Are Memecoins Capped?

A thought experiment on the flows of capital in meme coins.

Key Takeways:

• Meme Coins as Tokenized Culture: Meme coins represent tokenized attention and culture, enabling financial engagement with social symbols.
• Low 'Switching Costs': Transitioning between meme coins is effortless, driving users toward newer opportunities over established ones in a loop.
• Preference for New Narratives: Users consistently favor entirely new meme coins over older, established ones, even those from just months earlier.
• Fountain Effect of Liquidity: Liquidity rotates seamlessly between new coins and trends, fueling the speculation.
• Smaller Valuations Likely: Dozens of meme coins reaching $1 billion valuations are more likely than a few hitting $100 billion.

Tokenized Attention

Memecoins, which represent tokenized attention and culture, allow users to speculate on the growth of a social symbol or financially engage with that symbol. These assets are beginning to reveal patterns reminiscent of past cycles in crypto history—particularly the "killer narratives" that sought to upgrade the original generation of assets. For example, we witnessed the rise of Bitcoin forks and so-called "Bitcoin killers." This narrative also played out with Ethereum versus Bitcoin and, more recently, Solana versus Ethereum.

There will always be new technologies and communities arguing that their newer, shinier, and faster models are superior to the incumbent. In the case of utility-based assets, fundamentals such as adoption, user growth, and real-world use cases play a significant role in determining the success or failure of these new entrants. However, for meme coins, the dynamics are markedly different.

Low switching costs

Meme coins present an intriguing dichotomy: they are a stance against high valuation “VC” coins but their switching costs are extraordinarily low. Transitioning from one meme coin to another requires little more than a few clicks. Because of this minimal friction, the decision to switch from one meme coin to another is often more ideological than technical. The abundance of meme coins further amplifies this effect, as users are incentivized to seek out newer, smaller meme coins with the potential for explosive early growth rather than committing to an older, established one.

This phenomenon creates an ecosystem where constant creation and speculation dominate, making meme coins distinct from their utility-driven counterparts. While the underlying motivations and dynamics differ, the broader narrative of innovation versus incumbency continues to shape the crypto landscape.

This leads one to ask: Are meme coins more psychologically capped than we might think? New entrants are likely to prefer chasing entirely new narratives rather than adopting older, established coins from a different "generation"—with generations in this context being time periods as short as six months apart.

Memecoin “Fountaining” - Psychological Cap on Valuations

The prevailing consensus suggests we'll see multiple meme coins reach valuations of $100 billion. However, I propose a different scenario: it's far more likely that we'll see dozens of meme coins each hitting $1 billion valuations instead.

This is primarily because liquidity could continuously rotate into new coins, trends, and memes, creating a "fountain effect" of liquidity moving from coin to coin. The low switching costs make this rotation seamless, reinforcing the speculative flow of capital.

In fact, launching new coins are so easy that we ended up with 13-year-old meme coin developers.

https://x.com/damskotrades/status/1859143525595517345

I would argue that NFTs are a form of memes where the story or social context behind the NFT is the meme itself. During the 2022 meme euphoria, traders were using small, newer launches to generate cash flow to purchase higher-prestige or higher-class meme coins and NFTs. Essentially, there was a trade-up system where the gold-tier, top-tier NFTs were CryptoPunks and Bored Apes, and successful traders would ultimately end up with one of these top-tier assets. Whereas with tokenized memecoins, there isn't an affinity or prestige in holding Doge over some new speculative theme or coin.

It may be the case that market dynamics for meme coins push value horizontally, enticing new participants into the ecosystem instead of consolidating around strong winners as seen traditionally, thus creating a synthetic ceiling.