Crypto Investing
31 Jan 2022

Things Crypto Traders Should Know Before Investing in Meme Coins

Deepan Datta

CAUTION- Investing in Memecoins is Injurious to Your Crypto Portfolio. 

Yes, you heard that right. But, whyyy???

You know the reason- something that has no utility and comes with plenty of supply fails to grow in value over the long term. 

For example, seawater has limited utility to humankind and comes with plenty of supply. If someone starts selling bottled seawater, will you buy it? Certainly not, because, you know, bottled seawater has no value. 

It is a bad example to relate to, but this is all about memecoins. 

Despite having no utility value, some memecoins like DOGE and SHIB have found utility as a payment medium. Still, if you decide to invest in memecoins, follow the checklists below. 

Key Takeaways

  • Before investing, make sure the memecoin has a strong development team and community
  • Avoid coins with high wallet concentration
  • Check the third-party security and transparency audit report of the memecoin
  • Verify the community engagement level

Make Sure- It’s Not a Fake One

Just because it is popular or trending on the internet doesn’t mean they are legit and can provide good returns over the long term. 

Memecoins are all over the crypto market. There are not one, not two, but over 200 memecoins actively traded in the market, according to coinmarketcap.com. 

You may be surprised to know that only a few memecoins attract high community and investor engagement- the essence of any memecoin. In the absence of large community engagement and participation, the memecoin is bound to fail and is subject to frequent pump and dump.

How to make sure a memecoin is not a fake?

When discussing memecoins, points like the coin’s utility usually take a back seat because there are none in most cases. So, we need to focus on the project goals, community, development track record, etc., to identify a safe memecoin you can invest in. 

For example, Shiba Inu is a decentralised and spontaneous community-building experiment created by an anonymous group/ person named Ryoshi. The project goal was to showcase the power of the community in successfully running a crypto coin. It has a strong follower base of more than 500,000 members globally, called SHIBArmy. 

The project has a strong development team, constantly developing new upgrades and products, like the ShibaSwap. 

Note: We are not validating Shiba Inu’s fundamentals. The above content is just for informational purposes. DYOR before investing.

On the other hand, any memecoin project with no goals and an entire community engaging in occasional pumping and dumping of the coin’s value is a red flag! They are the by-product of greed. 

Avoid the coin if supply is concentrated to a few wallets

When the supply of memecoins is concentrated to only a few wallets. For example, if the developers hold more than 10% of the total supply of a coin, it could be a red flag. 

No single entity or wallet should own more than 5% of the token’s supply, and it also breaks the rules of blockchain and decentralisation. The person or entity can hugely influence the price of the memecoin in his/her favour. 

invest in memecoins

Check the validity of the liquidity pool

If you don’t verify the authenticity and validity of the liquidity pool, you may become the victim of rug pull. 

Rug pull is a crypto scam where developers desert the crypto project and run away with investors’ money. 

Nowadays, the order book based exchange system is replaced by Automated market makers (AMM). They pool liquidity into smart contracts that allow buyers and sellers to swap crypto coins instantly. 

How does a liquidity pool work?

Let’s understand it with an example. Michael is a blockchain developer and has created a new ERC-20 token. He successfully got it listed on an exchange, but investors are refraining from investing in the token in the absence of liquidity. 

To address the liquidity issue, Michael decides to create a liquidity pool, where he will deposit ETH and a certain quantity of the ERC-20 tokens in a smart contract. The ETH deposited will provide liquidity against the tokens and allow investors to swap the tokens instantly. 

Michael acts as a liquidity provider and enables a swift exchange of his newly launched token. Now, Michael is a good actor in the system and does whatever he can to maintain liquidity for the ERC-20 tokens he created. 

But, a bad actor can destroy the system by withdrawing the liquidity from the system, resulting in a price crash. This is called rug pull. Therefore, before investing, you need to verify the validity of the liquidity pool. 

How to verify the validity of a liquidity pool?

Thankfully, this information is easy to access, and you can check it using coinmarketcap.com, Etherscan.io, or Ethplorer. 

On Coinmarketcap.com, type in the memecoin you’re researching and click on ‘Explorers’. 

invest in memecoins
source: coinmarketcap.com

It will redirect you to Etherscan or Ethplorer, where you can verify the vital analytics of the coin. For example, last 24-hour trading volume, transactions, holders, when was liquidity last added, etc. 

If the coin shows low trading volume, low liquidity level, or supply is concentrated to a few wallets, it is a red flag and should be avoided. 

Check Audit and Transparency Score of Memecoins

How to check it? It’s simple- visit coinmarketcap.com and click on ‘Certik’ below the Audit option. 

investing in memecoins
source: coinmarketcap.com

The development team needs to vet the chain security and code architecture of their memecoin by a third party software auditing firm. The job of an audit firm is to ensure no backdoors or security loopholes exist in the codes of the memecoin that can cause rug pull/exit scams. 

You need to check the security score and review the audit report before investing in the memecoin.

Investing in Memecoins

This old proverb should be your guide to invest in memecoins- “excess of everything is bad.”

Confused?

With no inherent value, it’s difficult to value or predict the growth potential of any memecoins over the long term. Therefore, you should consider the following points before investing in memecoins.

  • Never invest more than 5-10% of your crypto portfolio in memecoins. Anything more than that is an incredible gamble.
  • Keep a close eye on the community sentiment on social media. Hypes and speculation usually drive the value of memecoins.
  • Avoid emotion-based trading; in short, avoid FOMO. Any investment resulting from FOMO is a terrible investment because the coin has already reached the rally’s top. 

The key to profiting from trading the volatility in memecoins is not to leverage much and adhere to strict stop losses.

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Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Deepan Datta

Content Writer

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