Analysis of Investment Strategies for Memecoins

Why Choose Memecoins?

Memecoins have a high beta value against Layer 1 (L1) assets, which is the main reason for choosing them. By making a small allocation to certain memecoins, one can gain leverage on L1 assets without actually using leverage, while avoiding liquidation risks.

The signal we are focused on is when the 30-day beta exceeds the 90-day rolling beta. When this happens, the average 30-day and 60-day returns of certain memecoins may reach triple-digit percentages.

The shift in risk appetite can often happen quickly, and memecoins may significantly outperform the market in a short period. This highlights the importance of buying at the right turning point.

The explosion of memecoins usually coincides with their corresponding L1 assets rising more than 5% within a week. In this case, the average return of memecoins can reach dozens or even hundreds of percentage points.

It is important to note that the performance of L1 assets does not guarantee the excellent performance of memecoins. In some cases, even if L1 assets rise, memecoins may still fall.

Memecoins are usually related to their corresponding L1 assets. However, during periods when memecoins perform exceptionally well, this correlation often weakens.

Key Points

• Memecoins have a high beta compared to L1 assets, and from the perspective of absolute returns, beta is even higher.
• Memecoins can be seen as leveraged bets on L1 assets without the liquidation risks associated with leverage.
• This relationship applies not only to specific memecoins but also to other "blue-chip" memecoins and their relationship with L1 assets.

On-chain Data Analysis

In addition to understanding the performance of memecoins relative to their L1 counterparts, we also use on-chain data for quantitative analysis to understand the relative quality and belief of the holder base. Here are some key metrics:

1. Growth of Token Holders (90 Days)
2. Median and Average Holdings
3. Percentage of holders holding > $1000
4. Percentage of holders with holdings > $100k
5. Whale Retention Rate
6. Whales: DEX Net Inflow/Outflow

These indicators help us understand the popularity of the Token, the beliefs of its holders, and the behavior of large holders.

Other Factors

In addition to on-chain data, we also focus on:

• Trading Liquidity
• Memecoins that have experienced multiple pullbacks of over 50%
• Open interest ( for Token) traded on major exchanges.

Community/Faith

Community and faith play an important role in investing in memecoins. We are looking for:

• Engaging narratives and community slogans
• Signs of strong belief and community belonging
• Leadership and coordination sense
• Signs of embedded culture
• Promotion through various social media platforms

Fair Value Assessment

Methods for assessing fair value include:

1. Achieve the ratio of value to market value (MVRV)
2. Momentum Indicator:
   • Relative Strength Index (RSI)
   • Moving Average
3. Google Search Trends and Other Social Sentiment Indicators

Liquidity Cycle/Macroeconomic Factors

Memecoins are at the far end of the risk spectrum, highly reliant on liquidity conditions. A favorable liquidity/economic environment, combined with the return of "risk appetite" sentiment and "animal spirits," is key to allocating memecoins.

Investment Framework Summary

• Understand the high beta characteristics of memecoins
• Use on-chain data to identify the strong "fundamentals" of memecoins
• Use MVRV to measure "fair value"
• Seize the buying opportunity ( inflection point/macroeconomic/momentum )
• Determine the selling timing ( Momentum/RSI )

Although this framework cannot guarantee absolute certainty, it can help investors make better decisions in the memecoins market. However, it is important to remember that excess returns are always accompanied by higher risks.