Cryptocurrencies might be in a slump at the moment, but that hasn't stopped investors from jumping on the crypto bandwagon.
"Meme coins" are often written off as a joke, but some investors believe they should be taken seriously. Cryptocurrencies like Dogecoin (DOGE -0.89%) have made massive waves in the crypto space, and some people have made a lot of money from these investments. But are meme coins a smart investment?
What are meme coins?
Meme coins are cryptocurrencies that have gained popularity in a short amount of time, usually as a result of influencers and retail investors promoting them online.
Dogecoin is the original meme coin: It was created as a joke based on a meme back in 2013. It rose to fame after Elon Musk began tweeting about the cryptocurrency, and retail investors started buying in droves.
Because anybody can create a new cryptocurrency, developers have released a slew of meme coins after Dogecoin. Many of these coins are spinoffs of Dogecoin -- take the coin Shiba Inu (SHIB -1.58%), for example -- but there are thousands of other meme coins out there. In fact, according to the website CoinMarketCap, there are more than 5,000 meme coins in existence as of this writing.
What's the difference between cryptocurrency and meme coins?
Meme coins are a type of cryptocurrency, but there's one major difference between cryptocurrencies like Dogecoin and Shiba Inu and currencies like Bitcoin and Ethereum, and it comes down to utility.
Major cryptocurrencies like Bitcoin and Ethereum were developed to solve real-world problems. The goal is to eventually become widely accepted by merchants, creating a new form of decentralized currency and revolutionizing a variety of industries.
Meme coins, on the other hand, serve no real-world purpose right now, and most of them were created as a way to make a quick buck.
Some of these coins have gained notoriety because they're promoted by influential celebrities, and retail investors have pumped up their prices by promoting them heavily online. This is why these coins tend to experience explosive growth despite their shaky fundamentals.
Once their prices surge, many investors sell shortly after to make a quick profit. Because meme coins have no real utility at the moment, it's unlikely they'll still be around in a few years or decades. Once investors move on to a new stock or cryptocurrency, meme coins will likely see their prices plummet.
Should you invest in meme coins?
While it is possible to make money investing in meme coins, this type of investment is incredibly risky and more similar to gambling than true investing. If you happen to buy and sell at precisely the right time, you could make a profit. It's more likely, though, that you'll lose all or most of the money you invest.
A better strategy is to focus on investments that are likely to perform well over the long run. Cryptocurrency in general is still highly speculative, so nobody knows how it will perform over time. But if you do invest in crypto, make sure you're choosing currencies that have strong fundamentals and are more likely to stand the test of time.