Anyone who has spent a significant amount of time on the internet will be familiar with what memes are. Their impact on Internet culture has been so significant that memes have moved past the borders of social media and even entered the cryptocurrency world.
In recent months, however, meme coin investors have found themselves tangled in an array of scams as well as pump-and-dump schemes.
What are some of the biggest risks associated with meme cryptocurrencies, and what can investors do to stay safe?
Meme Coins: Biggest Risks to Beware Of
One of the biggest risks of meme cryptocurrencies is their volatile nature, as their price highly depends on market sentiment and online trends. This forces the cryptocurrencies to experience harsh price swings, thus increasing the risk of loss for investors.
“For example, around 2021, Elon Musk shared a tweet on dogecoin, and the price saw a sudden surge of higher than 50%, and then later, when live on Saturday Night Live, he merely referred to dogecoin as a hustle and the price dropped by 30% in less than an hour,” the co-founder and CEO of CoinLedger, David Kemmerer explained, adding that meme coins are also at risk of scams that can eventually decrease their value.
The CEO and co-founder of Howl Labs, Ivan Perez, added that in many cases meme coins “are a gamble”.
“The interesting thing is that there is a parallel between the gamble you take when you buy a meme coin with the gamble you are taking when you decide that any fiat currency in the world has value. When you look at a meme coin, the only way to view or discern any inherent value is by the size of the community that is following that meme coin.”
Moreover, the speculative nature of meme coins makes them a great asset for scam projects as well as pump-and-dump schemes. Regulatory uncertainties also further compound the risks associated with meme cryptocurrencies.
When you invest in a meme coin, you have to understand that there is a real chance that every cent of that investment will become worthless.
What Are Meme Coin Scams?
Recent months have seen a surge in meme coin scams. At the end of April 2023, for example, in a Twitter thread, famous scam sleuth ZachXBT discovered a person whose crypto wallet address – 0x739c58807B99Cb274f6FD96B10194202b8EEfB47 – was linked to 114 meme coin scams, created in the span of 1.5 months.
Over the past 1.5 months one person has created 114 meme coin scams.
Each time stolen funds from the scam are sent to the exact same deposit address.
— ZachXBT (@zachxbt) April 26, 2023
CoinLedger’s Kemmerer also added that cyber scams in the likes of phishing and malware are also popular in the meme coin ecosystem.
“Sometimes scammers get in touch with meme coin investors and trick them into revealing private seed phrases or otherwise share malicious software, usually through email as a link related to the meme token, which, when clicked on, compromises their devices.”
Some meme coin scams simply lie about what they are. Many will claim that they have a massive community of investors ready to buy the coin or that they have a large team of developers ready to build some great product to further the coin when none of these things are true.
Another unfortunately popular kind of scam is often called a honey pot which is a mix of a traditional scam and a pump-and-dump scheme. A scammer launches a small token and then manipulates the price of the coin by immediately buying up a bunch of tokens. This causes a spike, putting the token onto various trending pages on analytics tools like Dextools or Dexscreener. This attracts more traders looking for a profit who all buy-in.
The catch is the scammer wrote the token’s smart contract so that only his wallet addresses can transfer the token. This keeps the scam going for longer as no one can sell, so it looks like the price is moving up nonstop. Eventually, these tools and marketplaces notice the scam and warn their users, eventually causing the rise to stop The scammer then sells all of their tokens at the inflated price for sometimes massive profits.
Moreover, scammers also tend to target prominent meme tokens on the market and create a series of different versions of that coin, leading people to believe that it is the original when in reality, they would be investing in a knockoff version of the cryptocurrency.
Pump-and-Dump Schemes Prominent Among Meme Coins
Perhaps, one of the most common scams in the meme coin ecosystem is pump-and-dump schemes. They entail a coordinated effort by a group of investors artificially inflating the price of a cryptocurrency, therefore pumping it by spreading positive hype online and encouraging others to invest in it.
Once the token reaches a certain price peak, the orchestrators sell their holdings, thus dumping everything they were holding on to it, causing the price to plummet and everyone else to lose money.
Howl Labs’ Perez explained that more often than not, meme coin projects that experience a pump-and-dump scheme die out due to the fact that the orchestrators are controlling all of its liquidity.
“If most of the liquidity is held in a couple of hands, as soon as they exit, the price drops and the liquidity thins out so much that even trying to sell out becomes very difficult because of slippage.”
The chief of markets at YouHodler, Ruslan Lienkha, added that within the crypto world, pump-and-dump schemes are much more common, as it is “easier to manipulate investor sentiment.”
“Many crypto traders simply do not have any experience in traditional financial markets in their background. So, coins with very low capitalization, lack of regulation, and easier ways to target potential investors through social media (with misleading informational campaigns, etc) make the scheme much more efficient and easy to implement.”
He added that speculations have recently risen that the prominent PEPE meme token was part of a pump-and-dump scheme when rumors spread saying that an American money management firm, BlackRock, was involved in the trading. While BlackRock disproved its involvement in the scheme, some investors speculated that it could have been an attempt at a pump and dump.
How Can Meme Coin Investors Stay Safe?
Kemerrer and Perez unanimously said that investors wishing to put their assets into meme coin projects should conduct thorough research prior to putting any cash into projects they may be unsure about.
“Any aggressive promotional campaigns with limited information on the meme coin, inconsistent information, or unrealistic claims are red flags. Also, [investors] should avoid investing in meme coins with a sudden increase in price or an abrupt spike in trading volume,” Kemerrer stressed.
Perez added that inspiring investors should look into a project’s community and analyze whether they are just discussing a token’s price or if there is real support for the project or its aspirations.
In addition, Lienkha noted that an easy win is to invest in projects that prove to be more liquid and to never be too swayed by trade news or enter the market at a moment of high volatility since FOMO could be an investor’s worst enemy.
“Also, regarding news, all information should be double-checked, for the long strategy, it is important to distinguish facts from opinions,” he added.
Even with all of these precautions, it’s important to realize that there will always be a lot of risks incurred when investing in nascent meme coins based on nothing but hype and community interest.
Overall, investing in meme coins can be a fun and sometimes incredibly profitable activity. However, like with any other cryptocurrency, it is important for investors to conduct due diligence when putting their money into a project they may be not too familiar with.
Research and familiarising themselves with the community supporting a certain project would be the first steps in reducing the risk of getting scammed when investing in meme coins. In addition, investors should never trade money they cannot afford to lose.