Analysis of Memecoins Investment Strategy: The Subtle Balance of Risk and Return
Why consider Memecoins as an investment option?
Value of High Beta Characteristics
Some memecoins are favored mainly because of their high beta characteristics exhibited against the underlying L1 assets. This means that by appropriately allocating assets like Solana ecosystem cultural coins, investors can achieve leverage effect on L1 assets without actually using leverage (, thus avoiding liquidation risk ).
The key signal we are focusing on is when the 30-day beta exceeds the 90-day rolling beta, as occurred on April 1st (. Historical data shows that when this happens, a certain Solana ecosystem cultural coin achieved an average return of 124% and 413% in the following 30 days and 60 days, with medians of 45% and 57% respectively ).
Data shows that changes in market risk appetite often occur rapidly, allowing such cultural coins to significantly outperform the market in the short term. This highlights the importance of buying at the right time.
Historically, the explosion of such cultural coins often coincides with their corresponding L1 assets rising by more than 5% within a week. In this case, the typical return performance is as follows:
1-week average return 26%( median 14%)
30-day average return 141%( median 11%)
60-day average return 512%( median 27%)
It is important to note that in about one-third of cases, even if L1 assets rise, these cultural coins may still decline, indicating that the performance of L1 assets does not absolutely guarantee outstanding performance of cultural coins. However, these exceptions mostly occurred before the explosive rise of this cultural coin at the end of 2023.
Correlation Analysis
Generally, cultural coins maintain a certain correlation with their L1 assets. However, during periods when cultural coins perform particularly well, such as the fourth quarter of 2023, the first quarter and fourth quarter of 2024, and April of this year, this correlation often weakens.
Core Viewpoints:
Top cultural coins of this type exhibit high beta characteristics against their L1 assets over various time periods, including 30 days, 60 days, and 90 days, within the context of (. From an absolute return perspective, the beta value is higher. This means that their price fluctuations usually far exceed those of their L1 assets, making them a high-risk/high-return investment choice.
From an investment strategy perspective, we can view these cultural coins as leveraged bets on their L1 assets, but without the liquidation risk associated with traditional leveraged trading.
Although we mainly analyze using the example of the Solana ecosystem, the same patterns apply to other "blue-chip" memecoins and their relationship with corresponding L1 assets, such as the relationship between PEPE and ETH.
On-chain Data Analysis
In addition to understanding the performance of memecoins relative to their L1 assets, on-chain data analysis also provides important quantitative metrics to help us assess the quality and strength of conviction of the holder base.
The following is a comparative analysis of several key indicators:
Token Holder Growth )90 Days (
The growth in the number of holders demonstrates the recent popularity and viral spread of the token. Comparative data shows significant differences between various memecoins.
Median and Average of Holdings
This indicator helps to understand the typical holding amount and average holding confidence of token holders. It is worth noting that certain memecoin communities have a more concentrated distribution, with these tokens having a lower median holding amount, primarily due to a large number of small airdrops allocated to numerous wallet addresses.
Large Holder Ratio
Percentage of users holding over $1000: This metric helps assess the quality of the holder base. A higher percentage of wallets holding large amounts of tokens typically indicates stronger interest and confidence.
Percentage of users holding over $100,000: This reflects the interest of large funds in the tokens, relative to the total number of holders.
Whale Retention Rate
This metric tracks the percentage of wallets that once held more than $100,000 in tokens that still retain more than 50% of their peak holdings ) excluding disruptive ( caused by price fluctuations. This helps to gauge the strength of the beliefs of the largest holders.
Whale Trading Behavior
By analyzing the net inflow/outflow of wallets that once held over $100,000 in tokens on decentralized exchanges, we can understand whether large capital is increasing its holdings or exiting the project.
Other Considerations
In addition to on-chain data, we tend to choose memecoins that have sufficient trading liquidity and have already experienced multiple pullbacks of over 50%.
It is important to note that our on-chain analysis does not include tokens held by centralized trading platforms, which may account for up to 20% for certain tokens.
For tokens listed on major trading platforms, the open interest is also a noteworthy indicator.
Community and Belief Factors
In this regard, the intuition of the crypto market begins to play a role, including monitoring social media activity and market sentiment.
We prefer to filter through the "potential audience interest" of memecoins. For example, it must be a concept that can be understood and accepted by users globally, such as the theme of "disrupting the stock market". Although it sounds simple, it has the potential to attract widespread attention and form a community movement.
