Understanding Memecoins: Don’t doubt the Doge | by Xen Baynham-Herd | @blockchain | Nov, 2021

Understanding Memecoins: Don’t doubt the Doge | by Xen Baynham-Herd | @blockchain | Nov, 2021

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Xen Baynham-Herd

TL;DR: What are memecoins? They are financial market ‘games’ that take the form of ‘transparent ponzis’ or ‘pure bubbles’ in the classical sense. Should you buy memecoins? Only if you see it as an experience or a gamble rather than as an investment.

The Game of Investing

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 behavioral 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.

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