Memecoins
How to Trade Microcap Meme Coins Without Losing Your Shirt
Love them or hate them, meme cryptos have been some of the best performers of the year. And some early-stage micro-projects with a total market size of less than $1 million, for example, have done even better. While most of them end up failing, a few have exploded, making fortunes for their early investors (ahem… speculators). Here’s the lowdown on what these things are, how to spot the opportunities, and how to manage the risks.
First, here’s how the meme coin market works.
Let’s get this straight: If you’re looking for cash-generating investments with intrinsic value, you’ll want to steer clear of memes. These projects are like the GameStops of cryptocurrencies: they’re driven by hype and speculative trading. The game here is to try to spot good opportunities before the hype happens.
It’s now easy for developers to launch meme coins on blockchains like Ethereum and Solana. First, they choose a meme concept (e.g., a dog, cat, frog, celebrity, or political figure) that might resonate with certain online communities. Then, they develop the project using smart contracts on the blockchain of their choice. Once the coin is created, it’s listed on decentralized exchanges (DEX) like Uniswap (on Ethereum) or Raydium (on Solana). This allows investors to buy or sell the coins directly from decentralized crypto wallets like MetaMask or Phantom, which connect to DEXs.
Then comes the hard part: Developers and community members will promote the cryptocurrency through social media platforms like Twitter, Reddit, and Telegram, often relying on viral marketing and influencer endorsements to create buzz and attract early investors. They will also work with crypto data platforms like Coingecko and Coinmarketcap to get their projects seen by more people.
If enough investors jump on board, centralized cryptocurrency exchanges might take notice. Their market makers (the big traders who provide liquidity for trades) would then buy the coins on DEXs and move them to centralized exchanges. This process usually starts with lower-tier centralized exchanges before the coins get their chance in the big leagues—top-tier exchanges like Binance, Bybit, and Coinbase (which have tons of users and significant trading volumes).
Next, how to spot microcap meme coin opportunities.
Again, let’s be clear: Most early-stage meme projects never get off the ground. And often, when they do, they don’t stay in the air for long. But if you fish in the right waters, you might end up with a decent catch. Here’s how.
Start by familiarizing yourself with the DEXTools.io platform. This front-end UI aggregates real-time blockchain data for all sorts of crypto projects, including early-stage meme coins. It lets you set custom filters to display an initial list of projects. For example, you can filter by blockchain and market size based on your preferences.
How to define custom filters in DEXTools to filter projects that meet certain criteria. Source: DEXTools.
In the filter, look for projects with a DEXTools score of 80 and above (out of 100) and set your list to show “only audited contracts.” These projects have passed an initial security review, so there is less risk of scams and contract vulnerabilities. Once you have set your filter, you can sort your list by attributes, such as trading volume, DEXTools score, days since launch, market cap, liquidity, and volatility. This is more of an art than a science and may involve some trial and error. But generally, you’re looking for newer coins with smaller market sizes and relatively high trading volumes and liquidity.
The next step is to look for projects that have successfully passed your initial screening process. Check out their website, social media following, and (most importantly) their price charts on DEXTools. You’ll want to see price charts that are building a base around a certain level or slowly moving higher—and avoid acting on your FOMO immediately if you see any vertical movements.
You’ll also want to make sure there are no “honeypots” (a type of malicious contract) and that the contract has been “terminated,” meaning the original developers have given up control and can’t change the contract at will. And make sure there are no purchase or sales taxes either—these taxes can eat into your profits and are often a red flag for dodgy projects.
You can also check the number of holders of the project in DEXTools – and in this case, the more, the better. For Ethereum projects, you can see the holding percentages of the ten largest investors in the project. The largest holder is usually the liquidity pool for trading, so it’s okay if they have a large share. But for the next nine holders, you’ll want to see lower percentages – this reduces the risk of “whales” selling large positions and driving the price down.
Finally, how to manage the risks associated with meme coins.
As with any financial market, meme cryptos have their own risk spectrum. On one side, there are the newer, “high-risk” microcap meme cryptos with much smaller market sizes. These are hit or miss, but if you find a winner, the multiples can be huge. With the latter, it’s best to take the venture capital approach: pick a few projects at a “good” valuation, invest small amounts, and hope one of them turns out to be profitable. With the latter, remember to plan your exit strategy in advance, so you don’t hang on too long (if the price goes down) or let your greed get the best of you (if it goes up).
Then there are the larger, more established meme projects that are already trading on major cryptocurrency exchanges – coins like Dogecoin or Pepe. These are more liquid than their smaller counterparts and generally less volatile (both up and down). They trade more like traditional cryptos – so regular cryptos risk management strategies apply: use a stop-loss, take profits on the upside and don’t be alone in the next bear market.