The qualities we are looking for include:
Resonant narratives and community slogans
Signs of strong belief and sense of belonging among community members ) this can turn holders into promoters (
Clear community leadership and coordination
Integration with a wide range of cultural elements
It is worth noting that some communities have started promoting projects through short video platforms to reach a younger potential crypto user base. The most successful memecoin communities are often also excellent marketing organizations.
Value Assessment
How to determine if you bought at "fair value"? A clear method is to analyze the relationship between the proxy metric of the cost basis of all tokens in circulation ) and the market value.
When the MVRV ratio is below 1, it indicates that holders are on average in an unrealized loss state, which may suggest that we are approaching a local bottom, assuming the bull market environment will continue.
For example, the realization price of a Solana eco-culture coin is around $0.0002 and it is trading at $0.0000145 at the time of writing, which may indicate that it was an ideal entry price at the time.
It is important to note that the price calculation does not take into account the token supply held by trading platforms. Based on market data, we estimate that approximately 20% of such token supply is held on centralized exchanges.
Momentum Indicator
In the absence of traditional fundamentals, another way to assess "fair value" is to focus on momentum indicators:
Relative Strength Index ( RSI )
RSI helps determine whether a token is in an overbought or oversold state:
RSI close to or below 30 indicates "oversold"
RSI close to or above 70 indicates "overbought"
Moving Average
Analyzing the position of the price relative to key moving averages is also an effective way to observe recent momentum. The ideal strategy is to buy after the price breaks through a key support area, provided there is confidence in a 3-6 month investment cycle.
Search Trends
Analyzing search engine trends and other social sentiment indicators can help determine the right timing for buying/selling.
Macroeconomic Environmental Factors
It must be emphasized that memecoins are at the extreme end of the risk spectrum. It is well known that Bitcoin's performance depends on liquidity conditions, and memecoins are even more sensitive to this. A favorable liquidity environment, a positive risk appetite, and the return of "animal spirits" are key prerequisites for allocating memecoins.
Investment Framework Summary
Based on the above analysis, we can construct a memecoin investment framework that includes the following elements:
Why choose specific memecoins as a small part of the investment portfolio ( beta features )
How to identify memecoins with strong "fundamentals" ( on-chain data )
How to evaluate "fair value" ( MVRV analysis )
When to buy the ( market turning point/macroeconomic environment/momentum indicators )
When to sell ( Momentum/RSI indicator )
Of course, this is not a foolproof method. There are no easy returns in the investment world; excess returns always come with higher risks.
Nevertheless, having a systematic framework should help investors make more informed decisions in the uncertain realm of memecoins.
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The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
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MoneyBurnerSociety
· 06-13 09:57
Every step of funds drop to zero is very professional.
Memecoins Investment Strategy: High Beta Characteristics and On-Chain Data Analysis Guide
Analysis of Memecoins Investment Strategy: The Subtle Balance of Risk and Return
Why consider Memecoins as an investment option?
Value of High Beta Characteristics
Some memecoins are favored mainly because of their high beta characteristics exhibited against the underlying L1 assets. This means that by appropriately allocating assets like Solana ecosystem cultural coins, investors can achieve leverage effect on L1 assets without actually using leverage (, thus avoiding liquidation risk ).
The key signal we are focusing on is when the 30-day beta exceeds the 90-day rolling beta, as occurred on April 1st (. Historical data shows that when this happens, a certain Solana ecosystem cultural coin achieved an average return of 124% and 413% in the following 30 days and 60 days, with medians of 45% and 57% respectively ).
Data shows that changes in market risk appetite often occur rapidly, allowing such cultural coins to significantly outperform the market in the short term. This highlights the importance of buying at the right time.
Historically, the explosion of such cultural coins often coincides with their corresponding L1 assets rising by more than 5% within a week. In this case, the typical return performance is as follows:
It is important to note that in about one-third of cases, even if L1 assets rise, these cultural coins may still decline, indicating that the performance of L1 assets does not absolutely guarantee outstanding performance of cultural coins. However, these exceptions mostly occurred before the explosive rise of this cultural coin at the end of 2023.
Correlation Analysis
Generally, cultural coins maintain a certain correlation with their L1 assets. However, during periods when cultural coins perform particularly well, such as the fourth quarter of 2023, the first quarter and fourth quarter of 2024, and April of this year, this correlation often weakens.
