The Cryptocurrency 'It' Factor: What Makes a Coin Explode Like Shiba Inu
Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
There’s a new dog meme coin in town.
The Shiba Inu coin, a meme cryptocurrency which has the face of the Japanese dog breed, has soared more than 100% in the last week. Why? As with many meme investments, it’s hard to say.
This spring, the co-creator of the crypto platform Ethereum donated more than $1 billion in Shiba Inu coin to a relief fund aimed at stopping the spread of COVID-19 in India. The crypto has since gained an online following that has come along with a soaring price of the coin.
It’s reminiscent of the rise of Dogecoin — another meme crypto with the face of a Shiba Inu dog — which was created as a joke but surged over 400% in one week in April. Dogecoin’s price, which started the year at less than $0.01 per coin, is now around $0.29. Shiba Inu coin’s creators call their coin the “dogecoin-killer.”
As these price surges suggest, if you can successfully predict the next crypto to explode, you could be rich. But picking it is much harder than it looks.
“If Dogecoin can explode in popularity, any single one of them could explode in popularity,” Hanna Halaburda, an associate professor at NYU Stern School of Business, says. “A funny cat might be the next thing.”
So what actually makes a crypto worthy of skyrocketing like Shiba Inu has over the last week?
A lot of hype for meme coins
Meme coins like Shiba Inu coin and Dogecoin don’t actually have any underlying fundamentals that could have hinted at their impressive performance. In other words, they're not like a company whose corner on its business market has sent its stock price soaring.
“They don’t do anything,” Halaburda says. “They are just cute.”
Other cryptos actually have a purpose, she adds. Ethereum, for example, is a platform that allows for financial transactions to be verified and stored without a third party like a bank. (The Ethereum-associated coin is actually called Ether.)
But the rise of meme coins shows just how powerful everyday investors banding together on Reddit or Twitter are. If a crypto harvests enough excitement, and more and more investors pile in, the value of that crypto will keep rising.
“You’re always going to get these ripples of enthusiasm that are both powerful potential investments and danger traps,” says Eric Schiffer, CEO of the private equity firm, The Patriarch Organization.
So in order to explode, meme cryptos need to have a lot of fans, and people willing to essentially gamble.
An actual purpose for certain coins
But not all cryptos that take off are meme coins. Bitcoin, the original and most well-known crypto, recently surged to an all-time high of more than $66,000 per coin. Ethereum has also taken off in recent years and is now the second largest crypto behind Bitcoin in terms of market capitalization.
“You should really look at projects that have utility and are actually doing something,” says Shidan Gouran, founder of Gulf Pearl, a merchant bank and advisory in the blockchain sector. Blockchain is an underlying technology of cryptocurrencies that stores information — like the history of Bitcoin transactions — in a way that ensures no one individual or group has control of that information.
If you invest in a cute, meme coin just because it has a lot of hype, it's basically a total gamble. But there may be underlying use cases that support other cryptos in the long-term.
One of those is Cardano, says Halaburda. Cardano is a blockchain that implements a more environmentally-friendly system of verifying new transactions than the system Bitcoin uses. Some may also find it to be an easier blockchain to use than Ethereum, she adds.
Solana is another example of a cryptocurrency with use and a forward-thinking basis, Schiffer says.
A playbook for how to invest in cryptocurrency
If you’re looking for the secret sauce of highly-successful cryptos, you might be out of luck.
But you can do your research to understand how cryptocurrency works, and to try to determine which ones are actually supporting the future blockchain technology — like Ethereum — versus those created just to make people laugh — like Dogecoin.
Financial advisors recommend that if you want to dip your toes into crypto investing that you do so with just a small part of your portfolio, no more than 5%. You really shouldn’t invest more than you’re willing to lose.
“You could easily have your entire investment go up in flames,” Schiffer says.
More from Money:
Airline Miles, Cash Back or Bitcoin? Mastercard Holders Can Soon Get Rewards in Crypto
You Can Buy Bitcoin at Walmart Now
Buying a Bitcoin Futures ETF Is Not the Same as Buying Bitcoin — and the Difference Could Cost You