Unlocking Opportunities

Purposeful Ponzi Schemes

Date of Publication
April 2024

Author
Charlie Kellaway

Reading Time
9 minutes

Meme Coin Mania

Amid the rampant increase in value of numerous cryptoassets in March 2024, one coin stood out. Dogwifhat (WIF), a cryptoasset inspired by the Dogwifhat meme, skyrocketed following creation in December 2023 to a market capitalisation of US$3.4bn on 15 March [1]. It fell off slightly, sitting at $2.54bn at the time of writing, but is still placed among the 50 largest cryptoassets globally. For comparison, Greggs (GRG), the British bakery chain founded in 1939 and constituent of the FTSE 250 Index, has a market capitalisation of £2.89bn ($3.67bn).

WIF achieved a market capitalisation comparable to a business with over 2,450 shops inside three months. Many finance professionals may observe this and, rightly, be perplexed. What on earth happened?

WIF is a meme coin: a genre of cryptoasset loosely defined as having an exuberant online community supporting its growth rather than strong underlying technology [2]. They are highly speculative financial instruments and it is not uncommon to see price swings of over 100% in a matter of minutes. Intriguingly, meme coins are often used to reflect, comment on and satirise various aspects of society and culture, characterised by humorous branding and even drawing inspiration from internet memes and pop culture. The most popular are Dogecoin (DOGE) and Shiba Inu (SHIB).

The coin showcases a Shiba Inu wearing a knitted pink hat and openly admits its minimal utility, with the project’s website describing the coin as “literally just a dog with a hat.” Despite this, WIF has garnered remarkable attention within the crypto community, surpassing several well-established coins in trading volume. Its rise is emblematic of meme culture in crypto and highlights the community’s appreciation for humour [3]. Meme coins are shaking up traditional views on financial instruments, allowing users to express themselves and make statements about society.

In principle, this works by facilitating the following:

• Community engagement and identity: meme coins often cultivate vibrant online communities around their brands, forming unique subcultures within the decentralised finance ecosystem.
• Inclusivity: meme coins often encourage broad participation. Users from diverse backgrounds can contribute to financial projects, regardless of their technical expertise or resource.
• Symbolism and social commentary: community members may use the coin’s branding, messaging or events to critique societal, political or cultural phenomena.
• Adaptability: as cultural references shift and societal attitudes evolve, meme coins may undergo rebranding to stay relevant and resonate with their audience.
• Promotion of movements: some meme coins align themselves with specific causes, movements or ideologies to raise awareness, funds or support.

Remarkably, meme coins function as vehicles for cultural expression, social commentary and community engagement. By using memes as currency, meme coins blend entertainment and finance, prompting people to think differently about digital assets and the broader decentralised ecosystem. It is a strange detachment from traditional financial norms where strong businesses providing value to customers attract investors and resources.

This seems harmless, but meme coins have significant sway over crypto markets. They frequently display frenzied trading, especially following a rise in Bitcoin (BTC), termed meme coin mania [4]. The market can spill into other coins and drag them along for the ride, with effects even extending beyond cryptoassets. For example, not only did WIF appreciate drastically, but the meme itself sold as a non-fungible token (NFT) for $4,311,234 – a record for a meme NFT [5].

Retail punters know that wild profits are achievable in crypto…you just have to pick the right coin. Speculation, risk and reward are buzzwords in crypto that perhaps apply most to meme coins, which almost perfectly encapsulate gambling. If you can get in and out at the right time, you can make an inordinate amount of money with very little investment. The community bubbled with pride when one trader turned $8,000 of SHIB into $5.7bn between August 2020 and October 2021: a 14-month gain of over 7 million percent [6].

But timing is vital. By and large, there is no underlying technology – no underlying value – to meme coin projects, which means the project can implode within days. A prime example is the cryptoasset SQUID (inspired by the Netflix show, ‘Squid Game’) which, after peaking at $2,861 per coin on 01 November 2021, collapsed to under one penny within a day. Developers behind the project sold their tokens for an estimated $3.3m, closed all social media accounts and abandoned the lot [7].

SQUID developers performed a rug pull: a common scam in which developers of a Web3 project announce a venture, drum up support and attract investors, only to sell their assets during the hype, run with the money and abandon the project altogether [8].

Another example is OneCoin, which operated between 2014-2016. As a result of misrepresentations that co-founders made about OneCoin, millions of victims worldwide invested over $4bn in the fraudulent cryptoasset, driving its price from €0.50 to approximately €29.95. But the cryptoasset had no underlying blockchain. Instead, the founders used investments to fund their own lavish lifestyles [9]. It was a gigantic crypto Ponzi scheme.

