Trading Memecoins: How and Why Investors Trade Them
Low-market cap coins (commonly referred to as shitcoins or memecoins) are some of the most volatile assets in the world of crypto, yet remain popular as ever for some of the most risk-prone traders in web3; and with so many projects like NFTs, CEXs, and DeFi consistently falling apart this year, now is a good time to explain what these types of coins are and why they remain active among some of the most speculative and fringe cryptocurrency traders.
What are memecoins?
Low-market cap coins are normally recognized as cryptocurrencies that have a total market cap value that ranges anywhere between a few thousand dollars to a couple million and are slightly comparable to penny stocks (however there is a much higher risk associated and most of these coins are not attached to any sort of project or company).
Compared to flagship protocols like Ethereum and bitcoin, which have both exceeded hundreds of billions of dollars, low-market cap cryptocurrencies pale in comparison and offer little to no utilities whatsoever despite any small marketing that they may attempt on social media platforms which are generally just shilling.
Why do people trade memecoins?
Trading low-market cap coins is more akin to gambling than it is to good investment strategies, so why do people do it? Well, the answer is simple, there is potential to profit. Two good examples of this are Dogecoin and its competitor Shiba Inu Coin which both began as meaningless protocols with little to no real value.
However, the bull run of 2021 helped amplify these projects and many of the earliest investors were able to make enormous profits during their rise in popularity following tweets from Elon Musk about the popular memecoin.
Although these coins have little to no real value and awful supply issues, they still offer traders a method of earning profits in an ecosystem where the earliest adopters are generally awarded the highest returns.
Risks and caveats
As with all things crypto, trading low-market cap coins carry a large number of risks that traders need to understand before venturing into the fringe world of cryptocurrency trading.
The biggest risk with these coins is the potential to be scammed. Because these low-market cap coins only receive notable activity for short periods of time and have so little to offer, there is not a lot of significant due diligence that can be made.
In essence, the strategy of being the first one in can become an extreme risk when certain smart contracts resemble honeypots and do not allow traders to withdraw their liquidity from the protocol.
The other risk is that these coins are not stable in any sort of way and have a tendency to drop to zero within a few hours because there is no inherent value to the tokens which means that activity needs to be monitored heavily in order to remain in the black.
Benefits to trading memecoins
So, what’s the point of these low-market cap cryptocurrencies if they are extremely risky and generally run by scammers? Well, the obvious reason is that on the off-chance that they do become profitable, there is a large return to be made that stems from a small investment.
However, the bigger benefit is that low-market cap trading requires traders to learn how to navigate and operate decentralized platforms. The majority of the low-value coins are not available on centralized exchanges which means that traders need to become familiar with decentralized exchanges (DEXs) and how they work.
Inputting Contract Addresses
Because many of these low-market cap coins are created so suddenly, they are not generally listed on DEXs and need to be manually added by finding the contract address on a block explorer.
Adjusting Slippage
Slippage also needs to be adjusted to the appropriated percentage because these coins are extremely volatile with small token prices which means that liquidity can be lost during the exchange due to price changes.
Reading Whitepapers
While many of these tokens are not the most utility-based projects, many of them still have white papers included which helps traders weed out any tokens which are likely to be a scam and encourages traders to become better at doing their due diligence before investing liquidity into a project.
Reading Price Charts
Finally, one of the most valuable aspects of trading low-market cap coins is how it helps people become better at reading price charts which is an important skill that every trader should possess.
Although patterns may appear to be unhelpful with these fringe investments, understanding different terms such as market cap, volume, total supply, liquidity pool holdings/pairings and the values attached to each are all helpful when deciding what to do as an investor.
