Memecoins: Burgeoning Market or Transitory Blackhole

In the 2021 crypto market cycle, memecoins experienced unprecedented growth, with DOGE and SHIB reaching market capitalizations of over $80 billion and $40 billion, respectively. Further down the list, tokens like Safemoon and BabyDoge, among countless others, surged on Binance Smart Chain as it was the dominant chain for memecoin launches in the latter half of 2021. 

Recently, a new wave of prominent memecoins alongside a deluge of new memecoin creation and speculation platforms like Pumpdotfun and Telegram trading bots have put memes front and center again. Yet as memecoin activity has grown, critics of the category have only grown stronger with proclamations that all memecoin activity is meaningless and ephemeral due to a lack of true fundamentals. 

However, we view memecoin dynamics as similar to that of lotteries and sports gambling as an industry. Lotteries are inherently pvp and zero sum, with very few winners over meaningful timeframes, yet U.S. state lotteries collected over $95B in sales revenue against $64B in prize payouts in 2021. Even though the odds of hitting a jackpot are around 1 in 300M for both Powerball and Mega Millions, Americans are enticed by increasingly large jackpots and return to play regularly. Additionally, the growth of online sports betting, which captured 49% of online gambling market revenues in 2022, highlights the effect that gamification of betting platforms has on user engagement. In other words, the growth of memecoin trading is rooted in many of the same fundamental drivers behind the success of lotteries and gambling which are historically very lucrative and growing businesses.

Beyond sentiment, refusal or inability to interact with memecoins is another barrier. As of today, most large funds will not touch memecoins. Notably, the Bitwise 10 Crypto Index Fund, a common benchmark for crypto asset managers, which “seeks to track an index comprised of the 10 most highly valued cryptocurrencies'', excludes DOGE despite being the 6th largest cryptocurrency today excluding stablecoins and derivatives (e.g. STETH, WBTC). Instead, names including ADA, DOT, and BCH, assets that are arguably far less useful in crypto portfolios than DOGE or even SHIB, make up the long tail of the index fund. However, despite negative criticism and a lack of recognition from funds and index providers, retail participants appear wholly unphased. As proof, Pumpdotfun-related tokens consistently account for upwards of 20% of total Solana DEX volumes since emerging onto the scene earlier this year.

In addition to Pumpdotfun’s leading position, users of Telegram DEX trading bots are generating over $100M in daily trading volume, with nearly all of the activity attributable to memecoins. With such incredible demand from retail and arguably the strongest PMF of any app or category today, why has the broader industry sentiment towards memecoins remained negative?