Investing in Dogecoin (DOGE 6.89%), the leader of the meme coins, and Shiba Inu (SHIB 7.85%), the runner-up, is risky under the best conditions. But with the right information in hand, you can mitigate some of the risks and stack the deck in your favor as much as possible.
Let's learn about three key concepts that'll you'll need to understand if you want to succeed with these investments.
1. Attention drives short-term price action
What's a meme?
One way to think about the answer to that question is that memes are themes or narratives that increasingly capture people's attention, widening like ripples in a pond. In the case of Dogecoin and Shiba Inu, the theme is simply a silly and cute picture of a dog, and the narrative is that the cryptocurrencies associated with those pictures are going to the moon, meaning a huge price rise as a result of the widespread attention they command.
But, as we all know intuitively from a lifetime of hearing and making jokes, memes rarely last long. Funnier, new images come along, or people lose interest in the narrative when their coins lose value instead of making them rich overnight.
From this, we can derive the first concept you need to know to succeed with these two meme coins: Attention can drive short-term price action, but it's fickle. If you are investing for the long term, as it's advisable to do with any investment, you cannot rely solely on the momentary popularity of these memes to succeed.
The actionable takeaway here is that if you see a few Doge or Shiba Inu memes on social media, it probably is correlated with a bump in the price, though there's no rule that says it must be so. Still, it's not a signal that's worth taking into account when deciding whether to make an investment. That brings us to the next point.
2. Conviction drives long-term price action
When a meme coin consistently attracts attention -- as it's arguable that both Shiba Inu and Dogecoin have over the years -- it implies several things.
First, it means that the memes are engaging enough to some people that, on average, they'll continue to produce and transmit meme content regardless of the coin's short-term price action. This activity helps to maintain the coin's share of attention in the public's mind over time, and it may occasionally attract some new investors to bid up the price of the coin. You can think of this as the coin's holders offering their labor to consistently perform free marketing for the project. It's a bullish sign.
Second, and more importantly, it means that there are coin holders who are unlikely to sell before the price increases significantly. After all, if they're already performing free labor to ensure the coin continues to get attention, they're likely angling for the activity to pay off in the form of higher prices down the line, when new money flows in.
But nobody invests in a meme coin for a piddling gain -- people are swinging for the fences and seeking gargantuan (and perhaps unrealistic) returns of many multiples of their initial investment. Holding a highly volatile cryptocurrency for years is much harder to do if you don't have the conviction that the opportunity cost of tying up our capital will eventually pay off.
Thus, the population of holders with high conviction about the future prospects for Dogecoin and Shiba Inu is likely a major determinant of the actual future growth of the coins. The more people who refuse to sell and who take the time to boost a crypto , the higher the floor on the coins' price. That makes them slightly less risky in comparison to other, less popular and less battle-tested meme coins.
Look for any signs of change in the number of people with long-term conviction with these coins, as the price is likely to eventually trend either up or down as a result.
3. Cyclicality
It's not possible to predict the future. But appreciating that both Dogecoin and Shiba Inu exhibit some cyclicality in their pricing is an easy way to feel a bit better about how to time your investment, assuming you don't want to pursue a dollar-cost averaging (DCA) strategy.
Most cryptocurrency investors are familiar with the idea of the four-year Bitcoin (BTC 3.49%) cycle. The idea is that, due to the periodic Bitcoin halvings that cuts the reward for mining new coins in half, the asset's price oscillates while trending higher in a vaguely predictable fashion. Dogecoin, and likely Shiba Inu as well, follow a similarly cyclical pattern.
The reason for this is that during the past 10 years, the prices of Bitcoin and Dogecoin tend to be very highly correlated on average. So when Bitcoin's halvings occur, it tends to mean higher prices shortly thereafter, which tends to occur around the time that Dogecoin is also in a sharp uptrend.
Use this information to your advantage. If Bitcoin is gaining, expect Dogecoin to follow sooner or later. Likewise, it may be wise to reduce risk by selling some of your coins if Bitcoin starts to tumble.
Keep your eyes on the long term. It's a better idea to buy when prices are low than to try to play catch-up when these coins are trending and gaining an increasing amount of attention.
