In its most recent newsletter, Coinbase put out a warning about the new meme coin craze that seems to be taking hold of the crypto market right now. Demand for meme coins, says Coinbase, is now at "a fever pitch not seen since the height of the bull market in 2021." And that is leading to a number of market distortions, including higher transaction fees and network congestion.
You can blame the spectacular success of a frog-themed meme coin called Pepe for that. Pepe is up more than 3,000% in just the past 30 days and now has a market cap of $708 million. Until a recent pullback in price, it appeared to be on a trajectory to bypass the two most popular meme coins -- Dogecoin (CRYPTO: DOGE) and Shiba Inu (CRYPTO: SHIB) -- as the new "must-own" meme coin of 2023.
Before rushing out to get involved in the meme coin craze, here are two key questions to keep in mind.
Image source: Getty Images.
1. What is the size of the coin supply?
All three meme coins have ridiculously large circulating coin supplies. The problem is particularly obvious with Shiba Inu, which has a circulating coin supply of 589 trillion, and Pepe, which has a circulating coin supply of 392 trillion.
This huge circulating supply explains how new meme coins such as Pepe have amassed such large market caps in such short periods of time. For example, Pepe launched in April and already has a market cap of $708 million, which now ranks No. 61 among all cryptos tracked by CoinMarketCap.
It's all about the math here: Multiply any number -- no matter how infinitesimally small -- by 392 trillion, and you're going to get a large number. So, even though Pepe trades for a laughably small amount of money (just $0.0000018 at last check), its investors can claim that they are investing in a top crypto with a nearly billion-dollar valuation.
But don't be fooled by these numbers. As a rule of thumb, if a coin has a circulating supply above 1 trillion coins, you should avoid it. By way of comparison, Bitcoin only has a maximum lifetime supply of 21 million coins. That ensures maximum scarcity and helps to explain why some think Bitcoin could hit $1 million in price by 2030.
2. What is the utility of the coin?
Next, it's time to consider the utility of the coin. In other words, what does this coin enable you to do either online or in real life?
In all fairness to Shiba Inu, this is perhaps the one meme coin that is trying to expand its utility. It's building a Layer 2 scaling solution, it's building a new metaverse world, and it keeps promising new innovations related to Web3. Plus, some reputable businesses now accept Shiba Inu as a form of online payment.
But what about Pepe? As far as I can tell, it offers no utility whatsoever. While some coins try to put on a veneer of respectability by creating white papers, or explaining their vision of the future with detailed roadmaps, the Pepe website is remarkably blunt that this crypto is backed only by "pure memetic power" and a desire to "make meme coins great again."
Pepe is, first and foremost, a way to have fun with the Pepe the Frog cartoon character. In other words, its only true value comes from the belief its price will continue to go up. It's Dutch tulip mania, but this time with crypto frogs.
Putting it all together
That being said, I can definitely understand the allure of meme coins. Anytime you hear stories about people parlaying a few hundred bucks into million-dollar crypto fortunes, it's easy to get sucked in. But it may cost you in the end.
Pepe, for example, is now down nearly 40% in the past week, and is at risk of being replaced by the next meme coin du jour. Meme coins might be fun to explore if you have a few extra bucks for entertainment each week, but they should not be part of your long-term investment portfolio.
