Is PEPE more valuable than DOGE and SHIB? How many steps can Meme coins take to become mainstream assets?

There are two factors driving asset prices - liquidity and faith. Liquidity refers to the amount of capital available for buyers and sellers to enter or leave the market

There are two factors driving asset prices - liquidity and faith. Liquidity refers to the amount of capital available for buyers and sellers to enter or leave the market. Belief motivates buyers or sellers to take action, and narrative plays an important role in shaping faith. When collective beliefs waver, people often rush to sell assets.

The recent bank run in Silicon Valley is an example of collective faith shaking. But what happens when people form a consensus on an asset and are eager to trade it quickly? Will it present the opposite result as a bank run?

This article studies on chain data to understand who is trading Meme assets that have recently become popular, how much returns have been generated, and whether investing a large amount of money to purchase Meme coins is a good idea. In the end, I will also express some personal opinions on how Meme coins can be more sustainable (bigger and stronger).

Is the new Meme coin more valuable than the "old" Meme coin?

PEPE has increased by over 60 times in the past few weeks. At the time of writing, the transaction volume generated by PEPE has exceeded that of Solana, Avalanche, Polygon, and even Dogcoin Doge. Is a new Meme coin more valuable than an "old" Meme coin? One way to evaluate the answer to this question is to examine the behavior of token holders.

According to Nansen's data, over 100000 independent wallets own these Meme assets. More than 1.4 million wallets hold "old card" Meme assets like ShibaInu. The agreement has been difficult to achieve such results for many years. In terms of scale, Aave and Compound each have only about 300000 independent wallets storing their tokens. Part of the reason for this low number is that many users may hold these tokens on exchanges.

Therefore, initially you will see an increase in the number of wallets holding these assets, as decentralized exchanges are the only place where users can access these assets. The chart in the figure below tends to flatten out around May 5th because the token was launched on Coin An at that time. Therefore, traders may purchase these tokens on centralized exchanges rather than through decentralized exchanges.

Meme coins are an interesting phenomenon as they demonstrate the power (and accompanying risks) that anyone can create their own digital assets. On the one hand, allowing the creation of anti censorship and customizable digital tools is the core of Crypto's spirit. On the other hand, Meme coins may be the trigger for the "mass destruction of value".

Currently, over 100000 wallets hold PEPE.

One way to regulate Meme coins is to force exchanges not to bring them online. But this only means that sales of DEX like Uniswap will increase. Even with a fee of 0.1%, the exchange can earn $1 million per day from Meme coins, as the trading volume of tokens has reached billions.

The Big Fool Theory refers to the fact that in capital markets, such as stocks and futures markets, people are completely indifferent to the true value of something and are willing to pay a high price because they expect a more foolish fool to buy it from them for a higher price. The most important lesson taught by the Big Fool Theory is that in this world, being foolish is not scary, but being the last to be foolish is scary Fool

In an environment of sustained inflation, most things look like a Ponzi scheme. When a "wild" Meme coin is released, DEX is its first trading venue.

Meme coins are usually traded like a Ponzi scheme because they operate on similar principles. Initially, some early insiders purchased tokens at very low prices. They contribute a small amount of dollars to the liquidity pool and receive many "native tokens" in return. Essentially, they only need a few dollars to obtain a large amount of tokens.

As people began to discuss this type of Meme coin, the supply of Meme coins in the pool decreased, creating a sense of 'higher' value now. When users see their unrealized profits, the hype for Meme coins intensifies, attracting more people to purchase Meme coins. Therefore, millions of dollars began to flow into Meme coins that appeared out of thin air. Once they reach a certain level of liquidity, Meme assets like PEPE may continue to exist for several years.

How can Meme coins be successfully 'converted to regular'?

I used to think that Meme coins would tend towards zero and then "hit the bottom". But Meme coins also have their own Lindy effect - the longer an asset is traded in the market, the more likely it is to remain in the market as long as it does not claim a certain purpose. Dog coins perfectly fit this description.

Most tokens issued by teams have several sponsors. Usually, these people are founders, venture capitalists, foundations, agreements, and early employees behind them. Conversely, when a Meme coin is released, early sponsors are early adopters who purchase tokens in US dollars.

Perhaps you think I'm fabricating the Lindy effect, but if we look at the on chain statistics of past Meme coins, you will notice that the average Meme coin will ultimately bring net profits to a few early holders. The chart above is about ShibaInu.

Just like last week's PEPE, it exploded in the narrative of 2021 and reached a new high. Wallet earned millions of dollars from its initial investment of $1067. Data from Nansen shows that over time, the average realized profit and loss on the network is about 249%. The data looks beautiful on the surface, unless you categorize the net results by seller.

The above figure shows the income distribution of the wallet for trading ShibaInu. The same token can make a person investing $1000 a millionaire and also make half of the traders aware of losses. From the data, only 6% of wallets generate over 600% of super returns. This is in 2021, when Bitcoin rose from a low of $20000 to $64000 (assuming you purchased it in December 2019). Therefore, compared to the risks associated with early purchases of Meme coins, unless you are one of the few examples of making a fortune with Meme coins, the returns are unreasonable.

