Cryptocurrency’s unique, decentralised approach to value creation is disrupting age-old financial industries at an astonishing pace. At the same time, a new generation of investors are flooding in, ignoring traditional ways of assessing value and instead just riding a speculative wave based on nothing more than memes. But why are investors seduced by cute dogs and not fundamentals - what makes memecoins so popular?
A meme is one of those things that you know when you see it but would struggle to understand from a strict dictionary definition.
Memes are essentially clever ways of boiling down complex ideas into instantly shareable ideas via humour and the internet.
Disaster Girl is a great example. It's a photo taken in 2004 by Dave Roth of his four year old girl in front of a burning building.
The image itself has an obvious narrative - mischievous girl - but it is also the perfect canvas for other humorous takes that can be instantly understood when shared.
Disaster Girl became so popular that it was sold as an NFT for $500,000 in April 2021.
A memecoin utilises the power that memes have to cut through complexity - of which cryptocurrency has plenty - and reduce it to a simple narrative.
Dogecoin is the original memecoin, based around a Japanese breed of dog, the Shiba Inu, which has absolutely nothing to do with the project itself, or the function of the coin. It just represents the ethos of the coin, which was created as a joke, and paradoxically gained traction because it didn’t take itself seriously.
Ironically, the irrational obsession with style over content. Epitomised by memecoins, is as old as money’s most analogue form - gold.
Ancient cultures valued gold for jewellery, or sculpture, long before it began to be used as money, in around 800 BC.
The Incas of South America called gold the ‘tears of the sun’ and that description explains much of the initial appeal of gold was down to how it looked. Yellow and shiny, it was associated with the Sun, giver of life and inextricably linked to fertility, success and power.
That simple narrative remains, with gold still holding huge cultural significance as something of intrinsic value, from rappers’ chains to wedding rings.
There is, of course, a more complex reason why gold is useful as a store of value - a means of transporting energy through time and space - but I doubt that many get that idea when they look at a photo of JayZ wearing a huge gold chain. Gold is even the name of one of his expensive branded colognes.
The reason is simple. Humans like narratives more than they like details. This is an evolutionary trait. Our brains process information at two speeds.
System 1 is instinctive using simple rules of thumb - known as heuristics - to make snap decisions.
System 2 is our slower, more analytical, conscious mind.
We aren’t even aware of the decisions that System 1 makes, because they are reflexive. But without getting deep into behavioural psychology, this two-speed approach to decision-making under uncertainty worked well when we needed to make a snap decision about the threat of a Sabre Tooth tiger, but it really isn’t suited to decisions around probability and complex logic. Which covers investing.
If you want great examples, read ‘Thinking, fast and slow’ by the Nobel prize winner, Daniel Kahneman; the point here is to make the connection that memecoins are the ultimate example of narrative trumping detail.
It’s not hard to see how, in the new attention society, that memecoins work. They press similar buttons with gen-Z as gold did with the Incas, and have simple narratives that are easy to grasp.
Every narrative needs a medium. In ancient cultures the best place around the fire was always reserved for the storyteller. Modern society has social media, which is explicitly designed to share simple narratives - which is what memes are - and Influencers who are the modern-day storytellers.
Memes convey ideas through shared cultural reference, comedy and creativity, utilising short form text, images, animated gifs, or simple videos.
So it makes perfect sense that new forms of money, that are complex and difficult to understand, would become reduced to memes themselves and popularised on communications platforms that reward simplicity, creativity and humour.
One of Bitcoin’s most popular memes is the phrase ‘Number goes up’, because it is the simplest most reductive way of explaining what bitcoin does to someone who just wants the TLDR and to skip the research.
The problem is, as Oscar Wilde famously wrote, ‘the truth is rarely pure and never simple.’
Bitcoin as a system requires a proof of work from miners and in a similar way, you cannot understand the investment thesis from a few memes. You have to DYOR. And there is no guarantee that Bitcoin’s complex design will translate into adoption and increasing value, because it sits within a broader context of geopolitics, regulation and usability.
But that is a lot to digest for the hungry investor just looking for tendies (that's profits if you haven't yet learned the crypto lingo).
Memecoins tap into this desire for simple, attention-grabbing narratives. Memes are easier for Youtube and Tiktok Influencers to amplify, so the message can spread quickly, and short-term increases in price provide all the justification that new investors need to avoid doing any scrutiny.
There is reassurance in the communities that develop around memecoins, which make it easier to get carried along, and in some cases memecoins can evolve beyond their superficial origins, Dogecoin being the prime example.
But the absence of any real use case, development team or sound economic structure doesn’t seem to matter. Shiba Inu Coin was launched in may with the objective of out-memeing Doge.
It has maximum supply is 1 quadrillion tokens (that's twelve zeros) and its price seems designed specifically to take advantage of another one of those heuristics - unit bias. This is illustrated by the way the project’s backers promote the fact that Shiba Inu's price “allows users to hold billions or even trillions of them” as if that has any relevance to real value.
In some cases memecoins actually parody those who buy them, as with Loser Coin, which suggests that a new genre of Kamakazi investors are being born, who are so disillusioned with, and alienated from, the financial system, that they invest as a form of sarcastic protest and unity with those who feel the same.
In that sense memecoins are perhaps, a by-product of the absurdity of our modern financial system, where governments keep generating ever larger IOUs that can never realistically be repaid and the traditional ideas of wealth generation and preservation no longer apply.
It’s hard to predict where memecoins will go next. They may simply fizzle out as investors lose interest and their money. It is quite possible that they become so widespread that regulators decide to protect investors from themselves.
They may evolve into something that makes sense or that just as conventional money - backed by nothing but authority - only has value because we society collectively agrees, that sections of society decide that a coin with a dog logo and almost infinite supply is not much different.