Does memecoin have “fundamentals”?

Author: Michael Nadeau; Source: thedefireport; Compiler: Vernacular Blockchain

Why Memes?

Beta

We like certain memecoins simply because they have high beta to Layer 1 (L1) assets. Simply put, a small allocation to memecoins like BONK (the cultural currency of the Solana ecosystem) can provide leverage to L1 assets without actually adding leverage (avoiding liquidation risk). The signal we look for is when the 30-day (pink) exceeds the 90-day rolling beta (red - last happened on April 1st). When this happens, BONK has averaged 124% and 413% 30-day and 60-day returns (medians are 45% and 57%, respectively).

Price: Bonk vs SOL

We can see that the shift in risk appetite patterns tends to be rapid, with BONK significantly outperforming over a short period of time. This highlights the importance of buying at the right inflection points (which we will discuss later in the report).

BONK's breakouts often coincide with SOL's +5% rally in a week. Here are BONK’s average returns in this scenario:

• Average 1-week return 26%, median 14%

• Average 30-day return 141%, median 11%

• Average 60-day return 512%, median 27%

About 1/3 of the time, BONK actually fell – suggesting that SOL performance does not guarantee BONK outperformance. Still, most of these situations occurred before BONK exploded higher in late 2023.

Bonk vs SOL Correlation

As shown in the chart below, BONK is often correlated with SOL. However, during periods when BONK outperformed (Q4 2023, Q1 2024, Q4 2024, and April this year), the correlation tended to weaken.

Key Points:

• BONK has high beta to SOL over the 30-, 60-, and 90-day rolling periods, and even higher beta from an absolute return perspective. This means that BONK typically rises and falls far more than SOL - making it a high-risk/high-reward asset.

• We think of BONK as a leveraged bet on SOL, but without the leverage (liquidation risk).

• We use BONK/SOL as an example of data, but the same conditions apply to other “blue chip” memecoins and their relationship to L1 assets, such as PEPE/ETH.

Turn to on-chain data analysis next…

On-chain data

In addition to understanding how a memecoin is performing relative to its L1 pair, we also like to use on-chain data for quantitative analysis.

This tells us the relative quality and conviction of the holder base.

Below, we compare some of the top “blue chip” memecoins to spot outliers. Token Holder Growth (90 Days) Token Holder Growth provides a perspective on the recent popularity and virality of a token. Median vs. Average Holdings helps us understand the median and average holders’ beliefs. Note that some memecoin communities are more centrally managed than others. For these tokens, you’ll notice that the median holdings are lower, due to a large number of small airdrops distributed to many wallets.

Holders Holding > $1000 (%)

This again gives us perspective on the holder base. We would like to see a higher percentage of wallets holding > $1k as an indicator of interest and conviction.

Holders with >$100k (%)

This provides us with insight into the relative interest and conviction of large holders in the token, relative to the total number of holders.

Whale Retention Rate

With this metric, we look at all wallets that once held >$100k Tokens and still hold more than 50% of their peak units (to remove noise from price fluctuations).

This helps us measure the conviction of the largest holders.

Whales: DEX Net Inflow/Outflow

Here we filter all wallets that have ever held >$100k tokens and analyze the inflow/outflow of these wallets to DEX.

This provides us with insights into whether the largest holders are buying more tokens or exiting the project.

Other factors

In addition to on-chain data, we are only interested in memecoins that have sufficient trading liquidity and have experienced multiple 50%+ pullbacks.

Please note that our data only looks at on-chain activity and does not include tokens held by centralized exchanges (BONK is about 20%).

For tokens traded on major exchanges, we like to look at open interest. The open interest shown below is mainly from Bybit.

Community/Beliefs

Here, more crypto-native intuition comes into play, involving monitoring social media activity and sentiment.

We like to filter by the “potential audience interest” of the memecoin. For example, it has to be something that is globally acceptable (e.g. “disrupting the stock market” for SPX6900 – sounds silly, but has the potential to attract attention/form a movement).

What we look for:

• A good narrative + community slogan that resonates. You don’t have to agree with it, just see others embrace it.

• Signs of strong conviction, and a sense of belonging to the community (this turns holders into evangelists).

• Signs of leadership and a sense of alignment (we observe this in memecoins like BONK, SPX6900, and Giga).

• Signs of cultural embedding (Pepe Meme is an example).

We are starting to notice that some communities are now promoting projects through TikTok to reach a younger demographic of potential crypto users.

The best memecoin communities tend to be excellent marketers.

Fair Value

How do you know if you’re buying at “fair value”?

We think the clearest way to do this is to understand the relationship between realized value (a proxy for the cost basis of all tokens in circulation) and market value.

When the MVRV ratio is below 1, it indicates that holders (on average) are in an unrealized loss — a sign that we may be near a local bottom, assuming bullish conditions will persist.

BONK’s realized price is currently $0.0002. At the time of writing, the token was trading at $0.0000145 — suggesting this could be a good entry price.

*As mentioned earlier, realized price does not take into account token supply on exchanges. Based on data from Solscan, we estimate that ~20% of BONK supply is held on centralized exchanges (BN, Robinhood, Coinbase, Kraken, etc.).

MVRV

Momentum

In the absence of fundamentals, another way to assess “fair value” is to look at momentum indicators.

Relative Strength Index (RSI)

The RSI helps us understand if a token is overbought or oversold in terms of recent momentum.

RSI near or below 30 indicates "oversold" conditions.

RSI near or above 70 indicates "overbought" conditions.

Moving Averages

Another way to view near-term momentum is to analyze price relative to key moving averages. We look to buy strength as price breaks through key support areas, but only if we have confidence in the 3-6 month time frame.

Google Search

Finally, analyzing Google Trends and other social sentiment indicators can help us understand when to buy/sell.

Liquidity Cycle/Macro

We must mention that memecoins are at the far end of the risk spectrum. It is well known that BTC relies on liquidity conditions, and memecoins even more so. A favorable liquidity/economic environment, combined with a return of "risk-on" sentiment and "animal spirits", is key to your allocation to memecoins.

Concluding Thoughts

Put it all together and you get a framework that covers:

• Why we like certain memecoins (beta) as a very small portion of a portfolio.

• How to identify memecoins with strong “fundamentals” (on-chain data).

• How to measure “fair value” (MVRV).

• When to buy (inflection points/macro/momentum).

• When to sell (momentum/RSI).

Of course, this doesn’t make the framework foolproof. There are no easy rewards in investing. Outperformance only comes with higher risk.

Nevertheless, having a system should help you navigate this wild west of memecoins.