Core Viewpoints:
Top cultural coins of this type exhibit high beta characteristics against their L1 assets over various time periods, including 30 days, 60 days, and 90 days, within the context of (. From an absolute return perspective, the beta value is higher. This means that their price fluctuations usually far exceed those of their L1 assets, making them a high-risk/high-return investment choice.
From an investment strategy perspective, we can view these cultural coins as leveraged bets on their L1 assets, but without the liquidation risk associated with traditional leveraged trading.
Although we mainly analyze using the example of the Solana ecosystem, the same patterns apply to other "blue-chip" memecoins and their relationship with corresponding L1 assets, such as the relationship between PEPE and ETH.
On-chain Data Analysis
In addition to understanding the performance of memecoins relative to their L1 assets, on-chain data analysis also provides important quantitative metrics to help us assess the quality and strength of conviction of the holder base.
The following is a comparative analysis of several key indicators:
Token Holder Growth )90 Days (
The growth in the number of holders demonstrates the recent popularity and viral spread of the token. Comparative data shows significant differences between various memecoins.
Median and Average of Holdings
This indicator helps to understand the typical holding amount and average holding confidence of token holders. It is worth noting that certain memecoin communities have a more concentrated distribution, with these tokens having a lower median holding amount, primarily due to a large number of small airdrops allocated to numerous wallet addresses.
Large Holder Ratio
Whale Retention Rate
This metric tracks the percentage of wallets that once held more than $100,000 in tokens that still retain more than 50% of their peak holdings ) excluding disruptive ( caused by price fluctuations. This helps to gauge the strength of the beliefs of the largest holders.
Whale Trading Behavior
By analyzing the net inflow/outflow of wallets that once held over $100,000 in tokens on decentralized exchanges, we can understand whether large capital is increasing its holdings or exiting the project.
Other Considerations
In addition to on-chain data, we tend to choose memecoins that have sufficient trading liquidity and have already experienced multiple pullbacks of over 50%.
It is important to note that our on-chain analysis does not include tokens held by centralized trading platforms, which may account for up to 20% for certain tokens.
For tokens listed on major trading platforms, the open interest is also a noteworthy indicator.
Community and Belief Factors
In this regard, the intuition of the crypto market begins to play a role, including monitoring social media activity and market sentiment.
We prefer to filter through the "potential audience interest" of memecoins. For example, it must be a concept that can be understood and accepted by users globally, such as the theme of "disrupting the stock market". Although it sounds simple, it has the potential to attract widespread attention and form a community movement.
The qualities we are looking for include:
It is worth noting that some communities have started promoting projects through short video platforms to reach a younger potential crypto user base. The most successful memecoin communities are often also excellent marketing organizations.
Value Assessment
How to determine if you bought at "fair value"? A clear method is to analyze the relationship between the proxy metric of the cost basis of all tokens in circulation ) and the market value.
When the MVRV ratio is below 1, it indicates that holders are on average in an unrealized loss state, which may suggest that we are approaching a local bottom, assuming the bull market environment will continue.
For example, the realization price of a Solana eco-culture coin is around $0.0002 and it is trading at $0.0000145 at the time of writing, which may indicate that it was an ideal entry price at the time.
It is important to note that the price calculation does not take into account the token supply held by trading platforms. Based on market data, we estimate that approximately 20% of such token supply is held on centralized exchanges.
Momentum Indicator
In the absence of traditional fundamentals, another way to assess "fair value" is to focus on momentum indicators:
Relative Strength Index ( RSI )
RSI helps determine whether a token is in an overbought or oversold state:
Moving Average
Analyzing the position of the price relative to key moving averages is also an effective way to observe recent momentum. The ideal strategy is to buy after the price breaks through a key support area, provided there is confidence in a 3-6 month investment cycle.
Search Trends
Analyzing search engine trends and other social sentiment indicators can help determine the right timing for buying/selling.
Macroeconomic Environmental Factors
It must be emphasized that memecoins are at the extreme end of the risk spectrum. It is well known that Bitcoin's performance depends on liquidity conditions, and memecoins are even more sensitive to this. A favorable liquidity environment, a positive risk appetite, and the return of "animal spirits" are key prerequisites for allocating memecoins.
Investment Framework Summary
Based on the above analysis, we can construct a memecoin investment framework that includes the following elements:
Of course, this is not a foolproof method. There are no easy returns in the investment world; excess returns always come with higher risks.
Nevertheless, having a systematic framework should help investors make more informed decisions in the uncertain realm of memecoins.