Meme Coin Mania: What’s Going On and What Are the Risks?

To the disinterested onlooker, the crypto winter may look like it’s over, as a particular frog-themed coin ascends to dizzying heights and the familiar aroma of FOMO permeates Crypto Twitter. But what’s really going on here?

Tokens like Pepe, Wojack, and WSB are the latest sensation among degens, a crypto-specific term for traders with an insatiable appetite for risk, willing to bet big on obscure tokens that have had little time to cultivate a reputation.

Nate Rivers, a self-professed degen, explained his decision to snap up over 31 Ethereum, or $58,000 worth, of a newly launched meme token called Wall Street Baby on Twitter Thursday. While providing insight on his trade, he wrote: “I’m mentally unwell.”

Cryptocurrencies are often billed as part of a permissionless ecosystem, where blockchains are open and anyone can create a token. And as a result, one could say that passing judgment on whether or not a coin is dangerous for investors goes against the ideals of Web3.

The glorification of risky trades is not isolated to remote corners of crypto, either. Prominent communities like Reddit’s Wall Street Bets have taken a similar YOLO approach to stock trading for years. But decentralized finance, or DeFi, has bolstered the meme coin scene in recent years.

There may be a new meme coin every minute, but meme coins as a category aren’t new. Launched in 2013 as a joke, Dogecoin was one of the first notable examples, and it has since achieved a market cap of nearly $11 billion, as of this writing, according to CoinGecko.

Its success has opened the door to a cadre of canine-themed coins, whether that’s tokens like Shiba Inu or, more recently, Bonk. And though Pepe is an amphibious phenomenon, it shares similar characteristics with other meme coins, writes Lim Yu Qian of CoinGecko.

“Meme coins are a very risky type of crypto because they are based on Internet cultural references,” she wrote Thursday. “The price movement depends on whether the meme coins can stay relevant by driving hype.”

Of the 179 meme coins tracked by CoinGecko, Qian notes that Pepe is one of the only meme coins to break into the top 100 by market capitalization, aside from Dogecoin and Shiba Inu. And Pepe is on a tear, for now, up over 2,900% over the past 17 days, according to CoinGecko.

The sense of hype surrounding Pepe is undeniable. DeAndre Cortez Way, more commonly known as the rapper Soulja Boy, is gleefully contributing to Pepe’s exposure. “I done got rich off #PEPE,” he Tweeted on Wednesday.

It’s worth noting that Way is just one of several personalities on Twitter giving Pepe the thumbs up. However, there are some digital asset veterans who advocate a cautious approach toward meme coins.

Thomas Kralow, the founder of University Grade Trading Education, told Decrypt that meme coin mania reminded him of a quote from the mathematician Isaac Newton: “I can calculate the motion of heavenly bodies but not the madness of people.”

Kralow said he would never recommend investing in them, arguing that meme coins have nothing to support their price once the sense of “hype dies out,” often leaving their value attached to lackluster utility.

“It’s not a very sound investment, it’s just gambling,” he said. “Those who invested in Pepe Coin were lucky that it picked up, while there [are] thousands of others that didn’t.”

The cautious sentiment toward meme coins was echoed by Chen Arad, COO and a co-founder of Solidus Labs, which last year acquired Token Sniffer, a tool that scans smart contracts for scams. He told Decrypt that hype, buzz, and FOMO are often conducive to fraud and price manipulation.

“If you make the right bet at the right time, you could theoretically make high gains, but buzz and FOMO are a scammer’s best friend, since they push investors to make rash decisions,” he said. “We suggest a high degree of cautions when considering investing in meme coins.”