Something interesting is happening in the crypto market right now. While Bitcoin (BTC +3.88%) is up 65% for the year, some popular meme coins are popping by even greater percentages. So far in 2024, Dogecoin (DOGE +2.01%) is up 85%, Shiba Inu (SHIB +2.32%) is up 147%, and little-known meme coin PEPE (PEPE +2.17%) is up nearly 1,000%.
It's starting to feel a lot like 2021, when the crypto market experienced its last major bout of meme coin mania. While it might be tempting to invest in those skyrocketing coins, history suggests that longtime sector stalwarts like Bitcoin will end up being better investments.
Short-term vs. long-term returns
The primary problem with speculative meme coins is that they are built only for the short term. Yes, they can deliver dazzling returns over short periods, but when you zoom out and consider their performances over a longer horizon, the picture proves much less enticing.
CRYPTO: DOGE
Key Data Points
Take Dogecoin, for example. In 2021, it enjoyed spectacular success, rising from mere pennies to an all-time high of $0.74 in just a few months. But then, Dogecoin crashed back down to earth, and it now trades for just $0.17. In its nearly 10-year history, Dogecoin has never once broken through the $1 mark.
Compare that performance to Bitcoin, which has been delivering triple-digit annualized returns for more than a decade. From 2011-2021, Bitcoin was the best-performing asset in the world, and it wasn't even close. Bitcoin delivered annualized returns of 230%, compared to about 20% for the tech-heavy Nasdaq-100 index. Yes, Bitcoin has had its down years, but over the long haul, it has delivered for investors.
The scarcity effect
Another factor in Bitcoin's favor is scarcity. The total number of Bitcoins that can ever exist is 21 million coins. Currently, 19.7 million of those have already been mined, and the rate at which new ones are mined was halved again just last month. This creates a real scarcity effect, especially now that large institutional investors are buying Bitcoin.
When you compare Bitcoin's circulating coin supply to that of Shiba Inu, the contrast is particularly striking. Shiba Inu has a circulating coin supply of 589 trillion. This explains why it is highly unlikely to hit a $1 price, since that would give the meme coin a market cap of $589 trillion. By way of comparison, the current market cap of the entire S&P 500 is approximately $44 trillion.
And the story is much the same with other meme coins. The key to their early success was the release of a huge initial coin supply, often measured in the trillions of coins. This lifts them to multibillion-dollar market caps, even at absurdly low prices measured in tiny fractions of a cent. This strategy can give even a coin that has existed for only a few months a billion-dollar-plus market cap, making it look like a relatively safe investment. Pepe, for example, exploded out of nowhere to become a Top 25 crypto, largely based on its staggering 421 trillion coin supply.
Making matters even worse, it's now possible to create a new cryptocurrency in just a few minutes, and have it ready for trading in just a few more minutes. Crypto speculators are creating literally thousands of new coins daily. If one of them happens to attract some attention and hits it big, they stand to make a huge profit. And if it doesn't, well, they only wasted a few minutes of their time creating it. Thus, meme coins are no longer as "rare" as they once seemed to be just a few years ago, when Dogecoin and Shiba Inu reigned supreme.
Dutch tulips and meme coins
In many ways, the current speculation around meme coins reminds me a lot of the 17th-century bubble known as Dutch Tulip Mania. This is largely regarded as the first speculative asset bubble of modern times, and has been brilliantly described in works such as Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds.
For a time, Dutch traders were willing to pay absurd amounts for particularly rare tulip bulbs -- a single one might command a price equivalent to the annual wages of 10 skilled laborers. But the story did not have a happy ending for the speculators. Eventually, it became impossible to find new buyers willing to pay more than the previous ones had, and the price of the bulbs swiftly collapsed.
Bitcoin as "digital gold"
Of course, there have been skeptics who have suggested that Bitcoin might be a Dutch tulip bulb as well. They claim that the price of Bitcoin could eventually fall to zero, wiping out speculative crypto traders in the process.
Image source: Getty Images.
Maybe that's the case, but I doubt it. It has been more than a decade since people began making those assertions, and what has been the result? Bitcoin has become more valuable, not less valuable, over time. And that's because Bitcoin has more in common with a precious metal such as gold, due to its inherent scarcity. In fact, many crypto investors often refer to Bitcoin as "digital gold."
Thus, if you are thinking about buying meme coins right now, I have just a single piece of advice for you: Buy Bitcoin instead.
