Memecoins
History Suggests Bitcoin Will Be a Better Long-Term Investment Than Little-Known Coins
The value of some meme coins may be skyrocketing right now, but that doesn’t make them better investments than the original crypto.
Something interesting is happening in the crypto market right now. While Bitcoin (BTC 1.36%), an increase of 65% over the year, some popular coins are increasing in even higher percentages. So far in 2024, Dogecoin (DOGE 2.66%), an increase of 85%, Shiba Inu (SHIB 5.48%) is up 147% and a little known coin PEPE (PEPE 6.29%) is up almost 1,000%.
It’s starting to look a lot like 2021, when the crypto market experienced its last major bout of coin mania. While it may be tempting to invest in these hotly rising coins, history suggests that long-time industry stalwarts like Bitcoin will end up being better investments.
Short-term and long-term returns
The main problem with speculative coins is that they are built only for the short term. Yes, they can generate dazzling returns over short periods of time, but when you zoom out and consider their performance over a longer horizon, the picture appears much less appealing.
Take Dogecoin, For example. In 2021, it has seen spectacular success, rising from pennies to an all-time high of $0.74 in just a few months. But then Dogecoin crashed to earth and it is now trading at just $0.17. In its nearly 10-year history, Dogecoin has never crossed the $1 mark.
Compare this performance to that of Bitcoin, which has generated triple-digit annualized returns for over a decade. From 2011 to 2021, Bitcoin was the best performing asset in the world, and it wasn’t even close. Bitcoin has generated annualized returns of 230%, compared to around 20% for technology-intensive sectors. Nasdaq-100 hint. Yes, Bitcoin has had some tough years, but in the long run it has been good for investors.
The scarcity effect
Another factor in Bitcoin’s favor is scarcity. The total number of Bitcoins that can exist is 21 million coins. Currently, 19.7 million of them have already been mined, and the rate at which new mines are mined has halved again in the last month. This creates a real scarcity effect, especially now that large institutional investors are buying Bitcoin.
When comparing Bitcoin’s circulating coin supply to Shiba Inu’s, the contrast is particularly stark. Shiba Inu has a circulating coin supply of 589 trillion. This explains why it is very unlikely to reach a price of $1, as that would give the same coin a market capitalization of $589 trillion. For comparison, the current market capitalization of the whole S&P500 represents approximately $44 trillion.
And the story is pretty much the same with the other meme coins. The key to their early success was the release of a huge initial quantity of coins, often measured in billions of coins. This brings them to market caps in the billions of dollars, even at absurdly low prices measured in tiny fractions of a cent. This strategy can give even a coin that has only been around for a few months a market cap of over $1 billion, making it a relatively safe investment. Pepe, for example, exploded out of nowhere to become a top 25 cryptocurrency, largely thanks to its staggering supply of 421 trillion coins.
Worse yet, it is now possible to create a new cryptocurrency in just a few minutes and have it ready for trading in a few more minutes. Cryptocurrency speculators create thousands of new coins every day. If one of them attracts attention and achieves great success, it can make huge profits. And if it doesn’t, well, they only wasted a few minutes of their time creating it. So meme coins are no longer as “rare” as they seemed to be just a few years ago, when Dogecoin and Shiba Inu reigned supreme.
Dutch tulips and coins
In many ways, the current speculation around meme coins reminds me a lot of the 17th century bubble known as Dutch Tulip Mania. This is widely considered to be the first speculative asset bubble of modern times and has been brilliantly described in works such as Charles Mackay’s Extraordinary Popular Delusions and The Madness of Crowds.
For a time, Dutch traders were willing to pay absurd sums for particularly rare tulip bulbs: a single one could cost the equivalent of the annual salary of 10 skilled workers. But the story did not have a happy ending for speculators. Eventually, it became impossible to find new buyers willing to pay more than previous ones, and the price of bulbs quickly collapsed.
Bitcoin as “digital gold”
Of course, some skeptics have suggested that Bitcoin could be a Dutch tulip bulb Also. They claim that the price of Bitcoin could eventually fall to zero, eliminating speculative crypto traders.
Image source: Getty Images.
That may be the case, but I doubt it. It’s been over a decade since people started making such claims, and what was the result? Bitcoin has become more valuable, not less valuable, over time. And that’s because Bitcoin has more in common with a precious metal like gold, due to its inherent scarcity. In fact, many crypto investors often refer to Bitcoin as “digital gold.”
So, if you are considering buying meme coins right now, I only have one piece of advice for you: buy Bitcoin instead.