OKX Insights takes a deep dive into the rise of meme coins to examine their impact on the cryptocurrency ecosystem.
In Q2 2021, the rise of meme coins put cryptocurrencies deeper into the mainstream consciousness than ever before. Dogecoin, one of the earliest meme coins, gained tremendous popularity following various tweets from Tesla CEO Elon Musk and extensive coverage from media outlets. The rise of DOGE also fostered the growth of a wider meme coin ecosystem — bringing new dog-themed tokens to the table, such as SHIB and AKITA.
In this OKX Insights article, we delve deep into the meme coin phenomenon. After introducing the pioneering meme coin, DOGE, we look at the history of meme coins and highlight their key developments. We then examine the value proposition of meme coins and discuss whether their rise promotes a healthier cryptocurrency ecosystem.
In examining the value proposition of meme coins, we first look at how the rise of meme coins leads to the tokenization of memes and brings new investors to the ecosystem. While new investors may suffer from the price volatility of meme coins, we consider the regulatory implications of meme coins for the wider cryptocurrency community.
Finally, we also examine the network fundamentals of meme coins to indicate the health of meme coin blockchains over the years.
A history of meme coins
Meme coins are cryptocurrencies based on internet memes, and their development is divided into three phases:
- The inception of meme coins in 2013
- The initial coin offering craze in 2017 and 2018
- The latest meme coin mania in 2021
2013 and 2014: Dogecoin becomes popular on Reddit
Dogecoin is, by all accounts, the first meme coin in the cryptocurrency space. The coin initially started as a joke between IBM software engineer Billy Markus and Adobe software engineer Jackson Palmer. Both founders had never met when they created DOGE as a combination of two hot internet topics: cryptocurrencies and doge memes.
Featuring an image of a Shiba Inu, DOGE gained immediate traction among the internet community. The meme coin’s website, dogecoin.com, gathered over a million unique visitors in the first month after its launch. DOGE also garnered interest from the Reddit community following the creation of the subreddit r/Dogecoin in December 2013. The cryptocurrency quickly became the second-most tipped currency on Reddit.
Dogecoin increased in popularity in 2014, when the Jamaican bobsleigh team received $25,000 in DOGE from their supporters to fund their attendance at that year’s Winter Olympics in Sochi. The Dogecoin community on Reddit also raised 67 million DOGE — approximately $55,000 at the time — to sponsor Josh Wise, a driver who needed financial assistance to attend the iconic Nascar race at Talladega Superspeedway. Wise’s “#98 Moonrocket” car was covered in images of Dogecoin and the Reddit logo.
Despite Dogecoin’s early publicity, the pioneering meme coin failed to thrive — due, in large part, to a lack of technical development. Dogecoin is a fork of LucKYCoin, which is a fork of Litecoin, which is a source-code fork of the Bitcoin Core client. As an internet meme, the community did not seriously consider developing the cryptocurrency. Dogecoin co-founder Jackson Palmer stepped down from the project in 2015, citing the toxic Dogecoin community as his primary motivation for leaving.
2017 and 2018: Meme coins and the ICO bubble
Dogecoin regained the attention of the crypto community during the initial coin offering boom in early 2018. The cryptocurrency reached the milestone of $1 billion market capitalization over Christmas 2017 before doubling that figure in early January 2018.
The ICO mania also led to the rise of other meme coins, such as the Useless Ethereum Token and MEME. These meme coins drew significant capital from investors, despite their apparent lack of fundamental value. Such irrational investment activity invited regulatory scrutiny, with the United States Commodity Futures Trading Commission warning the general public about digital currency pump-and-dump schemes.
2021: Meme coins go mainstream
The cryptocurrency community witnessed a meme coin renaissance in the first half of 2021.
The renaissance began when Wall Street hedge funds such as Melvin Capital took short-selling positions on GME — the stock of GameStop Inc. — to reflect their bearish outlook on the company. Led by retail traders, members of the subreddit r/WallStreetBets bet against the Wall Street giants by pouring their capital into GME. This led to an explosive rally for the stock and caused heavy losses for the short-sellers. After this, the subreddit r/SatoshiStreetBets decided to pump DOGE to replicate the GME stock price rally.
Dogecoin also gained mainstream attention after Elon Musk’s repeated tweets about DOGE. The Tesla CEO made his first comment on Dogecoin in 2019, after the Dogecoin community had first elected him to be the project’s CEO via a Twitter poll. Musk’s response was that DOGE might be his favorite cryptocurrency, and he then updated his Twitter bio to “former CEO of Dogecoin.” The SpaceX founder reiterated his support for DOGE in February 2021 and, as of May, was considering accepting DOGE in the sale of Tesla electric vehicles.
Musk’s Dogecoin endorsements created a ripple effect. Billionaire and Dallas Mavericks owner Mark Cuban accepted DOGE for ticket sales. The growing community interest saw DOGE temporarily surpass BTC as the most searched cryptocurrency on Google.
Dogecoin’s surging popularity also led to the rise of various dog-themed meme coins, such as SHIB and AKITA. These tokens were listed on major cryptocurrency exchanges, including OKX, and became popular, particularly among Chinese traders.
Despite the market hype, dog-themed meme coins remained volatile as market movements heavily influenced their price. For instance, the price of DOGE once plunged over 30% after Musk called DOGE a “hustle” during his Saturday Night Live performance.
Meme coins are not all jokes and laughs
While meme coins are now almost unavoidable when it comes to crypto discussions, and with many crediting them for onboarding new users to the space due to their low price barriers and massive hype, their entry into the mainstream is not without pitfalls.
