How do memcoins affect the cryptocurrency market?
Memcoins and their place in market capitalization
The overall cryptocurrency market capitalization is an important indicator of its health. Memcoins, occupying a significant share of this capitalization, contribute to the growth and dynamics of the market. For example, Dogecoin, during periods of hype, took up to 2% of the total cryptocurrency capitalization, and Shiba Inu periodically got into the top 15 assets by market value.
The main factor contributing to the growth of memcoin capitalization is mass interest. Social media plays a key role in promoting these assets. For example, after Elon Musk's tweet in May 2021, in which he called Dogecoin "the cryptocurrency of the people," the asset's price rose by 30% in a day. On TikTok, videos mentioning Dogecoin garnered millions of views, leading to a surge of new investors. Reddit groups such as r/Dogecoin had over 2 million members actively coordinating the asset's purchase, which helped raise its market capitalization to $88 billion. In October 2021, Shiba Inu gained over 200,000 new token holders in a month after the hashtag #SHIB went viral on Twitter and TikTok.
However, the growth of memcoin capitalization is often accompanied by increased volatility. For example, in May 2021, Dogecoin grew by 400% in just two weeks, reaching a maximum price of $0.68. However, by June of the same year, the price had already fallen by 60%, resulting in significant losses for investors. This process creates a bubble effect, which, if deflated, can lead to a short-term decline in the overall market capitalization.
A similar situation was observed with Shiba Inu in October 2021, when the token's price increased by 300% in two weeks and fell by more than 50% in a month. At the same time, memcoins can serve as an indicator of investors' general mood — their mass purchase often signals speculative interest and excess liquidity in the market. For example, in 2021, Dogecoin's total daily trading volume reached $20 billion at peak times, indicating high speculative activity.
The impact of memcoins on significant crypto assets
Memcoins not only hold some market share but also have an impact on major cryptocurrencies such as Bitcoin and Ethereum. Let's take a look at a few key aspects of this influence:
Capital flows
During the memcoin hype, investors often reallocate capital from more stable assets like Bitcoin and Ethereum to memcoins. For example, in October 2021, when Shiba Inu was gaining popularity, its capitalization went from $10 billion to $40 billion in just three weeks. During the same period, Bitcoin's market dominance dropped from 46% to 40%, indicating a reallocation of funds towards memcoins.
Ethereum also experienced an outflow of funds: ETH's average daily trading volume decreased by 15%, while Shiba Inu trading volumes increased by over 500%.
Increased transactional activity
The popularity of memcoins significantly increases the load on blockchains. For example, Dogecoin processed over 30,000 daily transactions in May 2021, making it one of the most actively used cryptocurrencies for small transfers. The average transaction confirmation time on the Dogecoin blockchain dropped to one minute, attracting users looking for a quick and inexpensive way to send funds.
Ethereum also experienced a significant increase in load due to the popularity of memcoins such as Shiba Inu, tokens of the ERC-20 standard. During the peak hype in October 2021, average transaction fees on Ethereum rose to $50 and, in some cases, as high as $200. This was due to a dramatic increase in trading volumes and the use of smart contracts.
The most significant impact was on decentralized exchanges such as Uniswap, where memcoin tokens accounted for up to 20% of all transactions on certain days.
Attracting new investors
Memcoins often become an "entry point" for new market participants. Their low cost per unit and high growth potential attract retail investors with no previous experience in cryptocurrencies. For example, Dogecoin attracted over 4 million new owners in 2021, of which 60% started their investment activities with this cryptocurrency.
Similarly, Shiba Inu increased its holdings by 200,000 in one month in October of the same year, thanks to viral campaigns on TikTok and Twitter. These new investors began diversifying their portfolios by investing in more stable assets such as Bitcoin and Ethereum. This process has had a positive impact on the long-term liquidity of the entire market. According to Crypto.com, more than 70% of new crypto investors in 2021 entered the market for the first time thanks to memcoins, which significantly increased overall capitalization and trading activity.
