Memecoins
In Defense of Fundamental Analysis Amid Memecoin Mania
Memecoins embody the “Wild West” image of DeFi. Thanks to the stratospheric success of tokens like Dogecoin (DOGE) and Shiba Inu (SHIB), the memecoin market collectively has a market capitalization of $54.4 billion – a figure that would have seemed outrageous when these assets first appeared. And yet here we are.
As recently as March, memecoin trading volumes reached levels last seen just before the last crypto bubble imploded in 2022. This resurgence highlights a familiar trend: traders are letting easily carried away by hype and FOMO, to the extent that they make impulsive investment decisions based on hype and FOMO. on pure instinct and greed. In Digital Asset Valuation FrameworkThe HashKey Capital team and I have advocated for the application of fundamental valuation frameworks and high-level technical analysis to manage inherent market volatility and avoid the pitfalls of memecoin mania.
Without putting too fine a point on it, more than ever we need to deploy strong frameworks and exercise cold judgment to discern true value in this most turbulent of markets. This is doubly true for institutional investors looking to achieve sustainable advantage and long-term value growth in digital assets.
In any financial market, there are times when speculative hype can overshadow a rational investment strategy. Look at the dot-com bubble, the subprime mortgage collapse, and countless other examples.
In crypto, speculative hype is on steroids, propelled by endless social media chatter and the feeling that the next moonshot token is right under your nose. Financial Times correspondent Joshua Oliver has written a new book on this phenomenon (“Hype machine”) focused largely on Sam Bankman-Fried and the cautionary tale of FTX.
Fundamental analysis provides the foundation needed to understand the intrinsic value of a digital asset, beyond the smokescreen of advertising and propaganda spread by clever marketers, arrogant project founders, motivated airdrop farmers and others.
Critical factors to consider when evaluating the merits of a Web3 investment include the track record of the project team, the underlying technology used, the practical use cases of what is being built and tangible evidence of its adoption in the real world.
This type of old-fashioned analysis allows investors to look beyond brief bursts of market enthusiasm and assess the long-term viability of a project. This is an approach based less on short-term commercial gains and more on creating sustainable value. That said, many projects without long-term viability can still enrich some investors.
The appeal of memecoins is understandable, even putting aside the incessant media buzz and viral marketing. Although often ridiculed for their lack of substantial value, memecoins have surprised the world with their performance. A staggering 12,000% increase in the value of DOGE in the first five months of 2021 is just one example (even though the price had fallen 80% by mid-December). More recently, Dogwifhat and Pepe have produced similar results – the former contributed liquid funding to Stratos. show a return of 137% in the first trimester.
While memecoins generally lack fundamental value and utility, their fortunes decline depending on the belief of traders who participate in speculation. This does not mean that we can simply will a memecoin in value, though. Engaging in the memecoin markets without in-depth analysis and a clear understanding of the risks involved is actually gambling, not investing.
The importance of fundamental analysis – especially in these volatile markets – cannot be overstated. These tools allow investors to make decisions based on meticulous research and solid evidence, rather than a reckless impulse to chase the next improbable moonshot.
Meaningful valuation frameworks – including those that can also be used to value memecoins – can help provide a deeper understanding of market dynamics during volatile times. Using these techniques, we can all understand the hype around what it is – “pixie dust,” to quote McConaughey’s wireframe character in “The Wolf of Wall Street,” that might be magic for a few lucky, but ineffective for almost everyone.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.