Memecoins Are Starving the ‘Already Struggling’ Crypto Market of Liquidity

Key Takeaways

• The memecoin craze has created an altcoin liquidity crisis.
• Experts call memecoins a double-edged sword: On one hand, it brings new users; on the other, it diverts liquidity from actual use case assets.
• The Trump memecoin launch was a prime example of this.

The memecoin craze in this bull cycle can be understood, because the total number of crypto tokens is touching 11 million on Coinmarketcap. Most of this comes from the daily creation of thousands of new meme tokens.

While the memecoin frenzy is often seen as a cultural phenomenon that attracts more new traders to the crypto ecosystem, the meme culture also has several downsides, be it high market volatility or sucking liquidity out of the altcoin markets.

Memecoin Impact on Market Liquidity

Creating a new memecoin often leads to a surge in market liquidity, with new investors putting their money in.

However, as a memecoin reaches a new high, it often attracts traders from the mainstream markets who want to bank on the potential listing on mainstream exchanges. 

As a result, traders often use their stablecoins or liquidate other crypto tokens to put their money into the memecoin. 

Liquidity in the crypto space tends to be highly rotational, moving quickly between trends. This was evident in the case of Trump’s official memecoin launch.

The rapid rise of the memecoin saw liquidity move into the Trump Memecoin. Yet, little new liquidity was added, as the total crypto market cap didn’t change much despite the Trump token reaching a $70 billion market value.

Chuck Zhang, CFO of PolyFlow, said that the memecoin cycle can be a double-edged sword. 

“On one hand, it brings mass retail adoption, increasing liquidity and attention to the space, but it can divert capital from fundamentally strong projects into speculative assets, creating instability—this was certainly the case with the TRUMP memecoin launch.”

Are Memecoins a Threat to the Altcoin Bull Market?

The current crypto market crisis is where most altcoins are down more than 25% from their cycle highs, while celebrity memecoins have faced over 80% market cut in the past month.

The Trump memecoin reached a market cap of $75 billion a day after launch and is currently down by 83% from ATH. 

The altcoin market is going through one of the worst phases in history. Its total market valuation has dropped to multi-year lows, losing $234 billion in the last two weeks.

Many market analysts believe that although memecoins alone won’t bring down the bull market, the rotational nature of the crypto liquidity surely adds more pressure on the market.

Nansen Research analyst Nicolai Sondergaard shared:

“In reality, liquidity hasn’t disappeared. It’s just spread across thousands of meme coins and altcoins, while meaningful liquidity growth remains concentrated in the top 10 tokens.”

He added that memecoins should not be seen as a net negative. Even if people get burned, they are likely to come back for more, which will put them in touch with various communities that then educate them on what lies outside of projects such as pump.fun.

Alvin Kan, COO of Bitget Wallet, said that memecoins often reflect broader market sentiment: They thrive when confidence is high and struggle when liquidity tightens. Shedding light on the liquidity crisis and the role of memecoins, Kan explained:

“They won’t single-handedly end a bull run, but excessive speculation can create volatility. The recent cool down in some memecoins suggests a market rotation rather than an outright collapse.”

Many memecoin proponents view these tokens as a key tool to attract new traders to the ecosystem who can explore better projects with real-world use cases. However, most of the memecoins in the cycle were purely used as a get-rich-quick scheme.