Memecoins
Venture capitalists and hedge funds are buying Meme coins like Shiba Inu and Dogwifhat. Should you?
New, sophisticated players with deep pockets are now emerging.
Cryptocurrency coins like Shiba Inu (SHIB -4.44%) do not have a reputation for being the type of investment that would interest serious institutional investors from banks and hedge funds. It is obvious that tokens are too useless, too speculative, too volatile, too impenetrable and too unpredictable. be usable in any type of complex financial strategy — right?
It turns out that meme coins are indeed a growing area of interest for professional money managers. That doesn’t mean you should rush out to buy them, but it does suggest that there are more opportunities in the segment than many people might think. Let’s take a look at which players are doing what, why they’re interested, and how you could also participate and invest in memes, under the right conditions.
Here’s Who’s Buying Meme Coins and Why
So far, a few companies are known to compete and use coins as part of their strategy.
Since December, Stratos, a hedge fund supported by venture capitalist like Mark Andreseen of Andresseen Horowitz, managed a fund that holds dog hat(Wireless -2.34%), a new meme piece on the scene that features a shiba inu dog with a cute knitted hat. Pantera Capital, a crypto-focused hedge fund, also owns memes and says “meme coins are here to stay” while touting their outsized growth potential. Other companies have touted the benefits offered by more mature cryptocurrency exchanges, which now have features enabling the use of more sophisticated investment strategies.
The biggest appeal of investing in meme coins is that gargantuan returns are possible even with a small initial capital commitment. For example, the Shiba Inu is up 221% over the past three years, although investors who bought it before its massive rise in 2021 briefly saw much higher returns. In the context of a hedge fund, investment bank or venture capital group, clients would be extremely happy to see gains of this magnitude. Yet even smaller, undiscovered coins can offer even higher returns than these.
Of course, the smaller a coin is market capitalization, the more likely it is that it will simply hit zero or become too illiquid to transact. And almost all meme coins are extremely risky investments that are horribly volatile on average. But for a wealthy investor willing to do the research and take many small bets in the context of a well-calibrated investment strategy, these are hurdles worth circumventing in exchange for exposure to the disproportionate returns that hide in memes.
Don’t start dabbling before you get your house in order
It goes without saying that most investors don’t have the same resources that hedge funds and similar organizations can provide. This means that you shouldn’t jump into the cryptocurrency deep end just because they are excited to do so.
However, with the right preparations, it can be beneficial for your portfolio to be exposed to meme coins.
The first step is to diversify your portfolio stocks and other non-crypto investments so that it is more resilient to issues affecting individual industries and regions. Warren Buffett may have been of the opinion that diversification is only for those who do not have a full understanding of the forces and risks affecting their investments, but investing in meme coins without properly protecting the more conservative parts of your portfolio , it’s like buying a house without taking out any insurance (don’t do that, please).
The next prerequisite for starting to invest in meme coins is to be serious with yourself about how much money you can actually afford to lose. Most meme coins are poor choices that will burn through your money, often incredibly quickly. Until you have some experience in the field, doing much more than investing in a more proven meme asset like Dogwifhat or Shiba Inu will come with an expensive learning curve. So don’t commit money that you will need again, because disasters are inevitable and you must be prepared to survive them. Consider a sized allocation of around 1% of your portfolio.
Finally, prepare yourself emotionally. As the late, great investor Charlie Munger said, “The big money is not in buying and selling but in waiting.” With meme coins, the wait can be uncomfortable or downright anxiety-inducing, and it can also last for years. You’ll need to be prepared to stick with your high-conviction picks despite wild price swings, and only take profits when it fits what your well-defined investment plan calls for.
Once you’ve checked the right boxes, don’t hesitate to follow these hedge funds into a position in Dogwifhat or something similar. Doing your own research and identifying promising investments for yourself is where the best returns lie. If the short history of meme coins is any guide, there could be some huge winners waiting to be discovered.
Alex Carchidi holds positions at Shiba Inu and WIF. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.