How to Trade Memecoins in 2024

General Tips for Trading Memecoins

1. Study extreme volatility. It is common for memecoins to see 50% drawdowns even in a bull market environment. 

2. Stay away from leverage. While most memecoins do not have platforms to host leveraged trading, those with access will likely lead to liquidations. 

3. Understand memecoins seasons, adoption waves, culture and parabolic movements. 

4. Technical analysis might not work. Memecoins generally trade on sentiments and virality of the project. 

5. Understand the upside potential. SHIB did a 1000x from its bottom and is unlikely to 100x from where it is today, a good knowledge on this will cultivate a strong risk management approach.  

6. Betting on memecoin leaders. Projects who occupy the throne will likely lead the markets – with a huge number of memecoins in the market this helps narrow your choices without compromising on upside potential.

7. Holding long term might hurt. Learn to be good at profit taking, majority of memecoins do not have the fundamentals to be held in an entire cycle, view it as a seasonal play. 

Key Takeaways

• Memecoins can offer high yields, but also exhibit significant volatility and may be prone to rug pulls, where developers abandon the project after raising funds. 
• When choosing a memecoin, consider its social presence, supply distribution, and how it stands out from other memecoins.

We all know what memecoins are—highly speculative currencies usually supported by enthusiastic communities. Often represented by animal images or animated characters, memecoins are purely trading instruments, unlike Ethereum and other chains with specific utilities. Despite this, they occupy a significant market share, with multiple memecoins boasting nine-figure market capitalizations. In fact, excluding Bitcoin, Ethereum, and stablecoins, the top 5 largest memecoins today hold a 22% dominance within the top cryptocurrencies.

Why You Should and Should Not Trade Memecoins

You’ve probably heard of many instances where people make substantial profits from memecoins. One notable example is BODEN, which surged by over 1000% in just 30 days, yielding a 10x return on investment (ROI). For comparison, investing the same amount in Bitcoin during May 2024 would have resulted in a 35.7% ROI. Meanwhile, an investment in the S&P 500 during the same period would have generated a 4.8% ROI.

While memecoins can offer unparalleled yields, they also exhibit significant volatility. Since BODEN’s peak in April 2024, it has experienced a 99.05% drawdown from its highs, further accelerated by Boden’s resignation from the election race. If you had invested $1,000 and held until today, your position would now be worth $9.5. 

In reality, there is only a small set of big winners, with a larger set of losers.

Unlike venture capital-backed projects that launch with multi-billion dollar valuations, memecoins typically start with very low valuations, often below $1 million. These memecoins are generally straightforward projects with simple supply dynamics and lack the complex economic models seen in other cryptocurrencies. 

Since most memecoins launch with their tokens fully circulating, there are minimal to no vesting or unlock schedules, resulting in little to no sell pressure from stakeholders. However, there are many instances where insiders are allocated memecoins and promote them, creating incentives to pump the price while simultaneously selling their allocations to new buyers.

Rotational plays within memecoins present an intriguing dynamic. Each memecoin often represents a particular narrative: PEPE acts as a beta for Ethereum, WIF as a beta play for Solana, and MAGA and BODEN as plays on the US elections. When navigated correctly, rotational plays within memecoins can result in positive outcomes.

Unlike the more consistent trends seen in Decentralized Finance (DeFi) or infrastructure cryptocurrencies, memecoins often exhibit a wider disparity in performance. While a few projects within a particular narrative might outperform drastically, many others tend to underperform significantly. 

Rug Pulls – A Common Occurrence in Memecoin Speculation

Rug pulls are common in the memecoin game and can occur in various ways. In March 2024, several Solana-based memecoins collectively raised over 180,650 SOL (approximately $26.7 million) before their developers abandoned the projects, leaving investors with significant losses.

Only 1 month has passed and 12 of the Solana presale meme coins have been completely abandoned after raising >180,650 SOL ($26.7M).

Would avoid any future projects launched by these founders. https://t.co/J0zFldRIa6 pic.twitter.com/K610MAEPMn

— ZachXBT (@zachxbt) April 21, 2024

As an example, the Squid Game token, SQUID, launched on Binance Smart Chain in October 2021, quickly gained attention due to its association with the popular Netflix show and media hype. However, investors soon found they could not sell their tokens, and in November 2021, the developers executed a rug pull, withdrawing approximately $3.38 million and causing the token’s value to crash to nearly zero. 

