If you have been in the world of cryptocurrencies for a while, you will surely have read articles about how this or that guy became rich overnight with meme coins. Titles sound more o less so: “How XYZ Coin Could Turn Your $100 into $1M”. Reading these articles it is inevitable to start thinking like this: “if he can do it, I can do it too. I could get rich quickly by buying and then reselling meme coins”. Well, the reality is very different, as we will try to illustrate in this article.
The Fallacious Strategy
Let’s say you are a very experienced trader. Every day you read all the news related to cryptocurrencies. So when a meme coin starts to power and people start buzzing around it, you buy it. Then, after a couple of days/weeks, i.e. as soon as the price starts to drop, sell everything. What could go wrong? What is the flaw with this strategy?
It’s true that perfectly timing the market to buy a meme coin at its low point and sell right before it drops could theoretically lead to high returns. However, this type of tradingTrading Trading is a speculative activity of buying and selling financial assets aimed at profit. is very unlikely to be successful for several reasons:
- Market Speed and Unpredictability:
Flash Crashes: Meme coin markets can be incredibly volatile. Prices can surge and then crash within minutes or even seconds. Even the most knowledgeable traders might struggle to react quickly enough to these flash crashes, leading to losses.
False Breakouts: A price increase might not be the start of a sustained trend. It could be a temporary “pump” before a drop. Selling too early based on a false breakout could mean missing out on potential gains.
- Information Asymmetry:
Insider Knowledge: Large holders or creators of meme coins might have access to non-public information that influences the price. This gives them an unfair advantage in manipulating the market, making it difficult for even informed traders to predict price movements accurately.
Social Media Manipulation: Pump-and-dump schemes often utilize social media to create artificial hype. It can be challenging to distinguish genuine excitement from coordinated manipulation, leading to bad buying decisions.
- Emotional Trading:
Fear of Missing Out (FOMOFOMO Fear Of Missing Out, literally 'fear of missing something', an expression widely used in cryptocurrency trading.): Seeing rapid price increases can trigger FOMO, causing you to hold onto a coin for too long, hoping for even bigger gains. This can lead to losses if the price starts dropping before you sell.
Greed: The initial success of selling a coin for a profit might tempt you to hold onto the next one for a larger gain. This can backfire if the market turns against you.
- TransactionTransaction Exchange of value, property, or data between two parties. Costs:
Frequent Trading: Trying to time the market by buying and selling frequently can lead to high transaction costs in fees. These fees can eat significantly into your profits, especially for smaller investments.
Overall, while your strategy has elements of good timing and awareness, the extreme volatility and potential for manipulation in the meme coin market make it very difficult to consistently achieve success. There’s always a chance things could go wrong, even for a knowledgeable trader. So here’s a more realistic scenario:
- You buy a meme coin at a low price.
- There’s a temporary hype surge, and the price increases.
- However, you might miss the exact peak to sell, and the price starts dropping.
- FOMO (Fear Of Missing Out) might prevent you from selling at a loss, hoping for another surge.
- The price keeps dropping, and you end up losing most or all of your investment.
While the dream of turning $100 into $100,000 with meme coins sounds appealing, the reality is that such success stories are extremely rare.
Even for a very knowledgeable trader, there are still several flaws in the strategy of buying meme coins as they gain buzz and then selling them shortly after for a profit.
The Correct Strategy
Instead of trying to get rich overnight by trading meme coins, here are some alternative strategies to consider:
- Invest in established cryptocurrencies: Research cryptocurrencies with a proven track record and strong development teams. While there’s still risk involved, these projects offer a more stable foundation for investment.
- Dollar-Cost Averaging (DCA): Invest a fixed amount of money at regular intervals, regardless of the price. This strategy helps to average out the cost per share over time and reduce the impact of market volatility.
- Technical Analysis and Fundamental Analysis: Combine technical analysis of price charts with fundamental analysis of the project’s technology and team to make informed investment decisions.
- Focus on Long-Term Strategy: Don’t chase get-rich-quick schemes. Cryptocurrency is a volatile market, and long-term investment strategies are generally safer than short-term bets on meme coins.
- Diversify Your PortfolioPortfolio A collection of investments and holdings like stocks, bonds, mutual funds, commodities, crypto, cash, and cash equivalents.: Spread your investments across different cryptocurrencies and assetAsset An economic resource with value that an individual or organization owns, controls, or expects future benefits from. Examples of assets: gold, stocks, cryptocurrencies, etc. classes to mitigate risk. Don’t put all your eggs in one meme coin basket.
- Do Your Own Research (DYOR): Never invest based solely on news articles or social media hype. Research the project’s whitepaper, team, and technology before investing. More information here: Do Your Own Research (DYOR).
By following these tips, you can increase your chances of success in the cryptocurrency market, even if the windfalls won’t be quite as dramatic as those promised by meme coin promoters.