Pepecoin: An Introduction
The cryptocurrency landscape is always filled with surprises. The rise and fall of new trends keep its users and enthusiasts on their toes. The meme coin season was ushered in by the emergence of Pepecoin (PEPE), an ERC-20 token, in late April 2023. After reaching an impressive market capitalization of $1.5 billion, Pepecoin experienced a downturn due to investors cashing in their profits.
Meme coins are a product of meme themes, and Pepecoin is no exception. Its inspiration comes from the “Pepe the Frog” meme, a creation of Matt Furie in his comic strip “Boy’s Club.” The initial price movement of Pepecoin was propelled by frog-themed memes circulated by the founding team and its followers on social media.
Pepecoin exemplifies how cryptocurrency communities can rally around a cultural phenomenon without necessarily considering the fundamental economics of the asset. Its predecessors are the dog-themed meme coins Dogecoin (DOGE) and Shiba Inu (SHIB).
Dogecoin gained popularity with the backing of billionaire Elon Musk and boasts a $10 billion market capitalization, while Shiba Inu’s market cap is above $5 billion. In contrast, Pepecoin’s market cap is currently around a modest $700 million, less than half its peak in May 2023.
The Value Creation and Retention of Meme Coins
Pepecoin’s rapid rise in popularity provides an intriguing case study on how meme coins generate and maintain value. The team behind the meme coin adhered to the meme culture on social media, enticing those who appreciated the culture to invest. Active community members also played a role in raising awareness and interest in the meme coin, attracting new users and investors. However, beyond the cultural appeal, meme coins lack a fundamental reason to retain value.
Much like Dogecoin and Shiba Inu, Pepecoin lacks an ecosystem with a commercial use case. A robust ecosystem would have a strong developer community, a range of user-interactive applications, and several uses for institutional investors.
Despite the absence of these fundamental use cases, Dogecoin has managed to maintain a market cap of several billion dollars, outperforming more mainstream cryptocurrencies like Solana (SOL) and Polygon (MATIC).
Following Pepecoin’s rise, several other meme coins emerged and subsequently fell. On the Ethereum blockchain, Turbo and Wojak were quick to follow suit, while on the Solana blockchain, Guacamole (GUAC) and King gained popularity. Turbo capitalized on the meme coin theme with an artificial intelligence (AI) overlay.
Turbo was established by Rhett Mankind, who utilized GPT-4 to create the meme coin. Within a few days, the meme coin reached a market capitalization of over $80 million before settling around $50 million after profit-taking ensued. The AI-created meme resonated with many investors who had witnessed or profited from the Pepecoin surge.
Several whales and investors who had made millions from a few thousand dollars in Pepecoin participated in Turbo, driving the increase in holders from just 56 wallets to over 4,000 wallets in less than a day. This surge in interest triggered alerts through on-chain activity, leading to further investments into the meme coin.
Therefore, meme coins represent an extreme category in crypto that largely operates on a culture-based speculative tribe. The culture excites an investor community that is not too shy to speculate. However, whether these meme coins will continue to hold value remains to be seen. Judging by the historyof Doge and Shiba, meme coins may become a significant category within cryptocurrencies.
The Investment Potential of Meme Coins
If there’s one lesson that history has taught investors about cryptocurrencies and Web3, it’s to keep an open mind and let the market decide. Investors have witnessed the emergence of new subsectors within cryptocurrency and Web3 that have attracted billions of dollars through cultural groups coming together. This behavior cannot be discounted when assessing meme coins.
For those who entered the world of cryptocurrencies in the first half of the previous decade, even Bitcoin seemed like a meme coin. For most retail audiences who do not understand the fundamentals of crypto assets, the entire asset class may appear as meme coins.
Yet, the crypto industry has a total market capitalization of over $1.1 trillion and is consolidating before the next Bitcoin halving. Investors in meme coins understand that these coins lack the fundamentals of a layer-1 protocol like Ethereum or Solana. These protocols have thousands of developers building hundreds of applications that can be used in a day-to-day context.
These layer-1 protocols derive their value from the demand for their cryptocurrencies by developers, creators, and users. They have several subsectors of applications — like decentralized finance, nonfungible tokens (NFTs), decentralized physical infrastructure, GameFi, and so on — to drive demand for their coins. Therefore, even large institutions are open to investing in them.
Meme coins lack this utility narrative. Crypto Twitter has gotten excited several times by inferring that Elon Musk might have plans for Doge as a method of value exchange on the platform. However, any potential plans have yet to materialize. Therefore, as it stands, meme coins rely on meme culture rather than real-world utility.
Nonetheless, the influence of culture should not be underestimated. The NFT asset class in Web3 has shown that culture could bring communities together and help drive huge sums of capital toward it. Meme coins might just be a fungible and a more liquid equivalent of NFTs.
However, when the crypto bull market is not on, it must be noted that there is often limited liquidity within the system. During periods of increased liquidity flowing into meme coins, NFT floor prices may decline or established cryptocurrencies may decrease in value. Investors sell some of their holdings to tap into the meme coin run.
It is also worth noting that this movement of liquidity happens even within meme coins. For instance, there are just over 174k and 30k wallets that hold Pepecoin and Turbocoin, respectively, as of May 15, 2023. Yet, of the 30k Turbocoin holders, over 14k have held Pepecoin at some stage. That is nearly 50% of the investors going into a subsequent meme coin within the ERC-20 token ecosystem.
This trend was also noticeable on Solana, where the top two coins by the number of wallets, namely Guac and King, had several thousand wallets in common.
On both Ethereum and Solana, it was the same liquidity moving across meme coins. Speculators were picking up a coin, buying it for others to follow and then dumping it on the latecomers.
Needless to say, the meme coin space is perhaps too risky to even think about having regulators address it. Also, with only a few hundred thousand wallets involved in the meme coin space and the overall market cap of meme coins at less than $16 billion, it is still in the early days. Yet, it is a huge regulatory risk for the firms launching meme coins, as they are currently perceived as the most speculative bet within cryptos.
The Future of Pepecoin (and Meme Coins)
Over the years, the crypto industry has created several “rags-to-riches” stories based on culture. Meme coins are one of them. The industry has only seen two previous instances of such models holding value through a tough bear market and consistently performing well from an investment perspective — DOGE and SHIB.
Pepecoin is perhaps only the third significant example of this trend. Therefore, it is too early to know if meme coins have a future. If culture-based asset creation becomes a significant economy within cryptocurrencies, with a number of such ecosystems emerging with big market capitalizations, that would be one data point.
These culture-based ecosystems must also hold value across a number of Bitcoin cycles and hit respectable milestones, like a $1 trillion market capitalization. That would then become undeniable evidence that the crypto world has unearthed a new asset class that is here to stay. Until then, meme coins like Pepe remain at the extreme end of speculation within the crypto ecosystem.