Memecoins embody the “Wild West” image of decentralized finance. Thanks to the meteoric success of coins like Dogecoin (DOGE) and Shiba Inu (SHIB), the memecoin market collectively has a market cap of $54.4 billion – a number that would have seemed obscene when these assets first appeared. And yet we are here.
Most recently, in March, memecoin trading volumes reached levels last seen before the last cryptocurrency bubble burst in 2022. This rebound highlights a familiar trend: traders easily get swept up in the hype and fear of fear, to the point where they… They make rash investment decisions based on pure common sense and greed. In our digital asset valuation framework, the HashKey Capital team and I demonstrate the necessity of applying fundamental valuation frameworks and high-level technical analysis to navigate the inherent market volatility and avoid the risks of memecoin mania.
Without putting too fine a point on it, now more than ever we must deploy robust frameworks and exercise cold judgment to discern true value in these most turbulent markets. This is doubly true for institutional investors looking to gain a sustainable advantage and long-term value accumulation in digital assets.
In any financial market, there are times when speculative noise can overshadow a rational investment strategy. Witness the dot-com bubble, the subprime mortgage crash, and countless other examples.
In the cryptocurrency space, speculative hype is on steroids, driven by endless chatter on social media and the feeling that the next moon token is right under your nose. The Financial Times’ Joshua Oliver has written a new book about this phenomenon (“The Hype Machine”) that focuses largely on Sam Bankman-Fried and the cautionary tale of FTX.
Fundamental analysis provides the foundation needed to understand the intrinsic value of digital assets, beyond the veil of hype and propaganda spread by savvy marketers, arrogant venture founders, self-motivated airdrop farmers and the rest.
Critical factors to consider when evaluating the merits of investing in Web3 include the track record of the project team, the underlying technology used, practical use cases for what is being built, and tangible evidence of its real-world adoption.
This type of old-school analysis enables investors to look beyond short bursts of market excitement and evaluate the long-term viability of a project. It is an approach that relies less on short-term trading gains and more on sustainable value creation. However, many projects that are not feasible in the long term can still enrich some investors.
The appeal of meme currencies is understandable, even if we put aside the constant media hype and viral marketing. Although often ridiculed for their lack of intrinsic value, meme currencies have surprised the world with their performance. The staggering 12,000% increase in DOGE value in the first five months of 2021 is just one example of this (despite the 80% price drop by mid-December). Recently, Dojoyvat and Pepe achieved similar results – with the former helping the Stratos Liquid Fund achieve a 137% return in the first quarter.
While memcoins typically lack fundamental value and utility, their chances diminish according to the conviction of traders who engage in speculation. However, this does not mean that one can simply get the value of a memecoin. Getting involved in memecoin markets without a thorough analysis and clear understanding of the risks involved is gambling, not an investment.
The importance of fundamental analysis – especially in these volatile markets – cannot be overstated. These tools empower investors to make decisions based on rigorous research and solid evidence, rather than headlong into chasing the next unlikely success.
Meaningful valuation frameworks – including those that can be used to value memcoins as well – can help provide a more solid understanding of market dynamics in times of volatility. Using these methods, we can all see the hype – the “fairy dust,” as McConaughey’s wired character in The Wolf of Wall Street puts it, which may be magical for a lucky few, but ineffective for almost everyone else.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc. Or its owners and affiliates.