Memecoins: A New Perspective on High-Risk Investments

In the cryptocurrency market, memecoins have attracted the attention of investors as a high-risk asset class. This article will explore why certain memecoins may become a small allocation in an investment portfolio, as well as how to assess and seize investment opportunities in this type of asset.

Beta Features of Memecoins

Memecoins typically have a higher beta coefficient relative to the Layer 1 (L1) of their respective public chains. This means they can provide investors with a leveraged effect on L1 assets without actually leveraging. Taking BONK from the Solana ecosystem as an example, its price fluctuations are often more severe than that of SOL.

When the 30-day rolling beta of BONK exceeds the 90-day rolling beta, it usually indicates the arrival of a strong market trend. In this case, the average 30-day and 60-day return rates of BONK can reach 124% and 413%, respectively.

It is worth noting that the explosive growth of BONK usually coincides with SOL rising over 5% within a week. However, SOL's strong performance does not completely guarantee BONK's outstanding performance, as in about one-third of cases, BONK may still decline.

On-chain Data Analysis

In addition to price performance, on-chain data analysis is also an important method for evaluating the quality of memecoins. Here are a few key metrics:

1. Growth of Token Holders: Reflects recent popularity and spread rate.
2. Median and Average Holding: Measure the strength of holders' beliefs.
3. Proportion of large holders: the percentage of holders with over $1000 and over $100k.
4. Whale Retention Rate: The proportion of wallets that once held over $100k and still retain more than 50%.
5. Whale Trading Behavior: The net inflow/outflow situation of large holders on decentralized exchanges.

In addition, trading liquidity and having experienced multiple significant pullbacks are also important considerations. For memecoins listed on mainstream trading platforms, the open interest is also a metric worth paying attention to.

Community and Faith Factors

The success of memecoins largely depends on the activity and cohesion of their community. High-quality memecoin projects typically possess the following characteristics:

• Global potential audience
• Resonant narratives and slogans
• Strong belief and sense of belonging among community members
• Effective community leadership and coordination
• Deep integration with pop culture
• Proficient in using social media for marketing promotions

Value Assessment and Investment Timing

Evaluating the "fair value" of a memecoin can be done through the following methods:

1. MVRV Ratio: The ratio of market value to realized value. When MVRV is below 1, it may indicate a local bottom.

2. Momentum Indicator:

   • RSI (Relative Strength Index): Below 30 may indicate oversold conditions, while above 70 may indicate overbought conditions.
   • Moving Average: A price breakthrough of a key support level may represent a buying opportunity.

3. Social Media Sentiment: Indicators such as Google Trends can reflect changes in public interest.

It needs to be emphasized that memecoins are extremely high-risk assets. Their performance is highly dependent on the liquidity conditions of the overall market and investors' risk preferences. Only in a favorable macro environment can a moderate allocation of memecoins potentially yield excess returns.

Conclusion

Investing in memecoins requires a comprehensive consideration of multiple factors, including their beta relationship with L1 assets, on-chain data performance, community activity levels, value assessment metrics, and the overall market environment. Nevertheless, memecoins remain a high-risk investment area, and investors should act cautiously and manage their risk exposure appropriately.