Investing in Meme Coins: Risks and Challenges

The meme coin sector has been very prominent in the last few years and many tokens have made massive profit for their investors. Thanks to this, more people are looking to get involved with meme coins and make some profit for themselves.

However, as with any crypto or asset, there are some risks and challenges attached to meme coins. Before you proceed with any meme coin investment, you need to be aware of some of these pitfalls. Investing without this foundation of knowledge could lead to you losing your funds.

In this guide, we break down meme coin risks and how you can protect yourself against them.

To get to know more about some general basics of meme coins, check our Introduction to Meme Coins, Understanding Meme Coin Basics, and Exploring Popular Meme Coins guides.  

Risks to Be Aware Of When Investing in Meme Coins

First things first, you need to be aware of the meme coin risks within the market. Some are peculiar to meme coins while others apply to most cryptos. They can be categorized as follows:

1. High volatility. Cryptocurrencies in general tend to be quite volatile but meme coins are especially tricky to navigate. A meme coin can have all the hype in the world and multiply its value when it first hits the market and then be replaced by the next big thing. Because so many meme coins rely on speculative market interest to keep their prices afloat, they are more prone to volatility than other cryptos.
2. Lack of regulation. Because meme coins are based on popular culture, internet lore, and memes, they suffer from a lack of regulation. Technically speaking, anyone can create their own meme coin and many of the famous meme coin creators are completely anonymous. This means that their operations have little oversight from bodies like the SEC. Ultimately, this means that you have limited protection if you decide to invest in them. If you’re someone who prioritizes regulatory oversight when investing in assets, you should keep this in mind.
3. Lack of utility. While many traditional cryptos try to sell themselves based on their utility (XRP (XRP) for cross-border transactions, Litecoin (LTC) for its fast blockchain, etc), many meme coins do not bother with this at all. At their core, many of these tokens are simply made for sentimental value or hype. Most meme coins actually pride themselves on being purely based on hype and not ‘doing anything’. This might be good for the community but not great for the meme coins price. Once this sentiment and hype cools, their price might take a massive hit. As an investor, you need to be aware of this and decide whether you’re willing to take the risk.
4. Lack of transparency. Many meme coins do not offer transparency in terms of their tokenomics, roadmap for the future, leadership, and whatnot. Essentially, they ask investors to buy into them as an act of faith or to signal loyalty to the community. While it does not mean that most meme coins are shady, it does mean that when you make a meme coin investment, you might not have all the information. Before making this investment, it is best to be sure of how much you know and do not know about your token of choice.
5. Market manipulation. Because of the lack of regulation and transparency, the meme coin sector is vulnerable to market manipulation, which investors need to be aware of. These include pump-and-dump schemes, where the creators of the token artificially inflate the meme coins price to get others to buy it and then dump them with worthless tokens. Then there are rug pulls which see investors tricked into investing in an upcoming meme coin project, only for the creators to run off with their funds.
6. Security risks. Like many crypto projects, you need to be vigilant about security risks when you are investing in meme coins. Buying from a project’s site could leave your information and digital asset wallet vulnerable to attack. From sites to servers, it is not unheard of for hackers to target investors or for scammy project founders to try to steal from them.

How to Protect Against Losses?

Now that you are aware of the meme coin risks, you have to know how to protect yourself against them. Here are a few ways to do so:

Do your own research (DYOR)

Knowledge is power, especially when it comes to making a meme coin investment. Before you invest in any meme coin, you should find out as much as you can about it to make an informed decision. There are a few things to look into before buying into a meme coin such as:

• Its use cases. Find out if it has any use cases or not. This should give some indication of its longevity.
• Its creators. Are the creators known to the public? If they are, find out if they have been behind any other projects.
• Its roadmap. Find out what new developments its team is planning for the future that might impact its price.
• Feedback from the industry. Do most experts believe it is a worthwhile token or not?
• Its listings. Is the token listed on and vetted by major exchanges
• Its price history. Find out how it has performed in the market so far. What is the meme coins market cap? Is it projected to go up or down?

Avoid impulsive decisions

When you are looking for meme coins to invest in, it’s easy to get carried away with headlines like ‘XYZ Meme coin Sees 1000% Spike in 24 Hours’ and ‘XYZ Meme Coin Set to Explode in 2024’ headlines and overall market hype. But always remember that you are spending your hard-earned money and need to be cautious. Many meme coin investors have lost money by rushing into a project without doing their due diligence.

Always take time to research a meme coin (using our guidelines above) instead of being impulsive as this can save you regrets down the line.

Spread the risk

Diversifying your investment is one of the key steps to successful investing and it applies to the world of meme coins as well. No matter how promising a token looks, it does not make sense to put all of your money into it. As a rule, you should spread your meme coin investment across several tokens. If one or more fail, you would not have lost all of your money. Similarly, if several perform well, you can make a profit on multiple fronts.

Use profit-taking strategy

A big part of mitigating risk when dealing with assets as volatile as meme coins is having a good profit-taking strategy. This refers to selling an asset after it has risen in value above what you paid for it. There are different strategies and calculations used to determine when profit-taking should be done but the principle still stands. 

By exiting a market at the right time, you can maximize your gains while avoiding your meme coin investment tanking in value.

Now, when you are aware of all the risks associated with meme coins and still want to diversify your portfolio with some, check our Where to Buy Meme Coins guide.

Bottom Line

Meme coins are some of the most exciting assets in the crypto space. While the idea of assets based on memes and pop culture might sound ridiculous to some, they have proven to be solid investments in many cases. At the same time, there are risks associated with meme coin investments that every investor should be aware of.

These assets can be very volatile, do not always offer transparency and utility, and could even be vulnerable to scams and security risks. But as we’ve pointed out, there are ways to protect yourself from these risks. These boil down to getting as much information as you can and also avoiding impulsive decisions. Finally, employ classic investment strategies like diversifying your investment and risk and having a profit-taking strategy in place.