Irresistible Profits! Hedge Funds Dive Into Meme Coins

According to a Bloomberg report, the hedge fund industry has found the lure of meme coins hard to resist.

Last December, when Dogwifhat (WIF) became the hottest token in the cryptocurrency space, Stratos, based in Newport Beach, California, launched a liquid fund holding the token, which features a mascot of a dog wearing a brimless pee cap. The token's price surged over 300 times, helping the fund achieve a 137% return in the first quarter, more than double the overall crypto market performance. Dogwifhat has since fallen more than 40% from its all-time high last month.

Stratos stated that its limited partners, including venture capitalists Marc Andreessen and Chris Dixon, are not the only hedge fund dabbling in meme coins. An unnamed insider revealed that macro heavyweight Brevan Howard has made a "small" investment in the sector. Cryptocurrency fund Pantera Capital recently wrote, "Meme coins are here to stay," and "meme coin trading has created massive opportunities." Indeed, according to Dex Screener, meme coins recently saw the highest volume on so-called decentralized exchanges. Data tracking company CoinMarketCap indicates that the overall market cap for meme coins has risen to around $54.7 billion.

"It goes without saying that if the funds don't do it, the fund staff will," said Rennick Palley, founding partner of Stratos, in an interview.

Source: Coingecko

Hedge funds have long been active in the crypto domain, drawn by strategies like arbitrage trades involving the Grayscale Bitcoin Trust, which allowed them to profit from the price difference between Bitcoin and the trust's stock until the recent "Bitcoin winter."

Nevertheless, many in the cryptocurrency community remain skeptical about meme coins. Unlike more traditional cryptocurrencies, memes usually are not linked to specific projects. Most originate from internet memes, characters, or trends, intended to be lighthearted and fun. This atmosphere has evolved into a speculative trading strategy led by groups seeking quick profits after aggressively promoting tokens on social media.

"This is just retail frenzy, like what you see in the traditional market with GameStop and meme stocks," said Quinn Thompson, founder of Lekker Capital, who has attempted to trade meme coins in his own account. "It's the pinnacle of speculation. It's gambling."

The first meme coin was launched in 2014, and since then, tens of thousands of coins have been created, with Dogecoin, featuring a Shiba Inu, currently the eighth largest cryptocurrency with a market cap of approximately $22 billion, according to CoinMarketCap. While many retail investors have lost their shirts on meme coins, some have made fortunes, although professional investors mostly stayed away until the recent cryptocurrency boom.

"Meme coins were obviously a joke at the beginning," said Cosmo Jiang, a portfolio manager at Pantera. "But they've evolved far beyond that over time. People have started to call some meme coins 'culture coins,' which are a part of a culture or a group with a shared belief system."

Creating and launching memes has also become easier, with apps like Pump.fun allowing users to mint coins in minutes. Blockchains like Solana and Base, which offer low transaction fees, have been overwhelmed by tokens. Telegram bots, such as Bonkbot, make meme trading more accessible. Perhaps most importantly, some memes are now listed on mainstream exchanges like Gemini, owned by the Winklevoss twins.

"Since the last cycle, the infrastructure around meme coins has become stronger, and liquidity for multiple tokens has significantly improved," said Josh de Vos, head of research at CCData. "Centralized exchanges have developed sophisticated futures markets for leading meme coins, allowing hedge funds to capitalize on their volatility trends and effectively hedge their risk exposures."

This has made hedge funds more willing to follow the lead of retail investors and promoters, who have long viewed the micro-pricing of most meme coins as opportunities for rapid, massive returns despite lacking traditional fundamentals.

Josh de Vos remarked that Dogwifhat is almost a rounding error in terms of its initial cost basis. This is typically how memes are viewed.

As more hedge funds begin to take meme coins more seriously, the focus on these highly speculative tokens is expected to increase.