Memecoins are digital tokens depicted with an image — often an animated character or animal — that can quickly gain notoriety and soar in value. Although they have little practical use, they can draw an exuberant community of followers who hoard or trade them. (The name takes its cue from so-called meme stocks, such as Gamestop Corp., that were seized upon by retail traders during the pandemic and driven to stratospheric valuations based on social media chatter.) There are hundreds of memecoins, some worth almost nothing, others with market values of $100 million or more. Investors often leap upon a newly minted memecoin when it starts trading on a digital exchange such as Coinbase or Robinhood. Others pile in after them for fear of missing out. One famous memecoin, Dogecoin, ascended to stardom when Elon Musk tweeted memes based on the coin, which inspired a number of dog-themed memecoins such as Shiba Inu.
2. What happened this time?
More than 420 trillion frog-themed memecoins known as Pepe were created in little more than a month. The token was obsessively promoted on Twitter before and after its launch in April and soared to a market value of more than $1 billion in May before reversing course and plummeting more than 60% in the following days, according to data tracker CoinMarketCap.
3. So another memecoin roller-coaster — what’s new?
Most memecoins were created and trade on Ethereum. Pepe is one of several that were minted not just on Ethereum but also on the Bitcoin system, using something known as the Ordinals protocol. Launched in January, Ordinals is effectively a new layer on top of the Bitcoin digital ledger, or blockchain, that allows users to attach data such as a serial number or an image to a satoshi — the smallest denomination of Bitcoin — allowing people to create Bitcoin NFTs. Subsequently, someone found a way to use Ordinals to mint tokens that are “fungible,” meaning others can be minted with the same characteristics and publicized on the Bitcoin network. At that point, Bitcoin memecoin mania took off in earnest.
4. Why is that significant?
The Bitcoin community has traditionally been reluctant to allow such experimentation with its code for fear of overwhelming the network, so the latest development represents something of a leap into the unknown. It’s also a delicate time for the biggest brand in the crypto world, which is bracing for a regulatory crackdown after a market rout in 2022 killed off several big industry names.
5. Who gains and who loses?
The memecoin frenzy drove transaction fees on Bitcoin blockchain to their highest in almost two years. This brought a windfall to the “miners” who generate new Bitcoin by solving complex mathematical puzzles using banks of powerful computers. If memecoins and similar innovations propel ever more activity on the Bitcoin network, that could inflate the cost of using it and diminish its appeal as a virtual alternative to traditional currencies — its original purpose.
–With assistance from Olga Kharif.
More stories like this are available on bloomberg.com
