Memecoins Becoming Hedge Funds Ultimate Risk-on Asset Could Spell Disaster for Institutional Trust in Crypto

Key Takeaways

• The hedge fund manager Stratos reportedly invested in WIF in December.
• Other hedge funds have also dipped their toes in the memecoin market.
• However, most institutions remain averse to the risky asset class.

Investing in memecoins has often been compared to gambling. But despite the risks involved, the silly side of crypto is more popular than ever. 

No longer just for degens, the memecoin market now sees hedge funds with millions of dollars to play with getting involved. As tokens like Dogwifhat (WIF) attract fund managers with a high appetite for risk, the new meme token investors are embracing the very volatility their institutional peers repudiate.

Hedge Funds Embrace Memecoins

In December, hedge fund manager Stratos invested in the Solana token WIF. From the end of February, it went on one of the meteoric rallies that only memecoins seem to be capable of. 

Thanks to its investment, the liquid Stratos fund holding WIF posted a 137% profit in the first quarter. Not a bad return for a dog in a beanie. 

https://twitter.com/DegenerateNews/status/1783189359216210387

But according to Bloomberg, Stratos isn’t the only fund manager tipping its toes in the meme pool. Brevan Howard, which manages assets worth tens of billions of dollars, has reportedly made a small investment too. 

Meanwhile, Pantera Capital’s Paul Veradittakit recently penned an article celebrating meme coins’ cultural value. Reflecting a growing acknowledgment of their “crucial role in kickstarting network activity,” he echoed the sentiment of many crypto influencers who have sought to highlight meme tokens’ legitimate benefits.

Memecoins Legitimized

Given their notorious volatility and association with reckless investing strategies, “serious” investors have traditionally viewed memecoins with distaste. Nonetheless, they remain central to the culture of Web3 and beloved by crypto natives. 

Recognizing their cultural significance, the Avalanche Foundation has started using Treasury funds to invest in “community coins,” which it defined as “memecoins, NFTs and similar tokens created by the community.”

It said: “Memecoins generally have high community value because of the engagement, community spirit, and culture that they engender, which goes beyond the humor and virality that they embody.”

In a similar vein, Ethereum founder Vitalik Buterin has explored how memecoins might be used to drive positive social change. Recently, he asked: “If people value having fun, and financialized games seem to at least sometimes provide that, then could there be a more positive-sum version of this whole concept?” 

However, despite their legitimization within certain circles, memecoins are still too risky for most institutional investors.

Institutional Trust Lacking

Even among institutions that are generally friendly to crypto, memecoins remain somewhat taboo.

Although it provides investors exposure to Bitcoin through its EZBC Exchange-Traded Fund (ETF), Franklin Templeton recently warned that meme coins have “no inherent value or utility.” Nevertheless, the asset manager admitted that they can be lucrative.

With hedge funds getting into the space, the potential for gains is amplified. But so is the potential for losses. The more managers choose to play with fire, the more likely it is one of them will get burned. 

If the fallout from such risky investment strategies is too spectacular (think 3AC for memes), it would hurt the whole sector. Furthermore, it could also damage institutions’ fragile trust in mainstream cryptocurrencies too.