When Will the Next Meme Coin Go to the Moon?

If you had told people at the start of 2021 that a coin called Shiba Inu (CRYPTO:SHIB) would rise more than 400% in a single year, they probably would have laughed. If you told them that a coin which began the year at $0.007 would hit highs of over $0.003 in mid-December, they might have thought you were joking.

Yet, both of those things happened, and in the final analysis, it is probably a good thing that most people did not believe it was possible. If they had, they might have flocked into the meme coin in such vast numbers that it would have quickly used up all of the liquidity in the cryptocurrency markets, sending the coin into a downward spiral.

Of course, several other coins also saw triple-digit percentage gains in 2021, and there was a broader speculative frenzy in risky assets, such as small-cap stocks, as people had an abundance of disposable income due to government stimulus measures. However, meme coins were arguably the riskiest asset class of all, and they attracted the most attention from smaller investors.

So, what were the conditions that led to this speculative frenzy, and might we see a similar environment in the future?

What went up...

The environment that produced the major price spikes in both Dogecoin (CRYPTO:DOGE) and Shiba Inu can be described as a speculative frenzy.

Now, that’s a bit of a tautology, as super-speculative and ultra-risky investments in valueless meme coins simply do not happen at large scale outside of such conditions. But what causes those extremely speculative periods that tend to pump up the riskiest of risk assets?

In a word, liquidity, which is to say the amount of money circulating in the cryptocurrency markets and also in traditional markets. As it pertains to meme coins, liquidity has a couple of components.

The factor that most investors will be the most familiar with is simply how much money potential speculators have in their pockets and in their investment accounts on average. When people are being given money actively, like with the pandemic-era economic stimulus policies, it directly frees up more of their capital to be allocated to investments.

If they are already feeling like their standard and less-risky set of investments are sufficiently supplied with capital, it’s natural for people to look further out on the risk curve, toward smaller growth stocks and cryptocurrencies. With enough slack, some people may be willing to take outright gambles in (misguided) hopes of leveraging their disposable income into a dramatically larger amount of money.

The other key factor influencing liquidity is the cost of borrowing money, as determined by the Federal Reserve’s prime interest rate. That cost is largely incurred by banks and institutional investors, but it trickles down to consumer borrowing costs as well. When holders of massive sums of capital can take out cheaper loans, their appetite for risky plays increases, as the required rate of return on their investments to cover their borrowing fees and turn a profit becomes lower.

The big players are probably not ever going to be buying Dogecoin or Shiba Inu directly, but they will doubtlessly invest in risky growth stocks once again, pumping the prices of those assets, and thereby creating a wealth effect that makes smaller holders feel richer, and thus more confident in taking on riskier plays themselves.

Both Dogecoin and Shiba Inu saw their prices explode most recently during the pandemic period, specifically in late 2021. People’s disposable incomes were supplemented by the government, and liquidity was extremely easy to come by for consumers as well as for financial institutions. In other words, the conditions were perfect for a meme stock surge.

Take a look at this chart:

As you can see, while it didn’t result in breaching the all-time highs, all it took to send Dogecoin sharply upward more recently was the mere anticipation of interest rates falling further.

Now, there wasn’t another meme coin that has reached multi-billion heights in the same way as either Dogecoin or Shiba Inu, but on a long enough timescale, it is inevitable so long as there are additional periods of increasing liquidity and personal income. During that same period, these two established coins will almost certainly rise significantly.

Resist the urge to gamble

After they peak, both of these coins will crash sharply, and there is no reason to believe that they will recover and become good investments for those who purchased them at the top, although it is technically possible.

Given that these gambles or others like them tend to flourish in times when you’re likely to have a little bit more cash on hand, a far smarter move is to keep an eye on liquidity conditions and be mindful of what your own inclinations are likely to be. Resist the urge to take gambles when you have more money than usual, especially if your portfolio is already doing well. The better option here is to shore up your safer plays rather than to throw your money away.