Improbability of Making Millions with Meme Coins

Slightly different style this report, we will resume to our normal crypto style next time

Last weekend, two events of relatively minor importance to their respective industries occurred simultaneously. But analysed together, we can develop some interesting conclusions and suggestions on how to become wealthy. On the one hand, we had billionaire investor Warren Buffett’s annual shareholder meeting of his Berkshire Hathaway conglomerate corporation. On the other hand, the PEPE meme coin reached a market capitalisation of $1.8 billion after a 9,071% return within less than four weeks. The contrast between these two events could not be more different.

Buffet’s investment style has primarily focused on buying the U.S. economy by shadowing the growth with a basket of blue-chip stocks with funding that has been consistently 2-3% below the funding rate of his peers. This strategy was sufficient to accumulate $112.8 billion of personal wealth.

First, investing in blue chip names without doing anything too risky is sufficient, and second, staying in the game for a long time allows for accumulating large sums of wealth. Safety plus longevity is the name of the game of becoming rich.

Buffett doesn’t buy lottery tickets and the odds of winning the Powerball jackpot (lottery) are 1 in 300 million, while there is a 1 in 1.2 million chance of death or injury from lightning in any given year. Similarly to lightning speed, people play the lottery because of the allure of becoming rich within a few days without any work and with only a tiny amount of capital at risk.

Another exciting aspect is that according to research reports, the lower socio-economic class (some call them the ‘poor’) always plays the lottery, whether the odds are good or bad. The higher socio-economic class (the ‘rich’) only plays when the jackpot offers the best returns. A $100m jackpot, or higher, will draw in more interest from wealthy individuals as winning a mere $10m jackpot might not offer the social mobility that would make a difference in their lives. A study done by a Harvard scholar showed that lottery sales increase when the jackpot is larger, and there is an increase in players from more affluent areas (as measured by sales sorted by zip codes).

Countries with low social mobility opportunities tend to favour lottery and online games — often involving money. Most countries in Asia and the Middle East have banned online casinos (gambling), leaving the lottery as the only alternative. 25% of Korean adults play the lottery weekly, and 56% bought lottery tickets in 2022. To some, crypto offers a welcome alternative in those countries where the government restricts gambling alternatives.

Exhibit 1: Meme coin performance during the last 7 days

Hence besides the utility of ‘risk-loving’, there is also a desperation factor at play here, a miscalculation of the odds of winning and access to other online gambling venues. People buy meme coins to maximise the fun element — instead for risk-loving and purely profit motivation. The task is to be ahead of others and get out once the momentum turns. This is why it is important to work with stop loss and stops when trading risky assets.

But as the Warren Buffett example has shown, if crypto can grow into a multi-trillion ‘economy’, buying large-cap, blue-chip names with staying power could lead to grey hair and massive wealth creation over the long term. But who has that time these days…buying lottery tickets and attempting to become wealthy overnight is just too tempting — for some. As Buffett has said in the past, “If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.”

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