What Makes a Good Memecoin?

Contrary to popular belief, memecoins have underlying fundamentals that can determine their success. 

Social Presence 

A memecoin with a large social presence often performs well in terms of price action. These projects leverage their communities and viral trends to gain attention and value. For example, Dogecoin quickly gained a loyal following, significantly boosted by frequent tweets from Elon Musk, the CEO of Tesla and SpaceX, which greatly increased its visibility and value. Beyond celebrity endorsements, memecoins with active social media communities and regular engagement tend to build stronger brand loyalty and investor confidence. Platforms like Reddit, Twitter, and Discord play crucial roles in spreading awareness, sharing memes, and creating a sense of community around these tokens.

Healthy Supply Distributions

Healthy supply distribution is crucial for the success and sustainability of memecoins. It ensures that no single entity holds an excessively large portion of the tokens, reducing risks of price manipulation and large sell-offs. Fair and decentralized initial distribution, through methods like airdrops and community rewards, fosters a strong, engaged community invested in the coin's long-term success. 

Shiba Inu (SHIB) exemplifies healthy supply distribution through its initial airdrop, which included sending 50% of the total supply to Ethereum co-founder Vitalik Buterin, who donated and burned a significant portion. The launch of ShibaSwap further decentralized token ownership by incentivizing users to stake and provide liquidity, spreading tokens across a large base of participants. This approach built a robust community known as the "Shib Army," which actively promotes and supports the token, contributing to its sustained popularity and market performance.

Unique and Fun

A good memecoin should be unique and not merely a copy of other memecoins. For example, PEPE stands out not just as a memecoin but as a broader cultural symbol with its roots in the Pepe the Frog meme. It has been adopted by many artists and is frequently used in NFTs and various visual artworks, showcasing its distinct cultural impact and appeal. The uniqueness of a memecoin often comes from its ability to tap into niche communities and cultural phenomena, creating a sense of identity and belonging among holders. Memecoins like Dogecoin and Shiba Inu have also developed unique brands and mascots that resonate with a wide audience, further differentiating them from other digital assets and contributing to their lasting appeal.

Based on memecoin trends, it's interesting to note that while numerous variations of alternative tokens can be created, the original token often performs the best. This trend highlights the strong brand recognition and loyalty that the original token holds among investors and enthusiasts.

Strategies for Trading Memecoins

Now, let's look at some strategies for trading memecoins and what aspiring traders should consider.

Understanding the Market Conditions and Correlations

Market conditions significantly impact the performance of memecoins. By analyzing broader market trends and historical price movements, traders can identify potential entry and exit points. A notable example is the performance of Solana (SOL) and the memecoin WIF. On March 18, 2024, Solana reached a peak price of $205. Shortly after, on March 31, 2024, WIF, the biggest meme on Solana, marked its top. This pattern suggests a correlation between the peak of a major cryptocurrency and the subsequent rise of associated memecoins.

Analyzing historical flows and statistical data can also provide valuable indicators for predicting the start of a meme season. Historically, significant price movements in major cryptocurrencies often precede increased activity in memecoins. For example, volume spikes in leading cryptocurrencies like Bitcoin and Ethereum can signal impending interest in memecoins as traders seek high-risk, high-reward opportunities. A correlation analysis reveals that, over the past three years, memecoins have shown a 0.65 correlation with Bitcoin's price movements during bull markets. Additionally, in 2023, significant volume spikes in Ethereum were followed by a 20% increase in memecoin trading volumes within a week. Seasonal trends also play a role; data from 2019 to 2023 indicates that Q2 and Q4 are typically periods of heightened memecoin activity. 

Measuring Social Accounts and Trends

With limited fundamentals available for assessing a memecoin project, a thorough analysis of their social activity via social media accounts becomes essential. A key metric to consider is the number of followers the account has. For instance, when PEPE was first created, it gained thousands of organic followers daily, surpassing 100,000 followers within the initial two to three weeks. Such significant growth often signals a strong memecoin project, attracting more attention and engagement, which can lead to further strengthening of the project.