The lack of underlying technology is critical because it blurs the line between what is fun for investors and what is, inherently, a scam.

The Nexus Between Meme Coins and Ponzi Schemes

Ponzi schemes, named after the infamous Charles Ponzi, have long plagued traditional financial markets, captivating both investors and regulators with their illusionary promises of high returns. Ponzis are characterised by a fraudulent investment operation that pays returns to investors from their own money, or the money paid in by subsequent investors, rather than from profit earned by individuals running the venture [10]. This can create an illusion of big profits for little risk and often relies on word-of-mouth to engage subsequent investors. The scheme unravels when the flow of new money slows, as the operators cannot keep up payments of alleged profits to earlier investors.

The most prominent scheme unravelled in recent years was that operated by Bernie Madoff: a $64bn arrangement that ran for over 20 years before imploding in 2008 [11]. The link must be made because, though blockchain technology has opened new avenues for financial innovation by encouraging decentralised and trust-less operations, it has also created opportunities for fraud. Sam Bankman-Fried, former CEO of collapsed crypto exchange FTX and trading firm Alameda Research, is due for sentencing on 28 March 2024 having been found guilty on seven counts of money laundering, wire fraud and securities fraud [12]. The Securities and Exchange Commission (SEC) stated [13]:

From at least May 2019 through November 2022, Bankman-Fried engaged in a scheme to defraud equity investors in FTX Trading Ltd. (“FTX”), the crypto asset trading
platform of which he was CEO and co-founder, at the same time that he was also defrauding the platform’s customers. Bankman-Fried raised more than $1.8 billion from investors, including U.S. investors, who bought an equity stake in FTX believing that FTX had appropriate controls and risk management measures. Unbeknownst to those investors (and to FTX’s trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow
his crypto empire.

…

While he spent lavishly on office space and condominiums in The Bahamas, and sank billions of dollars of customer funds into speculative venture investments, Bankman-Fried’s house of cards began to crumble.

Securities and Exchange Commission v. Bankman-Fried

The key characteristics of a Ponzi include the promise of high returns, an unsustainable payout structure, reliance on new investors and a lack of legitimate investment activity [14]. The launch of numerous cryptoasset projects that have subsequently imploded has rightly drawn comparisons with such schemes.

The Allure of a Good Story

Meme coins, therefore, form a peculiar subset of cryptoasset, drawing attention for their speculative nature and viral appeal, despite being so inherently risky. They continue to attract liquidity, despite historic implosions. There are simple explanations why, for example: the opportunity to 1000x returns, a misplaced belief in technology or even to have fun. However, noting the cultural symbolism that meme coins stimulate, an intriguing argument is that these instruments form a valuable story – one that increases in value over time [15].

Meme coins rely on widespread branding and online communities of loyal backers to rise in value. If marketed correctly, a given coin forms a movement, which perpetuates and dramatises the story of the coin. It’s not just a speculative bet. It’s a marketing effort. By buying the tokens and ensuring there’s a liquid market, investors help perpetuate and extend the story. This increases the likelihood that tokens will increase in value.

The technology underlying DOGE is not comparable to Ethereum – it does not support the development of Web3 applications. It was created as a joke. However, it currently sits in the top 10 cryptoassets by market cap at $18,530,251,354. It gains value based on the growing significance of its community to drive value upwards. DOGE highlights the wild swings – the meme coin mania – that captivates users of such instruments. It highlights how the story can run away with itself, taking on a snowball effect. The best outcome, no doubt, is for a billionaire to jump on the hype as this will take word-of-mouth to the next level. Support should pile in to the project, skyrocketing its price. You just have to hope said billionaire does not abandon ship!

This behaviour seems almost backwards. Buyers of certain cryptoassets do not pay for value. Rather, the community themselves create value in its absence. Whether for fun, as an expression of culture or for acceptable risk/reward trade-offs, large groups pile into the story and drive the success of projects in this remarkable new marketplace. In addition, good projects can fail in the absence of group support. It is not enough to sell a good product. Today’s consumers want the popular story; the content that everyone is consuming; the cultural movement of the moment. The success of a product depends on captivating the crowd and the osmosis of the crowd’s attention.

Just look at the world’s biggest products.

Football dominates sport viewership globally, with 3.5 billion fans [19]. It derives astronomical sums of money for different leagues around the world through television rights, with Sky recently paying £6.7bn to the Premier League in a four-year deal [20]. TikTok was the world’s most popular app in 2023, with 672 million downloads [21]. Its product is simply a platform to watch, share and create short videos online.