New investors are unlikely to understand the risks
Active promotions by social media influencers have drawn new investors to the meme coin sphere. The most notable example is Elon Musk. According to a survey by Piplsay, 37% of Americans have made or considered investments as a result of Musk’s tweets. Musk’s active Dogecoin push has reignited some popularized hype-train claims such as “DOGE to $1” and “DOGE to the moon.”
This hype and surging demand for DOGE have drawn massive interest from traders outside the crypto sphere. Most new DOGE buyers came from the popular but not crypto-native trading app Robinhood — and during the sharp DOGE price spikes in mid-April and early May, we saw service outages on Robinhood and Indian cryptocurrency exchange WazirX, respectively.
Even though DOGE appears to be a decentralized digital currency, its ownership is, in fact, very centralized. The largest DOGE address alone holds 28% of the current DOGE supply, and the top 20% of DOGE addresses control over 99% of the current DOGE supply. While the identity of those in control of the top DOGE holding addresses remains unknown, any material DOGE transfer from these wallets is likely to significantly move the price.
Moreover, with meme coins like DOGE, new investors are seeking quick gains, but are not always familiar with fundamentals such as market capitalization. ETH, the second-largest cryptocurrency — and one of the most widely used — currently has a market cap of around $300 billion. In contrast, for DOGE to reach the much-chanted $1 milestone, its market cap will have to exceed $130 billion. Even if that happens during a bull run, it is far from a feasible valuation with DOGE’s current state of development and utility.
Bobby Ong, a co-founder of cryptocurrency data provider CoinGecko, highlighted this in his comments to OKX Insights:
“Many speculators buy into these meme coins expecting a quick return without understanding the utility and valuation of these tokens. Thus, they may stand to get burned from sudden price movements like what happened recently.”
Putting this further into perspective is the fact that since the last major software update — that is, v1.14 — in June 2019, Dogecoin had not released a significant update until March 2021. Even the latest version involved minor updates such as improving synchronization speed.
All that being said, meme coins can give investors significant gains, especially in a speculative market. However, the potential for massive price volatility means investors are also exposed to significant downside risks. Additionally, unlike tokens with strong fundamentals and use cases, such as those related to decentralized finance, meme coins have little more than hype and speculation backing them. This in itself is a major risk factor that new investors may not readily understand.
Sharing these sentiments, Eloisa Marchesoni, an angel investor in blockchain businesses, told OKX Insights that:
“During the market correction, the losses of meme coins are more significant, and the chances of their recovery seem particularly slim. Compared to Bitcoin, there is no intrinsic value for DOGE’s copycat coins. These coins are created to capitalize on a temporary trend that is inevitably destined to die out.”
Increased volatility invites regulatory scrutiny for the entire space
Given how meme coins typically attract new people to the space, and they are inherently risky (as discussed above), any dramatic moves they make run the risk of inviting regulatory criticism and scrutiny for the entire space.
Regulatory bodies, understandably, aim to protect investors, and meme coins pop up on their radars when their market caps run into billions of dollars with weak or no underlying fundamentals.
Unfortunately, any measures taken against these kinds of risky investments are likely to affect the entire space, not just meme coins.
Kristi Swartz, the managing partner at law firm Swartz, Binnersley & Associates, told OKX Insights that regulators are less likely to devise a specific framework for meme coins. She elaborated:
“As can be seen from the recent price action of DOGE (and various virtual assets with canine-related names), a major risk attached to meme coins is retail investors being adversely affected by price swings that are seemingly driven by public comments of social media influencers with a large following. However, established virtual assets can also be subject to sudden price movements following public comments from key opinion leaders, albeit to a lesser degree.
Consequently, we do not expect that regulators will devise a framework specifically for meme coins. Instead, we expect that the approach will be to devise a comprehensive regime that adequately regulates all types of virtual assets.”
Are meme coins here to stay?
Led by the rise of DOGE, meme coins are one of the most rapidly growing sectors in the cryptocurrency sphere. The popularity of meme coins seems like a double-edged sword for the entire space. While meme coins draw new investors to the cryptocurrency sphere, they also expose them to significant risks.
While most media coverage has focused on the market hype of meme coins, their fundamentals remain weak and are not often highlighted or understood. Compared to major cryptocurrencies like ETH, meme coins like DOGE have limited technical development, as shown in the infrequency of software updates and lack of fully synced nodes. In addition, the community is doubtful of the ambitions of meme coin projects because of their questionable tokenomics.
Currently, there’s a lack of consensus on the fundamental value of meme coins. Some believe that the rise of internet memes and meme monetization fuel the growth of coins like DOGE and SHIB. Others believe that growing network fundamentals, such as transaction metrics and mining profitability, play an important role in these ecosystems.
Despite their trendy appeal and potential to rally communities, meme coins fall short of being valuable long-term investments in the absence of fundamentals and unique use cases.
Henri Arslanian, the global crypto leader at Big Four accounting firm PwC, shared his concerns in his comments to OKX Insights while summing up this phenomenon perfectly:
“I actually think that the rapid rise of DOGE is a risk to the crypto community, as it amplifies all the wrong stereotypes that many associate with crypto. My worry is that many people who are investing in DOGE have basic or no understanding of cryptocurrencies. And that never ends well.
However, I really think that the DOGE phenomenon is captivating, as it shows the intrinsic value in a community and a movement. If I was a PH.D. student in economics now, I would definitely do my thesis on the DOGE phenomenon.
I think that the DOGE and the WallStreetBets movements are to this generation what the Rolling Stones and the Beatles were to the previous generation.”