Cryptocurrencies offer a brand-new and massive opportunity in the investment world. With a pro-crypto administration making policy these days, crypto’s promise is more exciting than ever.
Having said that, like any big opportunity, you need to be smart about it.
Think of the California gold rush in the 1800s. It began when James W. Marshall discovered gold at Sutter’s Mill in Coloma. More than over 12 million ounces of gold were extracted from streams and mines over the years. Some people became wealthy – life-changing wealthy. But many, many more people lost money. Some lost everything. They assumed that, because some people got rich, they could, too…
No matter how revolutionary, exciting and promising an opportunity seems, we can’t suspend our critical thinking. Not every opportunity is the same.
Today we’ll apply that theory to the cryptocurrency market…
The promise and peril of memecoins
Mainstream media is buzzing about crypto these days. Specifically, there’s been a ton of reporting on memecoins – the good and the bad.
To some degree, that’s understandable! Ever since the first DOGEcoin millionaire made headlines, the possibility of creating massive, life-changing wealth with a few smart bets has become increasingly seductive.
Discount retail broker Robinhood’s recent, massive increase in profits came directly from memecoin traders. According to reports, Dogecoin (DOGE), Shiba Inu (SHIB) and Dogwifhat (not to be confused with DOGWIFHAT, DOGWIFHOOD, Dog Wif Nunchucks or Dogwifgras) are particular favorites.
Why? The perception of massive growth potential, that’s why! The original memecoin, DOGE, was launched as a joke. As a prank. Whether or not it succeeded as an amusement, it got so much attention and attracted so much capital that it made a lot of people quite wealthy.
Dogecoin proved that an asset can offer absolutely nothing but a goofy icon – and still soar from zero to a $73 billion market cap. The lucky few who loaded up on DOGE at $0.0001479 back in the day are absolutely delighted with its current $0.25 price. They’re sitting on 169,000% gains!
That’s a success story – and it led to many, many imitators.
If they could get rich trading DOGE, why not me, too? In fact, one recent survey of crypto investors, for example, showed that 85% had owned memecoins. Almost as many, 76%, said memecoins offered a positive risk vs. reward profile.
What’s the motivation? Micah Zimmerman gives us the answer:
The survey found that the primary reasons for investing in memecoins include price volatility, FOMO, recommendations from friends and family, and the entertaining nature of these assets.
Investing because of FOMO (fear of missing out)? Investing for entertainment?
For the savvy investor, these are terrible reasons to invest! As William Bernstein warned in his excellent book The Investor’s Manifesto, if people are going to invest for entertainment, they:
“…are better off putting half of their money under the mattress, then lighting the rest on fire and throwing it out the window.”
Remember, when people make emotionally-driven decisions to buy or sell assets, they set themselves up for failure. Fear of missing out is strong – but it shouldn’t be stronger than fear of losing your money.
To make matters worse, emotion-based investing is the perfect opportunity for scam artists to rip people off.
The art of the rugpull
Since memecoins are almost criminally easy to create, there’s no shortage of them. If you’ve ever wondered why there are nearly 12 million different cryptocurrencies out there, well, just search “memecoin creator” and you’ll find dozens of services offering to do all the hard work for you – for as little as 0.01 ETH. Anyone interested in a CORY coin?
Memecoins are trivial to create because they aren’t much more than a copy/paste of existing ERC-20 protocols. That’s it – there’s nothing else. Memecoins derive their value from attention.
Because they’re virtually free to create and totally unbacked by anything of value, the classic way to scam speculators is with a rugpull. Make a new coin, generate interest, sell your entire stake and walk away…
Rinse and repeat.
As you’d expect, there’s been no shortage of memecoin disasters recently demonstrating the risks every memecoin speculator runs.
Just think about the Hawk Tuah memecoin that soared to a $500 million market cap – and then plunged 90% within the next 20 minutes.
Or the LIBRA memecoin that some thought would be an official Argentine currency. It caused investors to lose $4.4 billion.
There are literally millions of examples. Because there’s no shortage of people looking to scam those who want to invest in memecoins for “entertainment” – which may be fine if you intentionally go in expecting to lose money, like in a slot machine. Or to prey on those experiencing FOMO – which causes people to make bad decisions in any area.
Crypto still has a brilliant future ahead.
The opportunities in crypto look fantastic.
But not all opportunities are created equally.
In the investing world, there’s no risk-free reward. That’s an axiom – just the rule.
Unfortunately, however, there is plenty of reward-free risk.
No, if you want to get a return on your investment, you need to make decisions rationally, calmly, and with good information…
…not from a stranger at the bar who insists that a certain memecoin is going to make you life-changingly wealthy – guaranteed.
Don’t believe that hype.
If you want to make smart decisions about diversifying with crypto, you need to make sure that you’re informed and educated. One great place to start that process is right here – BitIRA publishes weekly educational reports on the cryptocurrency market. If you want to level up, request your free, no-obligation Insider’s Guide to Digital IRAs.
