial security. The appeal of the possibility of instant wealth creation has increased, with strong growth in all forms of gambling – record revenues for casinos, fast expansion of online gambling and a parallel increase in gambling addiction, especially among young people. Trading highly volatile assets with the potential for extraordinary returns is a part of this trend.
In addition to social trends, the lack of clarity about the regulatory status of most crypto assets – with the risk that they would be regarded as securities in the traditional sense (something the previous SEC Chairman insisted on) – meant that the majority of crypto assets were structured without an economic relationship between the token and the revenues of the project. Although the hopes were, and remain, that an economic relationship will be established in the future, for now, many of the tokens trade as de facto memecoins, even when the underlying project is economically viable and successful.
Even when there is an economic relationship, a lot of the growth for most crypto projects is a long-term assumption, with current usage and revenues very modest. As pricing growth far into the future is extremely difficult, these tokens are also not too dissimilar to memecoins for now.
In addition, key opinion leaders, such as Elon Musk, have long influenced the rise of memecoins, and in the last few days, so has the new US President.
Memecoin cycle risks
The rise and strong outperformance of memecoins risks a hype cycle with a bubble that eventually bursts, as memecoins are not anchored in any fundamental value.
These projects are not productive in any way, and as they are simply tokens issued on other blockchains, they have poor store-of-value or medium-of-exchange properties. They also lack the scarcity of digital art and collectibles.
Ultimately, economic value is derived only from productive activity or from permanent, reliable demand for an asset – such as the fundamental need for a medium of exchange and a store of value or the human need for beauty (and status) through owning things of rare value. Memecoins do not do any of this and don’t even pretend to.
“Tokenised culture”?
Some describe memecoins as “tokenised culture” and assign value to them on that basis. This has some merit, as at least some memecoins signal growing cultural or social trends and function somewhat like prediction markets – betting on what will continue to grow in popularity.
However, the vast majority of memecoins are varieties of dogs, cats and other animals – these are obviously not cultural phenomena, and there is no “cultural” reason for why one dog-themed token is preferred to another or why the one with the knitted hat is the winner.
Recently, there has been a rise in tokens linked to political and ideological trends, and here, one can make the case that they are tokenising a rising social or cultural trend and a “shared narrative”. However, even if we can make the case that these memecoins are indeed tokenised culture, this already implies that they cannot maintain value in the long run. Culture is ever-changing; a political or ideological movement that addresses a current issue will lose relevance over time, and what is considered a hot trend at any given moment is always something new.
Shared narratives are only relevant for a period of time, and tokenising these cannot be the path to long-term value creation.
The history of hype cycles in crypto
The crypto market has a history of hype cycles – as do, of course, other markets, such as the late 1990s dotcom boom.
Examples in the crypto market include the 2015–17 ICO boom or the overhyped sectors of the metaverse and play-to-earn games, which relied on fundamentally Ponzi-like tokenomics in the last bull cycle. However, these hype cycles – as destructive as they were to the market when they burst – had some fundamental merit. ICOs are a sound method of fundraising, and innovating with new use cases is productive and beneficial. What went wrong at the time was the lack of consumer protection and disclosures, which allowed projects without any sound basis to masquerade as “useful innovation”. This led to a very great number of meritless “projects” launching without any innovation, business model, reasonable strategy or the resources and skills to ever create value. However, among the ICOs that launched, some were extremely sound and important innovations backed by strong teams – and these projects survived.
The experimentation with token models under the constraint of regulatory challenges was also valid – even if some tokenomic structures, such as play-to-earn, eventually turned out to be less robust than hoped.
For that matter, the dotcom boom also created a lot of value and very valuable companies, even if the majority of flaky internet companies that were created at the time had no hope of success.
But memecoins have no sound basis in any sort of lasting value creation, and therefore, a boom driven by this sector poses even greater risks to the crypto market than previous hype cycles.
Can there be real value in a memecoin?
Despite almost none of the memecoin projects making any attempt at creating value, in theory, it is possible for memecoins to lead to value creation.
The concept that successful memecoins create strong communities, which can later be leveraged to build something productive, is a sound idea. However, currently, very few memecoin projects pursue this or even suggest that they might one day.
Shiba Inu is an exception, having tried to leverage the success of the memecoin into launching a DEX, a Layer 2 network, a game and a metaverse. Although none of these were met with a lot of success in terms of user adoption, the project has at least been extremely active in trying to generate value.
It is also worth noting that Dogecoin is not a memecoin in the same sense as the rest of the tokens in the memecoin sector. Dogecoin is the native asset of a blockchain rather than simply a token launched on another blockchain. A blockchain protocol is fundamentally productive as long as it is technologically secure and has user adoption. Although Dogecoin failed to demonstrate any technological excellence until very recently, the promise of widespread adoption at Elon Musk’s companies – most importantly X – implied that there could be real value to the token. More recently, Dogecoin developers stepped up innovation, announcing a hybrid protocol that combines AI algorithms with blockchain technology, aiming for very high transaction speeds and reduced costs.
Should other memecoin projects attempt to create real value, this could change the trajectory and long-term viability of the sector.
Implications for the ecosystem
Other than the risk of a bubble, which inevitably bursts, memecoins also decredentialise the asset class in the eyes of institutional investors who are just beginning to consider allocations to crypto. Other than Bitcoin, which is increasingly accepted as an alternative to gold, the appearance of a lack of successful, productive use cases – but instead a market comprised of tokens with no pretence of any value – is unlikely to attract pension funds, insurers, endowments or sovereign wealth funds.
The memecoin cycle also diverts capital away from productive use cases and genuine innovation in the crypto space.
A further implication of the memecoin boom is its impact on the competitive landscape among blockchain protocols. While Ethereum remains the mainstay of a wide range of use cases, Solana is the clear winner in terms of memecoin issuance and trading. The Trump and Melania memecoins, choosing to launch on Solana, provided a signal to the market and further bolstered activity on the protocol. As memecoins lead the market and overshadow other use cases, Solana is set to keep rising in prominence and remains the biggest beneficiary of the trend in terms of revenue generation and market share gains. Other blockchains with a focus on memecoins, such as Sui or TRON, are also benefitting.
However, it is important to note that while the “picks and shovels” of this trend – the platforms on which these coins are issued and traded – are benefitting currently, they are also likely to be disproportionately affected when the bubble bursts. Just as Ethereum was the primary beneficiary of the ICO boom – at the time coming close to overtaking Bitcoin in market capitalisation – Ether underperformed Bitcoin by 85 percent after the ICO bubble burst, and despite the subsequent growth of the Ethereum ecosystem and the protocol’s revenues, it never recovered its relative value vs Bitcoin.
Summary
With the new US President’s support for the memecoin market, there is little sign that the memecoin cycle would be slowing, and the sector offers opportunities for profitable trading. However, the risk of the bubble bursting should be kept in mind. Ultimately, in the long run, only assets with actual value prevail.
As US crypto regulation clarifies the status of crypto assets, the hope is that this would allow tokens to have a link to economic value creation. This would reinvigorate innovation among productive use cases and redirect capital away from memecoins towards projects with real economic value.
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