From memes to multibillion-dollar pumps, scams and rug pulls
Memecoins, or meme cryptocurrencies, started as a cultural phenomenon with the launch of Dogecoin (DOGE) in 2013, inspired by an internet meme and a critique of the wild crypto market at the time.
Dogecoin was developed by software developers Billy Markus and Jackson Palmer as a joke to mock what many saw as an irrational investment hype surrounding cryptocurrencies.
Memecoins started as a form of social token. They were often created and promoted by online communities or individuals with a shared interest or sense of humor. The social element of memecoins played a significant role in their success and adoption. Other reasons for their popularity could be the sizeable total supply and low token prices.
A decade later, memecoins are a multibillion-dollar ecosystem, popular as a high-risk, speculative investment.
From DOGE to Pepecoin (PEPE), memecoins have come full circle. From their initial inspiration as parodies of cryptocurrencies to now being the same parody they were mocking, attracting irrational speculative investment to drive up prices.
Pepecoin’s popularity helped it explode to a market cap of over $1 billion, but within days its market value shrunk by more than 40% to below $600 million.
Ironically, the concept of memecoins has become a meme itself. While there are always stories about how a random trader turned a few hundred dollars investment into millions; for that one lucky trader, many others lose their life savings.
2021 bull run a turning point for memecoins
The 2021 bull market transformed memecoins from parodies to legitimate investment options. Before 2021, memecoins were primarily social media based, with strong internet communities driving their popularity. This changed when the unofficial DOGE ambassador emerged — Elon Musk.
Musk became an ardent supporter of DOGE, and the community behind it declared him the project’s unofficial CEO. The Musk-Doge relationship started as a continuation of the meme concept. Musk said on many occasions that he loved memes and, therefore, loved the idea behind a cryptocurrency like DOGE.
With the 2021 bull run fueled by increased institutional interest in cryptocurrency and Bitcoin (BTC), Musk started pitching DOGE as the true internet currency. The tech billionaire’s backing did wonders for the memecoin, with its price surging 23,000% in 2021.
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With the Dogecoin surge, the memecoin frenzy became a new phenomenon in the crypto market. This lured many new participants — from seasoned traders to regular people — to the crypto market, hoping to ride the bullish wave. Other memecoins started to emerge, with many newly minted tokens recording multidigit price surges, sometimes just based on a tweet from Musk himself.
The 2021 memecoin frenzy made many new crypto millionaires and attracted new traders to the ecosystem. In a year that saw memecoins break into the top 5 cryptocurrencies by market cap, there was no shortage of stories about traders losing their live savings after buying tokens at market tops or believing Musk would continue to influence prices positively.
Multitudes of new traders tweeted at Musk to post about DOGE; however, as soon as the frenzy died down, the token lost over 90% of its value.
Since the DOGE craze of 2021, the market has been inundated with tens of thousands of memecoins and “shitcoins” trying to become the next Dogecoin or Shiba Inu (SHIB).
Anjali Young, the co-founder of the community-focused blockchain application development platform Abridged, told Cointelegraph that the current memecoin frenzy is all about managing fear of missing out (FOMO).
“One crucial bit is managing FOMO. There are many approaches on how to handle it, and it’s best to find the one that works for you. For some, formulating a buying thesis and sticking to it or only investing what they’re prepared to lose helps. That being said, it’s important to mention that with cryptocurrency operating 24/7, it’s easy to get swept up in the constant influx of news and trading activity. When you succumb to FOMO, learn your lesson and move on. And then get back to managing that FOMO,” she explained.
Era of anonymous meme tokens filled with scammers and rug pulls
In addition to the memecoin speculation frenzy, observers were concerned about the risks posed by the new cryptocurrencies.
New anonymous memecoins often come with many smart contract vulnerabilities, including closed-source contracts, proxy contract mechanisms, tradeable logic with pause functionality (rug pull risk), and setting high sell taxes hindering token sales. These vulnerabilities can potentially result in losses for traders.
Gracy Chen, managing director at crypto exchange Bitget, told Cointelegraph that while original memecoins like DOGE and SHIB still have a solid community base, new closed-source and anonymous meme tokens are mostly scams.
“Most of the new era memecoins are anonymous in nature with many contract vulnerabilities. Some memecoin issuers concentrate on a large number of chips in a single EOA [externally owned account] address or distribute them across multiple addresses under their control, which poses significant risks of short-term dumping. When trading memecoins, especially newly deployed ones, it is essential to exercise extreme caution and do your own research,” Chen explained.
The dark side of the frenzy became evident in 2023, with several new scam tokens being launched in the garb of being a meme currency.
In May, blockchain analytic firm PeckShield released a report warning the crypto community to be wary of fake meme tokens. The security firm listed 24 scam meme tokens created in the first week of May.
#PeckShieldAlert We have detected a series of #rugpulls involving the creation of ~24 Scam #MEME Tokens within the last 10 days. #SHITMEME, #BENS, #WorldCoin, #MONKEYS, #ERDR, #Magneto, #STARK, #ZAT, #LADYBOY, #USACOIN, #WLD, #POGO, #Miniclip, #PORN, #FROGS, #RNDT, #PSYOP,… pic.twitter.com/KlBX5k9Go6
— PeckShieldAlert (@PeckShieldAlert) May 23, 2023
ZachXBT, an online sleuth known for exposing scams, highlighted how one account created 114 scam meme tokens in just over a month.
Another popular memecoin scam stemmed from the moderator of the popular trading subreddit r/WallStreetBets. The group created a memecoin called WSB Coin (WSB), claimed it was the official memecoin of Wall Street Bets, and launched it on May 2. The WSB token’s developers asserted that 10% of the coins would be set aside for the subreddit, with no allocation for the team.
On May 4, the moderator dumped a significant chunk of the meme token on the market, and within two days, the token’s price plummeted from an all-time high of $0.00067279 to an all-time low of $0.00004827 at the time of writing.
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According to Satoshi Nakamoto’s original vision, the purpose of crypto is to solve traditional finance’s limitations and provide greater access to everyone. While some people have achieved financial freedom through memecoin speculation, looking at history, most people end up on the losing side.
Kadan Stadelmann, chief technical officer at Komodo, told Cointelegraph that there are two main reasons why the current trend of memecoin investment is bad for the crypto ecosystem:
“First, it dilutes the potential funding that might otherwise go toward serious projects that have more innovative tech and real use cases. Second, many portfolios will lose value as a result of either not selling at the top or chasing scam projects.”