Meme coins like Shiba Inu (SHIB -3.13%) and Dogecoin (DOGE -3.69%) don't perform like stocks, or even like other cryptocurrencies like Bitcoin. A lot of the time, new developments that most investors in stocks would interpret as bad news aren't actually so bad.
In fact, in some cases what would be considered red flags for a stock end up being green flags, with higher prices often following. So to give you an edge with your investments, let's elaborate on a trio of these red flags that can mean the opposite in the context of a meme coin.
1. Controversy or drama
One of the oldest rules in the stock investing bible is not to buy shares of a company that's facing down significant legal or regulatory issues, or is otherwise embroiled in some kind of controversy that gets a lot of attention.
But the situation is different for meme coins, as they have the best chance at growing when they capture and retain a lot of attention.
If there is an external group that's vocally in opposition to a given coin, it could easily become free marketing for the coin. The public squares where complaints about cryptocurrencies are usually voiced, social media, typically amplify such conflicts. What's more, meme coins with strong communities may experience a greater level of commitment and social media marketing activity (posting memes) from coin holders when there is an external figure or group to oppose.
As if those two factors weren't enough, meme coin investors often consider a coin's history of controversy to be an important part of its narrative, or "lore". If you're unfamiliar with this concept of lore, consider it as a proxy metric for the times when a meme coin community encounters and overcomes obstacles during their quest to make the coin's price go up.
So if a coin is perceived as having a lot of lore, like Dogwifhat (WIF -9.99%) is getting a reputation for having, it means that the community is able to stick together through drawdowns or controversies and coordinate marketing and messaging effectively over time to continue growing.
For instance, in late March of 2024, when the owner of the actual dog that the meme is based on decided to collaborate with a group unrelated to the meme coin for the purposes of minting a non-fungible token (NFT), it could have been viewed as an extremely bearish development. Many traditional investors would correctly conclude that the Dogwifhat community must have appeared as too immature, disorganized, or rambunctious for the owner to want to work with.
As it turns out, the NFT mint was a wild success, and it didn't hurt the meme coin's price at all; its price is higher than before the drama. The saga was effectively free marketing, which is how the coin's boosters were able to rebrand it into being part of the lore rather than a regrettable event.
From that perspective, controversies are chances for a meme coin community to prove itself as being something more than the silliness of the meme alone, as they enable a community's reactions to events to become folded into its value.
2. Insider selling
Rightfully or not, insider selling is widely considered to look bad for a stock. It's typically interpreted as management not having total faith in the company's ability to grow.
For meme coins, "management" typically corresponds to the project's developers, who launch the coin and often retain a large portion of the supply. And a lot of the time, coin holders are happy to see them dump their tokens and go.
In short, the highly concentrated positions of a meme coin's originators are often viewed by crypto investors as a major risk to holders. Effectively, no investors have a cost basis that's lower than the developers, who essentially issued the coins themselves. That means the original holders will be sitting on a significant amount of the total outstanding tokens.
Cryptocurrency meme coin developers are on average thought to be a fickle lot, seldom committing to anything for the long term. When there's a chance to realize a large payout from their initial holdings, they often dump everything they have, thereby smashing the price of their coin dramatically downward on their way out the door.
If they've already dumped their coins, they can't do it again, so insider selling is often viewed as a bullish de-risking event.
For example, Dogwifhat only started its rapid climb to a multi-billion-dollar market cap after the original top holders were closed out.
3. Lack of a roadmap
When you invest in a company, you need to know that management has a long-term plan for how to increase the business' value. There's simply no reason to invest otherwise.
When you invest in a meme coin, some will have developer or community-proposed road maps for their (marketing) efforts. Others will be winging it.
Most importantly, unlike with companies, cryptocurrencies can still grow and become huge without any centralized strategy, because any coin holder can pitch in to promote the project. After all, Dogecoin didn't need a leader or a plan to soar. And as all holders have the same incentive -- to make the price go up -- they're often able and willing to collaborate spontaneously.
Dogwifhat is once again another pertinent example. Without any management team, all it has is the efforts of its community to have any hope for growth. And it's that community that raised $700,000 to advertise the coin on the Las Vegas Sphere later this year. Wif's value rose significantly upon completing the fundraising drive, and it will likely increase again when the advertisement actually airs on the Sphere.
In contrast, having a detailed plan for a project is unfortunately often the equivalent of giving a coin's most skittish holders a list of potential pitfalls to be scared out of their positions by if something doesn't work out as anticipated.
Extensive roadmaps by previous meme coin winners like Shiba Inu were only laid down after their heyday and public recognition, and at least in Shiba Inu's case the planning hasn't yet led to it reclaiming its all-time highs.
So don't get intimidated by a meme coin with no articulated plan for the future, as a culture of community improvising is one of the features that defines the greats so far. Just be aware that the risks of investing in meme coins are very high, regardless of whether or not the project has a road map. Even under the best of conditions, expect a lot of swings in the price, and understand that there is no guarantee of a recovery after a swing downward.
