Understanding Memecoins: Don’t doubt the Doge

Financial markets are a game. To win, you need to understand the game you’re playing.

The famous economist John Maynard Keynes explained this in the 1930s by likening the stock market to a beauty contest. In this contest, the objective is not to pick the prettiest face, or even pick “what the average opinion genuinely thinks is the prettiest”. Instead, the aim is to “devote our intelligences to anticipating what the average opinion expects the average opinion to be”.

This was his way of saying that the game of investing is not about picking the “best” stock — it’s about picking what other people predict others will pick. A subtle, but crucial distinction.

People Don’t Buy Stocks, They Buy Stories

Prices move when stories change and become more or less believable. Stories become more believable when facts change. You can observe this cycle with Tesla.

Elon Musk is currently the richest man on earth because ‘The Market’ has bought into the story of Tesla and the promise of an electric car future. Speculators bet on others coming to believe this story. They bet right.

Thus, the game of investing is as much about anticipating what story the market will believe as it is about the facts underlying these stories. The smartest investors anticipate how this story will shift based on new information (see Figure 1).

Keynes also famously said: “When the facts change, I change my mind.”

But perhaps he meant: “When the facts change, I change my mind about other people’s minds…”.

The investment game is therefore “outward looking” in that we must seek out new facts and explanatory stories about the world, but also “inward looking” in that we must anticipate how others in the market will respond to these changes.

Smart investors watch both (a) the world and (b) other investors, very closely. And they have a firm grasp of history.

Introducing: The Meme

There is nothing groundbreaking here. Anyone who actively trades or invests intuitively understands these market dynamics. But what happens if you take away the ‘facts’ — stripping out any reference to fundamentals at all?

What if you created assets that have zero cash generating potential whatsoever?

Well, then you have a game that is purely “inward facing”.

There is no external story to drive behavioural expectations because there is nothing fundamental to base the story on. The players have stopped looking outwards towards the external world and instead just look inwardly at each other.

The void created by the lack of a tangible story gets filled with a “meme”. Thus, the game changes from anticipating what story the market will come to believe, to anticipating what meme the market will rally around. Once this happens, it doesn’t really matter what the meme is: it could be a Shiba Inu dog, a cat, a joke, or the number 42.

Meme Speculation

Meme speculating is a different, but related, financial game to traditional investing. It’s not gambling because it’s not based on chance, and it’s not investing because it’s not based on anything fundamental — there are no expectations of future cash flow.

Meme speculating is its own, new “thing” and it’s a different beast to what seasoned investors and traders have seen before.

Many will argue meme coins are nothing new, as they are just ponzi schemes. This is misplaced. Ponzis are based on asymmetric information. Bernie Madoff tricked investors into believing the profits from his ponzi were due to savvy investments. This is not the case with meme coins. Here everybody knows there is no fundamental value! It’s not a ponzi if everybody knows it’s a ponzi.

Wolf in Shib’s Clothing

Another misconception is that meme coins are simply absurd and therefore should be written off. I would urge you not to doubt the significance of a meme coin just because it happens to be based on a cute dog.

Yes, it’s centered on a joke, but this joke is worth more than the total market capitalization of Barclays or Credit Suisse! If investment banks and traditional investors are not already developing a thesis around this, they should be — if only for the implications for traditional markets (see AMC and Gamestop).

Missed Nuances

Many of these declarations about meme coins miss some nuances.

Firstly, meme coins don’t create or destroy value; so they can’t be a ‘waste of money’ — because they don’t consume any scarce resources. Meme coins simply move capital around based on whoever wins the game. Like gambling.

Secondly, the total value of a meme coin is not how much the market thinks the meme is ‘worth’ — it’s just a measurement of the amount of capital at risk in this game. Sports games are not ‘worth anything’, but billions of dollars are tied up in sports betting markets. (Again, gambling.)

Thirdly, the definition of a market bubble is when the price of an asset is driven up, way in excess of the asset’s intrinsic value. In the case of meme coins, there is no intrinsic value so there is nothing to deviate from. It’s a perfect paradox.

IN SUMMARY

What are memecoins? Financial market ‘games’ that take the form of ‘transparent ponzis’ or ‘pure bubbles’ in the classical sense.

Should you buy memecoins? Before allocating any of your hard earned money to anything, ask: What’s your goal? What are you trying to get from this?

If you are looking to experience the community aspect or thrill of owning cryptocurrency, by all means, knock yourself out!

If you are speculating, do so in the same spirit as you might approach a casino bet or a giant game of poker: with the full expectations that you might lose everything.

The only difference? You’re at the table with thousands of other people, there are no cards, and the value of your chips will fluctuate wildly for many years to come.

Source: https://medium.com/blockchain/understanding-memecoins-dont-doubt-the-doge-601958022c7a?source=rss—-8ac49aa8fe03—4