2021 will go down in history for the jaw-dropping returns investors have made betting on meme coins. But these assets have limited fundamental value, which suggests this is more of a wealth transfer than actual wealth creation. In other words, someone will profit, and someone else will be left holding the bag.
1. Shiba Inu
With a market cap of $29 billion, Shiba Inu has soared around 60,000,000% since its inception. That means if you invested $1,000 in August 2020, you would have $60,000,000 now (assuming you could sell without tanking the price). But despite the bull run, Shiba Inu looks poised for a crash because of its weak fundamentals and concentrated ownership.
Instead of introducing any groundbreaking innovation or use-case of blockchain technology, Shiba Inu's rally started with a tweet from Tesla CEO Elon Musk, who recently adopted a Shiba Inu breed of puppy. This growth catalyst is unsustainable because it depends on external hype that will eventually end or lose its effectiveness as people move on to the next popular token.
That said, Shiba Inu has tried to set itself apart by emphasizing utility. And its developers are working on a complementary decentralized exchange called Shiba Swap (BONE), designed to allow people to trade Shiba Inu for other digital assets without an intermediary. The token also enjoys burgeoning real-world acceptance, as AMC Entertainment "explores" ways to accept it as payment at its movie theaters.
But despite these efforts, Shiba Inu has a typical holding time of just 14 days on Coinbase, compared to an average holding time of 44 days for rival meme coin Dogecoin. The short investment horizon suggests many Shiba buyers are looking for a quick flip, not a long-term investment. To make matters worse, the top 10 Shiba Inu holders control 64% of the coins in circulation, making it vulnerable to a crash if they take profits.
2. Floki Inu
Dog memes and Elon Musk enjoy a cult following in the cryptocurrency community. And Floki Inu has exploited this by naming its token after Musk's recently adopted puppy named Floki. But Floki Inu's rally could end in tears because of its manipulative marketing strategies and history of rug pulls (the crypto version of a pump and dump).
Like Shiba Inu, Floki Inu has attempted to rise above the meme coin stigma by encouraging real-world utility. In August, the project partnered with e-commerce facilitator Cryptocart to allow holders to make purchases from over 1,700 stores worldwide. The developers also plan to create a decentralized "ecosystem" around Floki -- featuring games and non-fungible tokens, which are digital records of ownership stored on the blockchain, typically as digital art.
But Floki Inu's marketing strategy is a red flag. The project collects a 3% tax on every transaction sent to a wallet controlled by its developers. The team claims to use these funds to pay for real-world marketing, including ads that stated "Missed Shiba? Get Floki" on the London underground.
But because Floki Inu is not audited by any government regulator, investors don't know for sure where all the tax is going. Further, the strategy is similar to illegal pump-and-dump schemes, which promote and then sell penny stocks. According to the news website cryptoslate.com, Floki Inu has rug-pulled investors twice in the past before changing management and rebranding itself to its current iteration. But with 10 wallets controlling 38% of the coin's supply, there is still potential for a rug pull if early investors jump ship.
The dangers of meme coins
Meme coins can offer spectacular returns in short periods, which leads to fear of missing out (FOMO) in those who missed the big rally. But these high-flying assets will struggle to maintain their value over the long term due to their weak fundamentals and potential to crash sharply when large holders (whales) take profits. Investors should avoid Shiba Inu and Floki Inu because of these challenges.