Generally speaking, when a Meme coin is launched on an exchange, it will generate the Lindy effect. For example, about 23% of ShibaInu is on the exchange. The proportion of Dogelon is approximately 33%. The exchange successfully converted Meme coins into formal financial products by handing them over to millions of retail investors, who invested hundreds of dollars in them.

Usually, Meme coins perform better than Bitcoin or Ethereum, and every time the market rebounds, liquidity flows to riskier assets during periods of market prosperity. When Meme coin is no longer about the community, but becomes a trading tool, it will continue to exist. For example, Musk understands the importance of producing Meme for himself and his company, as shown in the iconic tweet below.

The possibility of making a fortune with Meme coins

A bear market means that assets are traded at significant discounts. Assuming that prices will change with usage, ultimately, when usage increases to a point, it proves the rationality of asset prices. When you purchase JPEG, the pixel images you purchase may gain relative value due to the "social influence" of others who own the same asset. For example, due to Musk's push, the price of MiladysNFT skyrocketed.

Meme coins are different because their "market sentiment" determines their value. When "market sentiment" is hyped, the value soars. But confidence will eventually run out, and people will sell tokens at extremely low prices. Or hold on until the market rebounds again.

The following is ShibaInu's data. By analyzing the distribution of wallets with Meme coins, we found that approximately 78% of wallet holders have an amount of less than $1000. Most token economies follow a similar development curve. It indicates that retail capital generally flows to Meme coins, with tokens concentrated in a few wallets. For example, according to IntoTheBlock data, approximately 80% of ShibaInu is in 58 wallets.

The data comes from IntoTheBlock.

However, new Meme projects rarely achieve significant returns by investing small amounts of funds. The biggest return on a six digit investment that I have seen from PEPE's recent rebound was $100000, which doubled to $1 million within three weeks.

I selected 100 wallets with the highest realized returns as samples and plotted the initial capital deployed for them. Out of these 100 wallets, only 3 have funds exceeding $10000. Most investors who receive huge returns are those with smaller investment amounts.

There are two possibilities for these data:

1. Meme coins provide a way for smaller investors to earn huge returns (through early investments);
2. Or these are usually insider wallets, and they participated in the Ponzi scheme earlier than others.

The following is a summary of the Meme coin situation we have seen so far:

• As long as large exchanges support it, Meme assets can become a "legitimate" financial product;
• The key to obtaining huge returns for a small number of early entrants with small amounts of funds is to "be one step ahead of others";
• Most investors' investment amounts are below $1000;
• Most of the huge returns we see come from investments below $10000;
• Meme assets are similar to the Ponzi scheme, because if the inflow liquidity of the buyer stops, they may quickly disappear. The exchange has solved this problem.

How to view Meme coins correctly?

This is a screenshot of me searching for Meme coins on YouTube.

People often hold an optimistic attitude towards the world. This is because we believe that as long as we remain optimistic, everything will go smoothly. This is often referred to as the 'blind optimism principle'. When retail investors follow the trend and buy, they often assume that other investors have conducted a comprehensive investigation of the project.

Many native cryptocurrency users use Bitcoin or Ethereum to measure their wealth. To surpass your peers in the market, you need to take on more risks. During periods of low volatility, even leveraged trading may not necessarily create the returns that traders pursue. Therefore, they are taking on increasingly high risks in 'new assets' and believe that most of these assets will return to zero, some of which will help them create huge returns.

As the influence of Meme coins in the market decreases, its volatility begins to imitate other tokens. In the chart above, ELON and Shib, two early Meme coins, began to exhibit similar volatility to Bitcoin. Large fund managers also have a tendency to place higher risk bets and hold them consistently. In bull and bear market cycles, early adopters of fund managers are also better at hedging and exiting cryptocurrencies. This is not much different from retail investors, they just want to catch up with a Meme coin craze as soon as possible.

Meme coins are not kidnapped by evaluations, but persist due to faith. With just a few mouse clicks, you can find the tools to publish and trade them. As long as community beliefs do not collapse, we will see a surge in speculative activities surrounding these assets. In fact, regulatory agencies can play a role in requiring exchanges to establish a framework that sets the online standards for Meme coins. However, if liquidity is transferred to decentralized exchanges, any framework of regulatory agencies is of little significance. The most extreme scenario is like the sanctions TornadoCash has been subjected to. As an industry, the problem we face is that those who (pretend) make cool things also (often) sell these junk projects. When the market idolizes "dog projects" and requires regulation, it is difficult to prioritize user needs.

In this era where we live, money has become a form of meme. Our generation is facing an economic crisis between inflation and rising unemployment rates. People will do everything possible to earn more money, and Meme assets and NFTs have emerged. As an industry, what we can do is to raise a louder voice about the risks of investing in Meme assets and applaud Builder for creating useful tools that people can use at any time. Establishing a sustainable ecosystem requires both.