Another method for identification is by tracking social trends. There is a correlation between the price action of a memecoin and the frequency of keyword mentions related to the project. As people tend to react based on what they observe on social media, an increase in social media mentions often leads to a rise in prices. The following example illustrates how a spike in mentions of POPCAT corresponded with its price action.

Using Advance Search on Twitter

Twitter is a double-edged sword: it offers a wealth of information but also contains a lot of noise. Using advanced search on the platform not only helps to filter out the noise but also allows you to hyperfocus on the topic at hand. 

By employing advanced search techniques, such as filtering tweets by specific keywords, dates, and engagement metrics like retweets, you can determine if a topic is trending. This method helps in identifying the most relevant and viral content, ensuring that you capture valuable insights amidst the vast amount of information available.

Moreover, monitoring specific accounts and their tweets can help track trends and viral mentions. For example, conducting an advanced search before a parabolic price pump could reveal key social media accounts to monitor. These accounts might provide insights or mention another memecoin poised for a similar surge.

Using WIF as an example, before its over 1000% price increase on February 26, 2024, you would want to identify accounts discussing WIF prior to its parabolic run. 

Conducting an advanced search with specific parameters, such as finding tweets mentioning WIF that received more than 50 retweets and a minimum of 20 likes, can help pinpoint influential accounts and key discussions. This approach allows you to filter out less relevant content and focus on high-engagement posts. By adjusting these parameters based on your needs, you gain the flexibility to refine your search and discover accounts that consistently provide valuable insights or signals, potentially highlighting trends and upcoming opportunities in the memecoin market.

Betting on TVL Growth of the Chain

The Memecoin TVL Pump Theory posits that premier memecoins act as a leveraged bet on the Total Value Locked (TVL) of a blockchain. As a chain's TVL increases, a portion of it flows into high-risk, high-reward opportunities, such as memecoins. Historical examples, such as BRETT's performance during Base TVL ramp-ups. Predicting TVL increases, whether through long-term fundamentals or short-term catalysts like incentive programs, can guide you in identifying memecoins early.

Trading Memecoins In Various Waves

It is also good to understand the various waves of memecoins, each with its own set of risks and potential rewards. 

The first, is the initial launch. This phase is the riskiest but offers the highest potential returns. Early buyers benefit from low initial prices but must navigate the high risk of rug pulls and price manipulation. The allure of substantial gains attracts risk-tolerant investors who are willing to face significant volatility and uncertainty.

Especially in wave one, it's crucial to understand the basics of smart contracts and perform safety checks. One simple check is verifying the contract on platforms like Etherscan, indicated by a green verification mark. Another check is to examine buy and sell taxes, as some memecoins may have high sell taxes (e.g., 95%) that deter selling and falsely inflate the price. Additionally, tools can provide deeper insights into smart contracts. For example, you can use tools like ChatGPT to decode and analyze the contract code.

Next, the post launch phase. Following an initial price surge, memecoins often experience a correction. Traders can capitalize on these corrections by buying during the dip, provided they have strong conviction in the coin's potential. This phase requires careful market analysis and a solid understanding of the coin's fundamentals to identify the optimal entry points.

Subsequently, the third and final wave is where the project has established presence. By this phase, the memecoin has a more established market presence and community. The risks are lower, and the focus shifts to strategic buying during market pullbacks and holding for longer-term gains. Investors in this phase look for stability and gradual growth, relying on the coin's solidified position in the market and its supportive community.

Conclusion

Trading memecoins offers both high rewards and high risks. Understanding market dynamics, employing sound strategies, and staying informed through social media are crucial for effectively navigating this volatile landscape. Memecoins gain value by leveraging internet culture and attention, often driven by community engagement and viral trends. Initially met with skepticism, memecoins have gained recognition for their ability to engage communities and test blockchain capacities. They serve as onboarding tools, cultural tokens, and provide insights into emerging market trends. Despite criticisms and risks of scams and insider manipulation, memecoins have become an integral part of the crypto ecosystem, reflecting broader trends and cultural shifts. 

Always do your own research and never invest more than you can afford when trading memecoins, which are usually subject to higher levels of volatility than other crypto assets. This article is for informational and awareness only, and should not be taken as financial or investment advice.