Bitcoin is the most famous cryptocurrency and the one with the biggest market capitalization. Meanwhile, the Ether token, which is powered by Ethereum software, has a wider range of uses including non-fungible tokens, decentralized finance with smart contracts, and blockchain gaming. One unique use of the Ethereum blockchain that has recently crept into the Bitcoin world is a Memecoin named Pepe. Beside being a popular little guy, Pepe poses some Memecoin risks for Bitcoin.
What in the World Is a Memecoin?
A Memecoin is a cryptocurrency or digital token. Unlike standard tokens, like Bitcoin, a Memecoin has an associated digital image, usually an animal or animated character. The meme part is because these tokens can become wildly popular, soar in value, and then crash, similar to meme stocks like GameStop. GameStop stock became an object of interest on social media in early 2021. Many like-minded traders brought on a short squeeze when Wall Street firms were shorting the stock. To get out of the short positions the firms needed to buy the stock at higher and higher prices. The stock was trading at $4 a share and rocketed up to $80 before collapsing to $10 and then going back up to $66. GameStop was not a good long term investment but a stock with profit potential for traders. Likewise, a Memecoin generally has trading potential but is typically not a viable long term investment.
Why Is Pepe the Memecoin an Issue for Bitcoin?
Generally, Memecoins are on the Ethereum blockchain. However, in January the Ordinals protocol came into being. This is a layer that sits on top of the Bitcoin blockchain or ledger. It allows users to attach or affiliate an image, a serial number, or Memecoins named Pepe to a Satoshi, the smallest unit of Bitcoin. This might not have been such a big issue except that they minted more than 420 trillion of these Memecoins in less than a month. After a lot of promotion on Twitter, Pepe the Frog Memecoin launched in April and the total market cap went up to more than $1 billion before falling by nearly two-thirds.
Ethereum Efficiency Versus Bitcoin
The Ethereum blockchain underwent a big overhaul. Ethereum scaling has made it more efficient. Bitcoin does not have this efficiency. To a degree this was not needed because Bitcoin is more of an investment and trading tool, unlike Ether, which has so many applications. Then came Pepe and drove activity for the Bitcoin blockchain through the roof. Increased activity raised the cost of each transaction in the Bitcoin system. The miners who do the work of verification on Bitcoin made higher profits. But the higher cost of transactions on the Bitcoin blockchain makes it less attractive for its traditional users.
Can Memecoin Investments Be Profitable?
As noted by folks like NFT Now, the risks and rewards of Memecoins are such that one can make a lot of money trading these as lose money just as easily. The Pepe Memecoin started trading April 17, 2023 and was priced at $0.00000019 each. That is six zeros after the decimal point for a dollar. It peaked on May 5, 2023 at $0.00000372 which is five zeros after the decimal point or about 17 times its initial price. It then fell to $0.00000144 where it trades today. If this is the pattern for Memecoin trading, a trader needs to get in as fast as possible, wait for the hype to drive the price up and immediately get out before it collapses. There are no fundamentals that drive these prices unlike Bitcoin which reacts to the economy and generally tracks up and down with the Nasdaq stock market. Prices are commonly driven by hype and are prone to fall as the newness of the Memecoin wears off.
Memecoin Risks for Bitcoin – SlideShare Version