Meme coins have carved out a peculiar niche in the cryptocurrency market. Some blockchain networks don't have much of a business plan or long-term plans for usability in the real world. Instead, they sidestep traditional financial valuations almost entirely, deriving value from market messages or outright jokes.

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Understanding meme coins

Understanding meme coins

Meme coins are cryptocurrencies that originate from internet memes or have a humorous or viral aspect. Unlike Bitcoin (BTC -4.8%) or Ethereum (ETH -5.27%), which are backed by robust blockchain technologies and have clear utility in digital transactions and decentralized applications (dApps), meme coins often lack a specific purpose beyond the community and cultural value they hold.

Blockchain

Blockchain technology is a transaction ledger on a massive scale, fortified by strong encryption and advanced security protocols.

The first and most famous example, Dogecoin (DOGE -6.96%), was created as a joke in 2013 but has since gained significant popularity and market capitalization. It is based on the same blockchain code that runs the larger, more sincere Bitcoin cryptocurrency but with technical tweaks that make it less useful for real-world payments and storage of monetary value.

Many newer meme coins don't run their own blockchain networks at all. Rather, they function as tokens supported by existing cryptosystems, such as Ethereum or Solana (SOL -2.65%).

This strategy makes it even easier to create a new token with a suitably silly marketing message wrapped in the data security and transaction efficiency of the underlying parent network. The technical details can be somebody else's problem.

Why meme coins matter

Why meme coins matter

Meme coins spotlight the power of community and sentiment in the digital age. Their value is largely driven by social media, celebrity endorsements, and the broader meme culture that thrives on the internet.

This phenomenon underscores a shift in how value is perceived and created in the cryptocurrency space. While traditional assets are evaluated based on fundamentals or utility, meme coins thrive on collective belief and the communal desire to be part of a shared (but speculative) financial journey.

It doesn't hurt if your favorite project has a cute mascot, a funny name, or a controversial philosophy. Well-known celebrity backers with millions of social media followers can make a big difference, too. The most popular meme coins often have all of these headline-inspiring qualities.

Meme coins also serve as an entry point into the cryptocurrency world for many investors. They frequently come with very low dollar-based prices, often paired with viral stories of dramatic gains in the early going. These qualities can attract a whole new demographic of investors looking not just for profits but also for participation in a cultural movement.

This idea has important implications for understanding market dynamics, where narrative and hype can significantly influence digital asset prices. One social media post from the right influencer can send a meme coin skyrocketing in a hurry -- or pop a meme coin's inflated valuation just as quickly.

Have a meme coin? Now what?

So, you've got a meme coin on your hands. Now what?

Venturing into the world of meme coins is like stepping onto a roller coaster with your investment portfolio in tow. Can it be exciting? Absolutely. Is this thrill ride predictable? Not in the slightest. But you should be fine as long as you know what you're getting into. So, here's how you should strap in for the meme coin ride.

Do your research

Just like you wouldn't buy a car based solely on its color, diving into meme coins requires a peek under the hood. What's powering its popularity? Is the engine (community support and social media buzz) robust enough to sustain a long journey, or is it running on mere fumes?

Manage your risks

Investing in meme coins should be like placing a side bet in an unpredictable casino game rather than betting the farm on a so-called "sure thing." Cryptocurrencies should comprise a moderate portion of your properly diversified investment portfolio, and meme coins can occupy a small sliver of the larger crypto collection.

Make sure you're comfortable with seeing your meme coin values fluctuate wildly -- sometimes in the blink of an eye and not always for any obvious reason.

Stay informed

The meme coin market is as dynamic as a chat room meme war. It pays to keep abreast of trends, news, and shifts in sentiment that can turn today's laughing stock into tomorrow's golden goose -- or vice versa.

A Dogecoin example

Let's check out Dogecoin, for example

Perhaps the epitome of meme coin success, Dogecoin began as a lighthearted parody of Bitcoin but quickly grew into a symbol of the crypto community's playful side. Despite its lighthearted origins, Dogecoin has seen substantial price increases from time to time, usually fueled by social media buzz and endorsements from influential figures like Tesla (TSLA -2.03%) CEO Elon Musk.

Its journey from a pure meme to a solid staple of the crypto market highlights the unpredictable nature of meme coins and their potential for unexpected success. Dogecoin's rise underscores the importance of community in the crypto market, a factor that can turn a simple joke into a billion-dollar asset.

The ride down to smaller market caps can be just as quick and unexpected when the early backers stop promoting the meme coin on social media channels. In the cryptocurrency sector, value is not only defined by utility but also by the shared belief and enthusiasm of its holders.

Related investing topics

Perception often becomes reality, for better or worse. Giants like Bitcoin are not immune to this volatility-boosting effect, but meme coins like Dogecoin are always exposed to these unpredictable winds of change. Some go beyond simple jokes and prove to be outright scams in the long run.

So, be careful with those adorable meme coins and watch out for pump-and-dump schemes known as "rug pulls" in the crypto world.

Anders Bylund has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Solana, and Tesla. The Motley Fool has a disclosure policy.