In 2013, a new cryptocurrency, Dogecoin, was minted as a joke making fun of the speculative frenzy surrounding Bitcoin. Then last August, an anonymous developer created the Shiba Inu coin, the canine mascot for Dogecoin, riffing off the previous prank. Somewhere along the way, the internet gags became very real.
The two “meme coins,” as they are called, are now the ninth and tenth most valuable cryptocurrencies by market capitalization worth a collective $79 billion. On Oct. 27, Shiba Inu, briefly surpassed the eight-year-old dogecoin in value for the first time. The coin soared on speculation that it might be listed on the exchange Robinhood.
The crypto market is full of puffery. But meme coins are among the most risky, and perplexing, investments. While other cryptocurrencies have at least a stated intent, such as bitcoin (form of payment) or ether (currency for the Ethereum, a blockchain allowing decentralized applications such as contracts), meme tokens are quite explicitly a collective joke.
Experts say the coins, despite having no underlying purpose, are accumulating value based solely on speculative market demand. As speculation has driven up the price of many assets in the past year—including meme stocks, crypto, non-fungible tokens, and other collectible items—meme coin prices are now the latest. Many retail investors will be burned if and when they do fall.
Cryptocurrency values are skyrocketing. The price of bitcoin, the first cryptocurrency, has nearly doubled since the start of 2021, while the coin ether has quintupled. Smaller coins, including Dogecoin and Shiba Inu coin, have seen even more drastic movement.
Dogecoin is cheap, at just $0.23 per coin, but the Shiba Inu coin is even cheaper: $1 will buy you nearly 14,000 coins as of Oct. 28. There is essentially an unlimited supply: one quadrillion Shiba Inu coins (that’s 15 zeros). That allows retail investors to accumulate hordes of coins cheaply, a tenet that’s emphasized in Shiba Inu’s whitepaper—or “woof paper” as its anonymous author Ryoshi calls it. Its rivalry against Dogecoin may be the biggest motivator behind the Shiba Inu coin project.
Dogecoin was originally intended as a way to tip online creators and the developers behind Shiba Inu are rolling out a “decentralized exchange” around the coin and other tokens, called ShibaSwap, the point of both Shiba Inu coin and dogecoin is unclear. But Shiba Inu’s motivation is clearly to dominate the dog-themed coin market through collective action.
“We earned the nickname Dogecoin Killer because the value of SHIB is primed and ready to overtake the value of Dogecoin,” Ryoshi writes. “Even if SHIB never hits $0.01, between our publicity and our utility, SHIB will be worth proportionately more than the popular, canine memecoin.”
The project has attracted investors in part because as bitcoin, ether, and other established cryptocurrencies become more expensive, cheaper coins present an opportunity to make outsized early returns (and losses). The logic driving these returns, however, is the psychology of an asset bubble, not fundamentals. “People put their money in bitcoin… because they hear other people making a lot of money and there is this fear of missing out, so they don’t want to be left behind,” said Itay Goldstein, a professor of finance and economics at the University of Pennsylvania’s Wharton Business School. Cheap meme coins capitalize on the same FOMO.
Meme coins buttress critics’ argument the crypto market, as a whole, is primarily a vehicle for speculation without real-world utility. “For [meme coins] to have value is a bad statement about how people are valuing a coin without actually understanding what it does,” says Eshwar Venugopal, a finance professor at the University of Central Florida. “I don’t think the average investor in the cryptocurrency market is really worried about what this project is doing, rather they are more worried about speculation.”
Merav Ozair, a blockchain expert and fintech professor at Rutgers Business School, fears that this could have serious consequences for the entire crypto space. “I’m afraid it will break down, it will blow up in the face of people who took the risk, then it will give a bad name to everything that has to do with blockchain and cryptocurrency,” she said. “People are not paying attention to the real use cases.”
Internet memes can essentially be any item of popular culture online, though they are best known as viral jokes, images, or videos. While their influence in pop culture and politics have been rising for decades, their influence over finance has just begun. In 2021, meme stocks like GameStop and AMC Entertainment turned heads after retail investors on Reddit and Discord’s WallStreetBets forums banded together to pump up the stocks squeezing of short-sellers they felt were undervaluing the stocks. (One hedge fund, Melvin Capital, lost 53% of its investments in January 2021 as a result.)
Now, communities on Reddit, Twitter, and other social media appear to be developing around meme coins in a similar way, boosting their values higher and higher. The key distinction—and risk for investors— is regulation. Public companies must provide financial disclosures and quarterly statements. While GameStop’s meteoric stock prices shows how online chatter and collective action can drive up stock prices (however disconnected from its underlying value), the business generates real revenue and assets. Meme coins are investment vehicles without any real business or product. And the lack of any regulation in the US means that consumers don’t know much about who is in charge of specific cryptocurrencies or what their basic finances look like. Even basic mandated financial disclosures will bring a “sea change” in how cryptocurrency projects are evaluated by consumers, Venugopal said. Transparency, in other words, could wipe out the riskiest investments.
Cryptocurrency value remains a bit of a mystery, Goldstein said. Experts still do not fully understand how cryptocurrencies should be priced, fundamental knowledge that could protect consumers from speculative bubbles. “It’s easier to analyze stocks because we have frameworks we can fall back on,” Goldstein said. “The problem with cryptocurrencies is you really don’t know what the price should be. In some sense, almost anything could be justified.”