Infrastructure development
The popularity of memcoins is driving the development of the cryptocurrency ecosystem. For example, in 2021, the Robinhood platform supported Dogecoin, allowing retail investors to trade this cryptocurrency without commission. Dogecoin accounted for over 34% of Robinhood's cryptocurrency revenue in the first quarter of 2021.
Binance, one of the largest cryptocurrency exchanges, launched the Shiba Inu token, which became one of the most traded assets on the platform. In October 2021, daily trading volume exceeded $10 billion.
These moves have increased the availability of memcoins and spurred the development of services for storing and managing cryptocurrencies, including projects such as Coinbase and Kraken, which have also added support for popular memcoins. The high demand for memcoins has encouraged exchanges and platforms to invest in infrastructure to facilitate greater use of memcoins and the underlying assets.
Negative impact of memcoins
Despite the positives, memcoins also carry significant risks for the cryptocurrency market:
- Increased volatility. Sharp price spikes often characterize memcoins. For example, Dogecoin in April 2021 rose 500% in three weeks, but by July of that year, its price had fallen 70%. A similar situation was observed with Shiba Inu, which rose 300% in two weeks in October 2021 and then lost more than 50% of its value in a month. Sharp price fluctuations create an illusion of instability in the entire market, scaring away institutional investors. According to Glassnode, an analytical company, periods of increased memcoin volatility correlate with a general decrease in the activity of large market participants who prefer to avoid the risks associated with excessive speculation.
- Risks of manipulation. The low value of memcoins makes them attractive for manipulation. For example, in January 2021, a group of investors on Reddit in the WallStreetBets community coordinated to increase the price of Dogecoin by over 800% in just two days. This surge of interest resulted in over $30 billion worth of transactions in 24 hours. A similar case happened with Shiba Inu in October 2021, when the asset went up 300% in a few days thanks to organized community purchases on social media. Glassnode statistics show that during such manipulation, the number of significant transactions (worth more than $1 million) with major cryptocurrencies such as Bitcoin and Ethereum decreases by 15-20%, indicating a decrease in the activity of large market participants.
- Lack of fundamental value. Unlike Bitcoin, seen as "digital gold," or Ethereum, with its smart contract functionality, memcoins often have no real utilitarian value. For example, Dogecoin, created initially as a joke, still offers no significant technological improvements or unique features. This makes it dependent on market sentiment and speculation. Similarly, despite developers' attempts to add utilitarian value through projects like ShibaSwap, Shiba Inu remains largely an asset for short-term speculation. Glassnode notes that 80% of memcoin transactions are short-term, significantly reducing their stability and attractiveness to institutional investors.
Memcoins as part of the ecosystem
The existence of memcoins can be seen as a phenomenon of digital culture. They combine economic and social aspects, contributing to the popularization of cryptocurrencies and the involvement of new users. For example, the #dogecoin hashtag on TikTok has garnered more than 10 billion views, and memes on the topic of Shiba Inu have become part of popular internet cultural trends, garnering millions of likes and reposts.
According to analytics platform LunarCrush, memcoins account for up to 20% of social media discussions about cryptocurrencies. Their importance extends beyond the financial world, becoming part of modern internet folklore.
In the long term, memcoins may contribute to the diversification of the crypto market and the creation of new business models. For example, Dogecoin is actively used for microtransactions and charitable fundraisers. In 2022, the volume of donations in Dogecoin exceeded $5 million, demonstrating its potential in socially relevant projects.
Shiba Inu, for its part, is actively developing its ecosystem through the ShibaSwap platform and plans to improve the Shibaverse metaverse.
However, realizing memcoins' full potential requires their integration with the real economy. According to Chainalysis, in 2023, only 2% of all memcoin transactions were used for actual purchases, indicating the need to expand their utilitarian value for long-term success.