From memes to multibillion-dollar pumps, scams and rug pulls

Posted on May 26, 2023

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Memecoin, or meme cryptocurrency, began as a cultural phenomenon with the launch of Dogecoin (DOGE) in 2013, inspired by internet memes and criticism of the wild crypto market at the time.

Dogecoin was developed by software developers Billy Markus and Jackson Palmer as a joke to mock what many see as the irrational investment hype surrounding cryptocurrencies.

Memecoin started as a form of social token. They are often created and promoted by online communities or individuals with similar interests or sense of humor. The social element of memecoins plays a significant role in their success and adoption. Another reason for their popularity is their sizable total supply and low token price.

A decade later, memecoin is a multi-billion dollar ecosystem, popular as a high-risk speculative investment.

From DOGE to Pepecoin (PEPE), memecoin has come full circle. From their initial inspiration as a parody of cryptocurrencies to now the very same parodies they ridicule, attracting irrational speculative investments to drive up prices.

Pepecoin’s popularity helped it explode to a market cap of over $1 billion, but within days its market value shrank by more than 40% to under $600 million.

Ironically, the concept of memecoin has become a meme in itself. While there are always stories about how a random trader turned a few hundred dollar investment into millions; for that one lucky trader, many others lost their life savings.

Bull 2021 runs a turning point for memecoins

The 2021 bull market turned memecoin from a parody to a legitimate investment option. Prior to 2021, memecoin was mostly social media based, with a strong internet community driving its popularity. This changed when the unofficial DOGE ambassador appeared – Elon Musk.

Musk has become a staunch supporter of DOGE, and the community behind him proclaims him the project’s unofficial CEO. The Musk-Doge relationship started as a continuation of the meme concept. Musk has said on numerous occasions that he loves memes and, therefore, likes the idea behind cryptocurrencies like DOGE.

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With the 2021 bull run fueled by growing institutional interest in cryptocurrencies and Bitcoin (BTC), Musk set about making DOGE a true internet currency. The tech billionaire’s backing worked memecoin magic, with its price jumping 23,000% in 2021.

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With the Dogecoin boom, the memecoin craze is becoming a new phenomenon in the crypto market. This lured many new participants — from seasoned traders to everyday people — to the crypto market, hoping to ride a bullish wave. Other memecoins began to appear, with many new tokens recording multidigit price spikes, sometimes based solely on tweets from Musk himself.

The memecoin craze of 2021 produced many new crypto millionaires and attracted new traders to the ecosystem. In a year that memecoin has entered the top 5 cryptocurrencies by market capitalization, there is no shortage of stories of traders losing their immediate savings after buying tokens at the peak of the market or believing that Musk will continue to positively influence the price.

Tons of new traders are tweeting at Musk to post about DOGE; however, as soon as the frenzy died down, the token lost over 90% of its value.

Since the DOGE craze of 2021, the market has been flooded with tens of thousands of memecoins and “shitcoins” trying to become the next Dogecoin or Shiba Inu (SHIB).

Anjali Young, co-founder of community-focused blockchain app development platform Compact, told Cointelegraph that the current memecoin craze is all about managing the fear of missing out (FOMO).

“One important part is managing FOMO. There are many approaches to how to deal with it, and it’s best to find one that works for you. For some people, formulating a buying thesis and sticking to it or only investing what they are prepared to lose can help. Having said that, it is important to mention that with cryptocurrencies operating 24/7, it is very easy to get swept up in the constant wave of news and trading activity. When you succumb to FOMO, learn your lesson and move on. And then get back to managing that FOMO,” he explains.

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The anonymous token meme era is filled with scammers and interesting rugs

Aside from the memecoin speculation frenzy, observers are worried about the risks posed by any new cryptocurrency.

New anonymous memecoins often come with many smart contract vulnerabilities, including closed source contracts, proxy contract mechanisms, tradable logic with a pause function (risk pull rug), and set high sales taxes that inhibit token sales. This vulnerability has the potential to result in losses for traders.

Gracy Chen, managing director at crypto exchange Bitget, told Cointelegraph that while the original memecoins like DOGE and SHIB still have a solid community base, the new anonymous and closed-source meme tokens are mostly scams.

“Most of the new era memecoins are anonymous with lots of contract vulnerabilities. Some memecoin issuers concentrate a large number of chips in a single EOA [externally owned account] address or distribute it to addresses under their control, which creates a significant short-term dumping risk. When trading memecoins, especially those that are newly used, it is very important to be very careful and do your own research,” explains Chen.

The dark side of the frenzy became apparent in 2023, with several new scam tokens launching disguised as meme currency.

In May, blockchain analytics firm PeckShield released a report warning the crypto community to be wary of fake meme tokens. The security company listed 24 fraudulent meme tokens created in the first week of May.

ZachXBT, a well-known online sleuth who uncovers scams, highlights how one account created 114 fraudulent meme tokens in just over a month.

Another popular memecoin scam comes from the moderators of the popular trading subreddit r/WallStreetBets. The group created a memecoin called WSB Coin (WSB), claiming it was Wall Street Bets’ official memecoin, and launched it on May 2. WSB token developers confirmed that 10% of the coin will be set aside for the subreddit, with no allocation to teams.

On May 4th, moderators dumped most of the meme tokens on the market, and within two days, the token’s price plummeted from an all-time high of $0.00067279 to an all-time low of $0.00004827 at the time of writing.

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According to Satoshi Nakamoto’s original vision, the goal of crypto is to overcome the limitations of traditional finance and provide greater access to everyone. While some people have achieved financial freedom through memecoin speculation, looking at history, most people have ended up on the losing side.

Kadan Stadelmann, chief technical officer at Komodo, told Cointelegraph that there are two main reasons why the current memecoin investment trend is bad for the crypto ecosystem:

“First, it undermines the potential for funding that might go towards serious projects that have more innovative real-world technology and use cases. Second, many portfolios will lose value by not selling at the top or pursuing fraudulent projects.”