What is a memecoin?

Memecoins represent a subcategory of cryptocurrencies centered around popular internet memes, pop-cultural references, and viral online trends.

Famous examples of these sorts of memes include the Japanese Shiba Inu dog Kabosu and different iterations of the Pepe the Frog cartoon, but even reach as far as celebrities like Elon Musk.

Memecoin creators leverage these themes to attract attention and trading volume from crypto market speculators. In many cases, high profile online influencers as well as forums like Reddit have also joined in on the excitement of memecoins.

Unlike other cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH) — which primarily serve as digital currencies — developers often create memecoins solely as light-hearted social experiments with limited utility.

Many see memecoins as a refreshing departure from the seriousness that often surrounds traditional cryptocurrencies. Memecoins have invited a new generation of users to engage with blockchain technology in an approachable and unconventional manner.

However, others see memecoins as extremely risky assets that undermine the legitimacy of ambitious blockchain projects. 

Whether you agree or disagree, it is still important to understand how memecoins operate, what they are most commonly used for and some of the risks you should know before entering the space.

The concept of memecoins dates back to the early days of cryptocurrency.

However, it wasn't until the advent in 2013 of the original memecoin called Dogecoin (DOGE) that the phenomenon gained significant traction.

Dogecoin was created as a joke by software engineers Billy Markus and Jackson Palmer. The coin featured the popular Shiba Inu "Doge" meme as its logo. Despite its origins as a humorous endeavor, Dogecoin’s comparatively low transaction fees and fast block times led to its adoption. 

From small-scale online tipping across sites like Reddit.com and charitable donations for international non-profits, Dogecoin’s technical capabilities helped it become a viable medium of exchange rather than solely a light-hearted joke.

Following Dogecoin's success, the floodgates opened for a variety of memecoins inspired by internet trends and jokes.

Coins like Pepe (PEPE) (inspired by the Pepe the Frog meme) and Shib Inu (SHIB) gained attention in their own right and also took the cryptocurrency community.

However, it was the rise of the decentralized finance (DeFi) movement and the non-fungible token (NFT) craze which would provide fertile ground for even more memecoin experimentation.

Memecoins have also tapped into the NFT mania, transforming viral internet characters into one-of-a-kind digital assets that users can own and trade.

For instance, a memecoin project might create limited edition NFTs featuring popular memes associated with their coin. Crypto users can buy, sell, or trade these NFTs on various NFT marketplaces, including Kraken NFT. This gives meme enthusiasts an opportunity to own a piece of internet history while supporting their favorite memecoin project.

Rare Pepes, and the Fake Rares collection that followed, are examples of some of the earliest NFT projects developed from viral internet memes.

Shiba Inu Coin (SHIB), one of the most popular memecoin ecosystems in today’s crypto space, also launched its own “Shiboshis” NFTs. The collection featured 10,000 Shiba Inu-inspired cartoon characters that holders can use to battle with inside Shiba Eternity — the project’s play-to-earn game.

Like many other popular NFTs, memecoin NFT holders have established their own private communities around their favorite collections. Some grants holders access to exclusive in-person events and opportunities to receive related merchandise.

If you want to learn more about the benefits of joining an NFT community, you can check out our blog post Why buy an NFT: Community membership.

DeFi refers to a collection of blockchain-based financial applications that aim to recreate traditional financial services in a decentralized manner.

Memecoins leverage DeFi protocols to create innovative ways for users to engage with their coins beyond mere speculation. These features can include staking, yield farming, and liquidity provision.

Staking: Memecoin holders might be able to stake their coins on DeFi platforms to earn rewards. These rewards could be in the form of additional memecoins or other tokens, providing users with an incentive to hold and participate actively in the memecoin's ecosystem.

The Shiba Inu Coin ecosystem is a leading example of how a memecoin project has flourished by incorporating DeFi elements into its protocol. SHIB token holders can swap ERC-20 tokens using its ShibaSwap platform, as well as perform a variety of tasks to earn SHIB and two other native tokens, BONE and LEASH. The DoggyDAO — a decentralized autonomous organization (DAO) — provides additional utility to token holders by granting them voting powers over key protocol decisions.

Yield farming: Yield farming involves lending your memecoins to others via smart contracts in exchange for interest. The memecoin's DeFi platform uses these loans to facilitate various activities, including trading or providing liquidity, and users are compensated for their contributions.

Liquidity provision: Memecoins can also create liquidity pools where users provide their coins for others to trade against on decentralized exchanges. This process enables users to earn a share of trading fees while contributing to the liquidity and efficiency of the memecoins market.

The viral nature of memecoins has meant certain projects in the past have enjoyed significant price gains, but also suffered sudden crashes.

As a result, these digital assets tend to attract highly speculative traders that are often willing to gamble away their capital for the small chance of making an outsized return.

The potential for quick profits can be alluring, especially when a memecoin experiences sudden price surges due to viral memes or social media buzz.

But it's important to understand that memecoins present a lot of unique, inherent risks compared with other types of cryptocurrency.

Extreme volatility

One of the most significant risks associated with memecoins is their extreme price volatility. 

The value of a memecoin can skyrocket one moment and plummet the next, leaving investors vulnerable to significant financial losses. The speculative nature of memecoins makes them particularly susceptible to sudden market shifts influenced by memes, news, or internet trends.

Lack of fundamental value

Many new memecoins often lack underlying technology or a tangible use case, which can lead to their value being solely reliant on market sentiment. While some memecoins find creative ways to integrate NFTs, decentralized finance (DeFi), or community-driven initiatives, many projects are primarily focused on humor and satire.

This lack of fundamental value increases the risk that the price of a memecoin may not correlate with any actual utility or demand.

Pump and dump schemes

The meme-driven nature of memecoins can attract bad actors looking to capitalize on the hype. Pump and dump schemes involve artificially inflating the price of a memecoin through coordinated efforts, only to sell off their holdings at the peak.

This often results in unsuspecting investors facing significant losses. These schemes exploit the speculative and emotional nature of memecoin trading, making it crucial for investors to exercise caution and conduct thorough research.

Lack of transparency

Anonymous or pseudonymous developers launch many memecoin projects, making it challenging to gauge the credibility and intentions behind the coin. Without proper transparency and accountability, investors may have no knowledge about the project's progress, updates, or potential risks.

Overall, memecoins represent a fascinating convergence of digital currencies, internet culture, and humor. As memecoins continue to capture attention and evolve, it remains to be seen how they will shape the broader cryptocurrency landscape and the ways in which they might find surprising applications beyond their comedic origins.

Kraken lets you buy, sell and trade the leading memecoins that continue to redefine the cryptocurrency ecosystem.

Sign up for your Kraken account today to get started in the world of memecoins.