What Exactly Is A Meme Coin And How Does It Work?

FLORA LICHTMAN: This is Science Friday. I’m Flora Lichtman. Later in the hour, using woolly mammoths and AI to find new antibiotics. Plus can psychology help us get through winter? But first, last Friday just before the inauguration, President Trump hosted a crypto ball in DC, where he and Melania Trump unveiled their very own meme coins. You may have heard about it.

SPEAKER 1: President Trump and First Lady Melania launched meme coins.

SPEAKER 2: The cryptocurrency world erupted into chaos as Donald Trump and Melania Trump launched rival meme coins.

SPEAKER 3: Donald Trump has stamped his likeness on his own meme coin.

FLORA LICHTMAN: I am going to venture that many of us don’t have a crystal clear understanding of what this is or why you’d want to make one or sell one or buy one. So up next, what is a meme coin? How is it related to Bitcoin? What do you do with them?

As you can hear, I have a lot of question coins in my digital wallet, and we have just the right person to give us some answers. Liz Lopatto is a senior writer at The Verge, where she covers cryptocurrency and business. Liz, welcome to Science Friday.

LIZ LOPATTO: Thank you very much. It’s good to be here.

FLORA LICHTMAN: Liz, what is a meme coin? Is it a meme? Is it a coin?

LIZ LOPATTO: Maybe the easiest way of describing this is to say that it’s like a digital stock that tracks how popular a meme is. So unlike something like Bitcoin, this isn’t really about technical innovation, and it’s not meant to be something that could be used as a substitution for currency. It’s mostly about going viral.

FLORA LICHTMAN: So it’s like a stock in an idea or in a meme?

LIZ LOPATTO: Yeah. So let’s just start with stocks. Those tracks the future of a company and can be used as a way of understanding how one feels about let’s say Apple. If you feel good about Apple’s future, you buy Apple stock.

So to translate that, a meme coin can be thought of as a way of expressing an emotion about a meme with money. Assume that the meme becomes more popular and thus the meme coin will go up. It’s almost pure psychology. This is economics without any underlying real world assets.

And so there’s a culture of gambling around meme coins, which I’m sure will just shock you. And the way that this gets to refer to is– I’m not kidding– Ponzinomics, and the idea is everybody knows the trajectory of how meme coins work, which is they go up in value and then they immediately they drop very steeply. And then usually they aren’t worth anything. This is just speaking generally.

FLORA LICHTMAN: That’s the usually how it goes with a meme coin.

LIZ LOPATTO: Usually how it goes.

FLORA LICHTMAN: OK.

LIZ LOPATTO: Not always but very often. So the idea if you’re playing in meme coins and you’re cynical is that you buy in thinking that you will sell before the big drop off and you will make money that way.

FLORA LICHTMAN: Is anyone playing in meme coins who’s not cynical?

LIZ LOPATTO: We call them bag holders. They’re the people who lose all their money.

FLORA LICHTMAN: They’re stuck holding the bag.

LIZ LOPATTO: That’s right. And, listen, there is– there are real ideologically committed people in the crypto space, but they don’t typically work on meme coins. And they refer to them as something I don’t think I can say on your show.

FLORA LICHTMAN: Four letter coins.

LIZ LOPATTO: Yeah, that’s right. And these are things that are not taken very seriously. And the errr meme coin, if you will, is Dogecoin, which was created as a parody of cryptocurrency and then took off. And you may recall, there was a period where Doge had a big run up in value, and then Elon Musk went on Saturday Night Live–

SPEAKER 3: I keep telling you, it’s a cryptocurrency you can trade for conventional money.

SPEAKER 4: Oh! So it’s a hustle.

SPEAKER 3: Yeah, it’s a hustle.

SPEAKER 4: Why didn’t you just say that, man!

LIZ LOPATTO: And the value immediately plummeted. And that’s how these things work. You hit the peak, and then everybody sells at once. And one of the things that’s interesting about how some of these meme coins work is that many people who are getting into them, it’s their first foray into cryptocurrency, and I think it’s a very easy way to get burned.

FLORA LICHTMAN: So it’s a hustle?

LIZ LOPATTO It’s a hustle.

FLORA LICHTMAN: How is the crypto community reacting to President Trump’s new meme coins?

LIZ LOPATTO: Well, they’re not happy about it. Meme coins are not universally popular within the crypto world, and I think a lot of people who are the true believers really do see the risks that are involved with them. One of my favorite things was actually I saw members of the crypto community who are blaming Gary Gensler, who is the former head of the SEC, for not having created a framework that would have prevented meme coins like this, and it’s particularly funny if you are pretty deep in the finance world because the crypto community has hated Gary Gensler for cracking down on crypto. And so to have them suddenly say, oh, he wasn’t cracking it down enough or he wasn’t cracking down in the right way is just– sure, guys.

