What Happens to Memecoins in Bear Markets?
Crypto Basics

What Happens to Memecoins in Bear Markets?

5 months ago

This week, CoinMarketCap Alexandria takes a look at charts from previous years to find out if memecoins perform differently in bear markets in comparison to utility tokens. Learn more!

What Happens to Memecoins in Bear Markets?
Despite their comical and oftentimes unusual origins, many memecoins put on an impressive performance in 2021, generating incredible returns for investors.
Indeed, coins like Shiba Inu, Dogelon Mars, and Baby Doge Coin weren’t just some of the most profitable assets of 2021, but also some of the best-performing assets of all time — each attaining a market capitalization in excess of $1 billion, providing several fold returns for early investors. However, during times of market turmoil, these same memecoins often fare extremely poorly and collapse in value faster than other popular assets. For example, Dogelon Mars and Shibu Inu are down 50% and 30% respectively YTD, whereas the average cryptocurrency lost 26% since the start of the year.
Longer-term, many traders and investors expect that digital assets with the strongest fundamentals and use cases, as well as the most loyal user bases will fare best during a bear market, whereas those with limited utility and highly inflative tokenomics could be in for a tough time.

Given that memecoins almost invariably have little to no current utility, built-in transaction taxes, and a high rate of inflation, it is easy to see why sell pressure could exceed buy pressure in a bear market, thereby driving the price down.

This begs the question, what is going to happen to the best-known memecoins in a true bear market? Unfortunately, large cap memecoins are a relatively new phenomenon, but as arguably the first of its kind, Dogecoin represents the best comparison.

2018 was nothing less than a gutwrenching time for many 2017-era cryptocurrency investors, in that the vast majority of digital assets witnessed shattering losses over this period. During this period, the average cryptocurrency lost a whopping 88% of its value. Meaning for every $1,000 invested at the top, users could expect to lose around $880.

As it turns out, Dogecoin was a near-perfect reflection of the average expected result during 2018, since the famous memecoin lost 88.5% of its value from peak to trough that year. That said, Dogecoin may be an imperfect comparison, given that it was arguably the first of its kind and had already established significant utility by 2018 — being an asset of choice among online gamblers and those needing to conduct low fee payments.

Given that more than half of SHIB and ELON holders are currently holding in a loss, there is a strong incentive to continue holding, despite the limited utility offered by these assets. Nonetheless, if a bear market were to arrive, it is reasonable to assume that assets that are held primarily for speculative purposes rather than their utility value will be the first to collapse — particularly when their token supplies are largely concentrated among large holders.

And given that newfangled memecoins lack the originality that may have somewhat protected Dogecoin in the previous bear market, many memecoins may suffer worse than average losses in adverse markets.

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