Unlike other digital assets, Ravi Sarathy says meme coins are “largely speculative,” “don’t have much of a business purpose,” can’t be used in decentralized finance arrangements and don’t act as stores of value.
Both Donald and Melania Trump are dipping more than just a toe in the world of so-called “meme” coins: the pair recently launched their own coins, which together have amassed a multi-billion-dollar market capitalization.
A meme coin is a type of cryptocurrency that is based in, or gets its name from, a meme or cultural trend.
The meme coin associated with Donald Trump, $TRUMP, launched on Friday, skyrocketed in value over the weekend, then fell to $40 after Melania Trump dropped her digital coin, $MELANIA. The coin was trading around $60 early Monday. Both of the coins are now trading on the Solana blockchain.
Ravi Sarathy, a professor of international business and strategy at Northeastern University, explains that meme coins differ from other digital assets in several ways. He says they are primarily speculative in nature, lack significant business utility, cannot be utilized in decentralized finance (DeFi) applications, and generally don’t act as stores of value.
“They’re part of the wild west of cryptocurrencies,” he says. “This is all brand new.”
Though the meme coins bear the names of the president and first lady and are being pushed by the pair on social media, they are “are not intended to be, or to be the subject of, an investment opportunity, investment contract, or security of any type,” a disclaimer on the website for the meme coin associated with Melania Trump says.
Further, the website states that the coin “is not political and has nothing to do with any political campaign or any political office or governmental agency.”
Still, Sarathy says that it’s odd to see an incoming president promoting a meme coin as he takes the oath of office.
“People who wish to curry favor with President Trump might buy his coins because if they buy his coin, the demand goes up; and if the demand goes up, the price might follow,” Sarathy says.
Far from the first joke currencies, meme coins have been around since the beginning of the crypto industry, with the most famous example being Dogecoin. Dogecoin began as a joke and features a dog as its mascot.
Meme coins tend to appeal to investors with an appetite for short-term speculation, though Sarathy notes that collectors have also taken an interest in them.
“I’d say most of these purchases were speculative,” Sarathy says of the Trumps’ meme coins, “and those speculators are perhaps now dumping the coin because there are no quick gains to be made.”
Buyers of meme coins ought to exercise caution, though: their creators often talk up the coins before quickly selling their holdings, leaving others with worthless “bags.” It’s what’s popularly referred to as a “pump-and-dump” scheme.
Pump-and-dump schemes tend to be initiated by those in charge of the coin, or who have the biggest holdings. Other cryptocurrency projects tend to lose interest over a long period of time, as buyers “move on to the next exciting thing,” Sarathy says.
“There have been coins that have been launched by their promoters and then people stop supporting them,” he says. “As the interest gradually disappears, the price drops. As demand drops, the people who own the coin and are not holding it for the long-term decide, ‘the price is dropping, I better sell it before I lose everything.’”
In this way, meme coins differ from more established cryptocurrencies like bitcoin. Meme coins, such as $TRUMP or $MELANIA, are often quickly sold off at the first sign of trouble. Their prices are driven primarily by short-term speculation and the “fear of missing out” (FOMO). In contrast, bitcoin’s price is influenced partly by its “very limited” supply, according to Sarathy.
“More than half of all bitcoin is held by long-term investors,” he says.
“Here, I don’t think it’s a question of supply,” he adds, referring to meme coins. “I think it’s a question of demand gradually shrinking as people begin to see that the price isn’t appreciating.”
As long as cryptocurrencies exist — and Sarathy predicts that they’re not going anywhere — new meme coins will pop up, generate brief enthusiasm and die off.
“They’re part of the framework of crypto,” he says. “There’s always going to be an element of, ‘let’s make a quick buck.’”