Venture Capitalists and Hedge Funds Are Buying Meme Coins Like Shiba Inu and Dogwifhat. Should You?

Cryptocurrency meme coins like Shiba Inu (SHIB -2.84%) do not have a reputation for being the type of investment that serious institutional investors at banks and hedge funds would be interested in. It’s obvious that the tokens are too useless, too speculative, too volatile, too inscrutable, and too unpredictable to be usable in any kind of complex financial strategy — right?

As it turns out, meme coins are indeed an area of growing interest for professional money managers. That doesn’t mean you should rush to buy them, but it does suggest that there’s more opportunity in the segment than what many people might think. Let’s unpack which players are doing what, why they’re interested, and how you might be able to participate and invest in memes as well, under the right conditions.

Here’s who’s buying meme coins and why

So far there are a few businesses that are known to be competing and using meme coins as part of their strategy.

Since December, Stratos, a hedge fund backed by venture capitalists like Mark Andresseen of Andresseen Horowitz, has operated a fund that holds Dogwifhat, (WIF -1.27%) a new meme coin on the scene that features a shiba inu dog with a cute knitted hat. Pantera Capital, a crypto-oriented hedge fund, holds memes as well, and claims that “meme coins are here to stay” while touting their outsized potential for growth. Other companies have touted the advantages offered by the more mature cryptocurrency exchanges, which now have features that allow for the use of more sophisticated investing strategies.

The biggest draw to investing in meme coins is that gargantuan returns are possible even with a small initial commitment of capital. For example, Shiba Inu is up by 221% over the last three years, though investors who bought it before its massive bull run in 2021 briefly saw vastly higher returns. In the context of a hedge fund, investment bank, or venture capital group, customers would be extremely happy to see gains on that scale. Yet smaller and undiscovered meme coins may offer even higher returns than those.

Of course, the smaller a meme coin’s market cap, the more likely it is to simply go to zero or become too illiquid to transact. And pretty much all meme coins are extremely risky investments that are horrifically volatile on average. But for a moneyed investor willing to do some research and take a lot of small bets within the context of a well-calibrated investing strategy, those are obstacles that are worth working around in exchange for exposure to the disproportionately high returns lurking in memes.

Don’t start to dabble before getting your house in order

It goes without saying that most investors are not equipped with the same resources that hedge funds and similar organizations can bring to the table. That means you should not jump into the deep end of cryptocurrency just because they are enthusiastic about doing it.

Still, with the right preparations, it may be beneficial for your portfolio to get some exposure to meme coins.

The first step is to diversify your portfolio of stocks and other non-crypto investments such that it is more resilient against problems affecting individual industries and regions. Warren Buffett may have been of the opinion that diversification is only for those who don’t have a total understanding of the forces and risks affecting their investments, but investing in meme coins without having the more conservative portions of your portfolio well protected is like buying a home without buying any insurance (don’t do that, please).

The next prerequisite for starting to invest in meme coins is to be serious with yourself about how much money you can really afford to lose. Most meme coins are bad picks that will burn your money, often incredibly rapidly. Until you have some experience in the space, doing much beyond investing in a more proven meme asset like Dogwifhat or Shiba Inu is going to entail an expensive learning curve. So don’t commit any cash that you will ever need again, because disasters are inevitable, and you need to be ready to survive them. Think about an allocation that is sized on the order of 1% of your portfolio.

Finally, prepare yourself emotionally. As the late great investor Charlie Munger said, “the big money is not in the buying and the selling but in the waiting.” With meme coins, the waiting can be anywhere from uncomfortable to outright anxiety-inducing, and it also can go on for years. You’ll need to be ready to hold your high-conviction picks through wild price swings, and only take profits when it’s what’s called for in your well-defined investing plan.

Once you’ve checked the right boxes, feel free to follow those hedge funds into a position in Dogwifhat or something similar. Doing your own research and identifying promising investments on your own is where the greater returns lie. If the short history of meme coins is any guide, there could be huge winners waiting in the wings to be discovered.