There was an op-ed in the Wall Street Journal complaining about it. This is something that people who are serious about cryptocurrency feel undermines the seriousness of what they’re attempting to do.

FLORA LICHTMAN: Because this is more cynical or because this is not actually about being an alternative to existing currency or is this about deeper ethical concerns?

LIZ LOPATTO: That’s right. And also just being blunt here, this is also potentially a route for bribing the president because who stands to benefit the most when the meme coin goes up in value. It’s the person who holds the most of the meme coin, and who is that?

So there is– there are real ethical concerns here as well as the ideological concerns that come with the launch of a presidential meme coin. And there’s also the potential reputation hit that comes from a pump and dump. So if Donald Trump decides he wants to sell his reserves because to be clear, only 20% of these coins are trading right now. So whatever the value is is not fully diluted. If he decides he wants to sell some of those non-public coins, he can essentially tank the entire market and walk away with a lot of money, which is one of the things that famously happens with meme coins. This is called rugging or pulling the rug out from under people.

FLORA LICHTMAN: Is that legal?

LIZ LOPATTO: Great question. It’s murky territory. And there are a number of things that go on in crypto that would not be allowed in other markets that may very well be illegal but that are often difficult to prosecute.

FLORA LICHTMAN: You were telling me before we started chatting that crypto is inherently political. What do you mean by that?

LIZ LOPATTO: Essentially, Bitcoin started as a way to hate the federal government with money. Bitcoin comes out of the 2008 financial crisis. It was invented in part because the Satoshi Nakamoto entity didn’t trust the banks. And it was started by a group of cypherpunks who wanted an alternative to the dollar, and the dollar is actually politically incredibly important. It’s the world’s reserve currency. It’s a major source of American soft power.

So creating an alternative to that, something that competes with the dollar, is a political action. Investing in Bitcoin is essentially giving the middle finger to the Fed. It’s one of the reasons why you see a lot of Libertarians in that space and a lot of anarchists. These are people who are not big fans of government generally and our government specifically.

So in terms of the ideology involved, this is, in fact, inherently political. There is no way to talk about cryptocurrency without talking about politics.

FLORA LICHTMAN: Do you think meme coins fit into the same bin there, or are they different in some way?

LIZ LOPATTO: I think they’re different in the sense that they are a much smaller piece of this. This is a very cynical way of expressing what you think the stock market is. In some ways, I think that the rise of meme coins and Ponzinomics is a way of essentially critiquing the broader stock market and the broader way that we approach economics by saying actually the stock market’s a joke. Actually, it’s not really worth anything. Actually, it’s all a rigged game.

FLORA LICHTMAN: I’ve read the headlines that President Trump’s coins are said to be worth billions now. How should I interpret that? Is that in real money that he could cash out and have?

LIZ LOPATTO: No is the short answer to that question. So, again, I think I mentioned that this is not a fully diluted market. So if he were to try to cash out right now, the market would plunge. One of the things that happens to be true is I think 20% of the tokens are what’s trading, and supply and demand suggests that this is a limited supply. So if you add to the supply, the price goes down, the demand goes down. So if you were to sell all of his holdings right now, maybe he would make some money, but it wouldn’t be that much.

FLORA LICHTMAN: Liz, what are you going to be looking out for in the next whatever, months, year in the meme coin space? Is there anything you’re waiting to– something that you’re waiting to see happen?

LIZ LOPATTO: One of the things about crypto is that it is the most absurd part of the financial industry. And so there are moments where you can predict what will be happening. And so in this sense, like I said, I think that all of these meme coins eventually go to 0, and I just don’t know when or how quickly.

So that’s one thing, but the other thing is, look, we’re looking at a crypto boom. Crypto was huge in the last election. The industry spent a lot of money getting pro-crypto lawmakers including Donald Trump elected. I think they are expecting some kind of payoff in that whether that’s legislation that gives them a friendly regulatory regime or ahead of the SEC, who’s friendlier to crypto than Gary Gensler was.

One of the things that I’m trying to track is just the serious piece underlying this because the Bitcoin ETFs suggest an interest from the broader financial market in this space. And just today, BlackRock went on I think it was CNBC to say that they want to tokenize securities. That would be a significant change to have something as established as BlackRock operating in the crypto space in this particular way.

It would bring the real financial system a lot closer to the crypto system, and the two of those things have been relatively divorced although they have been getting closer. And the last time we had a big crypto crash, it took out two real world banks. So I’m just watching to see where and how this develops because obviously there is a lot of political power in play.

FLORA LICHTMAN: Fascinating. Thank you for taking the time to explain this to us.

LIZ LOPATTO: Yeah, my pleasure.

FLORA LICHTMAN: Liz Lopatto is a senior writer at The Verge.

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