The biggest winners in today’s markets get the crowd on side. It is crucial – what the crowd consumes will succeed and all else falls by the wayside. Launching a successful product is harder but more lucrative than ever. Staying relevant relies on keeping the story going.

Decentralised finance is growing. Projects will come and go. As with Web2’s dot-com bubble, there will be success stories and failures – the Amazons versus the Pets.coms. Blockchain platforms such as Ethereum will work hard to innovate and provide value to the ecosystem. All the while, Dogwifhat,with no underlying technology, will garner millions of supporters mere weeks after its inception. It is, essentially, a Ponzi scheme. But it somehow makes sense in this crazy new marketplace, adding value for those using it for cultural expression and a sense of belonging.

The crowd is more important than ever. Provide them with a good story – capture their attention – and value can be realised from a project even in the absence of technological merit.

Just don’t be holding on when the story ends.

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[1] Lutz, S. (2024). Dogwifhat Spat? Ethereum NFT Auction Reveals Tensions Between Dog’s Owners and Solana Community. Available at: Decrypt (Accessed: 19 March 2024).

[2] Rosenberg, E. (2023). Meme Coin Explained. Available at: Investopedia (Accessed: 19 March 2024).

[3] Trust Wallet. (2024). A Beginner’s Guide to Dogwifhat (WIF). Available at: Trust Wallet (Accessed: 19 March 2024).

[4] WhiteBIT. (2024). What Is the Altcoin Season Index? Available at: WhiteBit (Accessed: 20 March 2024).

[5] Lutz, S. (2024). Memes Have a New Top Dog: Dogwifhat Ethereum NFT Sells for $4.3 Million. Available at: Decrypt (Accessed: 19 March 2024).

[6] Fox, M. (2021). A crypto wallet shows an investor made an $8,000 shiba inu coin purchase last year. Today, it is worth $5.7 billion. Available at: Business Insider (Accessed: 19 March 2024).

[7] Montgomery, H. (2021). ‘Squid Game’ Memecoin Soared to Record $2,800. Then It Fell to Zero. Available at: Vice (Accessed: 19 March 2024).

[8] Becher, B. (2023). What Is a Rug Pull, Exactly? Available at: Built In (Accessed; 19 March 2024).

[9] United States Attorney’s Office. (2023). Co-Founder Of Multibillion-Dollar Cryptocurrency Scheme “OneCoin” Sentenced To 20 Years In Prison. Available at: U.S. Department of Justice (Accessed: 19 March 2024).

[10] Chen, J. (2024). Ponzi Schemes: Definition, Examples, and Origins. Available at: Investopedia (Accessed: 19 March 2024).

[11] Smith, D. (2023). ‘He’s a financial serial killer’: how Bernie Madoff became the monster of Wall Street. Available at: The Guardian (Accessed: 20 March 2024).

[12] Pequeño IV, A. (2023). Sam Bankman-Fried Found Guilty Of Fraud And Conspiracy. Available at: Forbes (Accessed: 20 March 2024).

[13] United States District Court Southern District of New York. (2022). Securities and Exchange Commission v. Bankman-Fried, 1:22-cv-10501, (S.D.N.Y.).

[14] Securities and Exchange Commission. (2013). Ponzi Schemes Using Virtual Currencies. SEC Pub. No. 153 (7/13).

[15] Poleg, D. (2023). In Praise of Ponzis. Available at: Dror Poleg (Accessed: 19 January 2024).

[16] Dogecoin. The History of Dogecoin. Available at: Dogecoin (Accessed: 19 March 2024).

[17] Gola, Y. (2022). Dogecoin has crashed 75% against Bitcoin since Elon Musk’s SNL appearance. Available at: Cointelegraph (Accessed: 20 March 2024).

[18] Sephton, C. (2022). Elon Musk sued for $258bn over claims he ran a pyramid scheme to promote Dogecoin. Available at: Sky News (Accessed: 20 March 2024).

[19] Sport for Business. (2017). The World’s Most Watched Sports. Available at: Sport for Business (Accessed: 19 March 2024).

[20] Bennett, H. (2023). Sky and TNT score TV rights to Premier League in £6.7bn deal. Available at: Royal Television Society (Accessed: 19 March 2024).

[21] Suarez, C. (2023). The Most Downloaded Apps of All Time. Available at: Kobiton (Accessed: 20 March 2024).

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