Original author: CHARLES
Original translation: TechFlow
This cycle has been called the "memecoin cycle" by some, and some even call it the "memecoin supercycle." We've seen new memecoins like WIF go from zero to billions of dollars in market cap in a matter of months. We've also seen various products built around the memecoin phenomenon, such as the launch of pump.fun. Like it or not, memecoin can't be ignored.
Most active crypto players will be acutely aware that memecoins have performed extremely well this cycle, outperforming all others as a sector by a wide margin. When we hear stories of traders making multiple-time gains on memecoins, the question is always, “How did they identify that particular memecoin?” There is certainly an element of survivorship bias, but are there other factors at play?
Generally, at HFAResearch, we focus on fundamentals-driven ideas from an investment, trading, and mining perspective. This makes it difficult for us to cover the memecoin sector - like NFTs, the investment logic of memecoins is often more fuzzy and more dependent on the "vibe" and the memes themselves, which makes fundamental analysis more difficult. At least, this is what we thought before we discovered what we call the "Memeccoin TVL Pull Theory".
The Memecoin TVL pump theory states that a major memecoin or a basket of major memecoins will act as a leveraged bet for on-chain TVL. Before we list various examples from the past, let’s first understand why this makes sense.
We know that as the TVL on a chain increases, a certain percentage of money will flow into certain applications or “destinations” on that chain…like X% going to money markets, Y% going to major decentralized exchanges (DEXs), etc. Therefore, it’s reasonable to assume that a small percentage of money will want to find a way to bet on the highest beta of that chain. How would they do that? By buying the major memecoins, or a basket of major memecoins. Maybe this is obvious to some of you, but we think this provides a valuable and potentially reduced risk way to participate in memecoins because it provides some “fundamental” ways to assess future memecoin performance (whether it’s up or down).
Let’s look at a few examples from history of this happening:
Base
Base TVL
TOSHI's performance began to sync with Base TVL's growth in March
Both of BRETT’s parabolic price increases occurred during an uptrend in Base TVL.
TON
YOUR TVL
REDO is the main memecoin on the TON network
The above example clearly shows that; TVL inflow = major memecoin performance. If you can predict that TVL will increase, then you can take a position on the major memecoin on that chain as a leveraged bet on the TVL prediction.
Critics of this strategy would say that the design of this strategy reduces returns because it requires knowing which are the most important memecoins in order to determine where the TVL should flow. This criticism is valid, this strategy certainly does not allow sniping a memecoin at a $100k market cap and causing it to rise 1000x to $100m, but it can be very effective in finding some slightly larger, slightly more mature memecoin and causing it to rise from there. For example, between late February and early April, Base experienced a parabolic run in TVL, and Toshi went from a $40m market cap to a $300m+ market cap, with almost lackluster returns in less than 2 months.
Predicting TVL growth can be broken down into two categories: long-term and short-term. Long-term predictions are really just predicting where TVL is going over multiple months. We might point to Base as a funnel for retail users to onboard Coinbase as a reason TVL growth will remain steady. We can look at the near-incestuous closeness between TON and Telegram to see what the onboarding of all 900 million Telegram monthly active users would do to TVL. We might mention Solana and its superior on-chain UX and mobile wallet as reason to believe TVL will join the funnel as well. You get my point; in the long term, to predict TVL growth over longer time spans, you have to look at the deeper distribution base on the chain. Then you’d look at the primary memecoin or memecoins on that chain and bet accordingly.
The short-term approach sees short-term catalysts such as points programs or airdrops as the reason for TVL growth. For example, $FOXY, the premier memecoin on Linea, performed extremely well in the ensuing TVL inflow after announcing its surge points program:
Linea TVL and Surge were released in mid-May
$FOXY Market Cap
The short-term approach requires a more active focus on the market and where capital might flow based on incentive programs. This is similar to the game some of us played last cycle; entering Pool 2 of the top DEX on a new chain to bet on the TVL growth brought by the incentive program.
A more specific example is Scroll. We have seen explosive growth in its TVL after the introduction of its latest points program. Could Scroll be the next good target for short-term strategies?
We think this approach offers a more systematic and less risky way to participate in the memecoin space, but we’re still fairly new in this space so we’d love to hear your feedback!
