top of page
Search

The Greater Fool’s Dopamine: A Behavioral Analysis of Meme Coin Market Cycles

  • Sara Alarayedh
  • 6 days ago
  • 6 min read

An overview of meme coins

Meme coins are cryptocurrencies created to follow trends, employ humor, and try to build a sense of community to attract users (Investopedia, 2025). Meme coins are altcoins (crypto currency not considered as bitcoin) which have no functional utility—meaning they do not serve a specific technical purpose within a blockchain ecosystem; so the question is, why do assets with zero inherent utility gain massive market caps? Data shows that this is not a niche phenomenon: Dogecoin, Shiba Inu, and Pepe are generally the most popular meme coins. By market capitalization, they accounted for more than 62% of the total meme coin market cap on Nov. 27, 2025, at 11:26 a.m. EST (Investopedia, 2025). This leaves us speculating, do people invest into meme coins because of its potential economic longevity or the social utility and membership it brings?

With the risk of a market bubble, this makes it unknown when meme coins could potentially crash, so even with that imposed risk of a market bubble, lets focus on the economical and psychological integrity of social proof and its role in the meme coin economy.

The Psychology of Social Proof and Herd Mentality

Meme coins are formed when an individual or group conceives of and creates a token, usually on an existing blockchain, and begins marketing it. As of 2025, Base and Solana are among the most widely used blockchains for launching meme coins — with Base now challenging Solana’s dominance (CoinGecko, 2025). It is argued that meme coins should be defined as a cryptocurrency characterised by three properties: community before utility, inverse crowdfunding, and zeronomics (an economic model where the supply/demand has no traditional basis in value.) (Stencel, Adrian 2025).

Social proof is a psychological concept where individuals yield to group pressures by looking to other sources, such as twitter, reddit or other investors, to learn how to act and think; this is especially true when individuals are in ambiguous situations; this is when individuals are exposed to stories of potential success stimulating investment into the stocks. Hence the feeling of FOMO (fear of missing out) drives the incentive to join the crowd, through herd behaviour, with the underlying desire to also succeed.

In context, meme coins are cryptocurrencies although they don't follow traditional financial metrics such as the P/E ratio, EBITDA, or ROE. Therefore, this means investing in Meme coin stocks relies on Informational social influence (proposed as an explanation of conformity by the Dual Process model), because of an individual's desire to make profit by accurately buying and selling these stocks at the correct time.

The Dopamine loop as a result of social validation of meme coins

Owning meme coins creates a biological response known as the dopamine loop as a result of social validation and the sense of community which comes with owning the coin. This dopamine loop creates a similar sensation to gambling which is a highly influential cause for people to be so addicted to trading these zero utility coins. As meme coins lack the usage of economic metrics and run off informational social influence, this can manipulate an individual into hysteria and act irrationally by trusting external sources, such as twitter, rather than their own logical risk assessment. To add, emotional triggers often include a dopamine rush caused by anticipation, the thrill of winning, and the urge to “chase” losses after setbacks; hence the person continues to gamble because they believe they must be due for a win by now (Gold, Mark S 2025).

The Greater Fool Theory and the Mechanics of the Meme Bubble.

While psychology explains why individuals are drawn to meme coins, the economical concept of the ‘Greater fool theory’ shows how individuals will buy an overvalued, unjustifyable coin with the possibility of there being a ‘greater fool’ to buy the coin at a higher price. Therefore, this shows the economical drive of meme coins, with investors intentions to make profit from their sales.

Therefore this shows how holding volatile stocks, such as meme coins, can prompt a wealth effect, increasing confidence when the value of the coin goes up, driving speculation and increasing its overall value.

This induces a herd mentality, where news on social media concentrates an individual's credibility of the situation, increasing confidence in buying the coin as it feels more like a community driven movement.

Speculation is when individuals buy a coin with the intention to sell it at a higher price later. Market bubbles are when the price of securities or assets rise well above their fundamental value and are filled by speculation rather than underlying demand. Therefore, in economical terms, an individual is motivated to purchase a coin with no inherent utility due to speculation and media hype; incentivised by herd behaviour and irrational exuberance. When a coin is predicted to rise in value in the future, this attracts speculators to buy into the coin. Therefore, this induces a positive feedback loop attracting more speculative investors until the value of the coin rises to an unsustainable level. Hence, the speculative investors will lose confidence that the coin will continue to rise in value hence sell off their shares, causing a market crash. The sudden increase in availability of the coins significantly reduces the value therefore inducing a market bubble which is a form of market failure.

An example of a meme coin which experienced a market crash, as a result of a market bubble was PEPE coin. Back in January, PEPE Coin was riding high off its 2024 success, priced at $0.000019. Investors were optimistic, fueled by the token’s past gains and bullish market. However, on February 9, 2025, the price had tumbled to $0.00000960—a 50% drop that wiped out half the value for those who bought in at the year’s start (L, Vanessa 2025).

The "Rug Pull" and “Liquidity draining”: Fraud as a Market Catalyst

Although market bubbles are a main cause of market crashes in meme coins, another possible cause is the phenomenon of ‘Rug Pull.’ This is when speculators are attracted to a stock with the potential of it being the next best thing, increasing the stocks value. This can incentivize the creators of the coins to sell their mass insider holdings of the coin, unexpectedly; increasing the supply therefore causing a crash in its value. Therefore, a rug pull occurs when a crypto project developer suddenly withdraws all the funds from the project, essentially “pulling the rug” out from under investors who are left with worthless tokens (Garnett, Allie Grace n.d.)

Another scam in the meme coin industry is liquidity draining. As the transactions of coins are through a liquidity pool, the creator of the coin tends to be the initial provider of real money. As the coin grows stronger and larger, fueled by speculation rather than underlying demand, the creator of the coin could drain the liquidity by removing the money in the coin; which built up through increased speculation.

Rug Pull and liquidity draining are ways of scamming in the market of coins, explaining how volatile and risky investing into it is.

Conclusion

The phenomenon of meme coins is a great indicator of the shift in digital financial stocks. The psychological explanations of why mankind invests into the zero inherit utility coins is the dopamine loop, associated with addiction from gambling; due to the social utility and desire to make profit. Hence, as meme coins do not use traditional economic metrics and are identified through information social influence; this risks individuals using secondary sources as their full credibility of the coin, overriding their own risk judgement. Meme coins, just like any stock, have full potential to crash. Market bubbles fuelled by speculation, herd behaviour and irrational exuberance are key reasons for this, causing the asset to rise well above its fundamental value hence crash. Risks of investing into meme coins are the potential scams of ‘Rug pull’ and “Liquidity draining” however it may be argued the potential to make profit due to the “Greater fool theory” Is a more powerful motive to invest into meme coins, due to its potential economic longevity. In theory, meme coins are alt cryptocurrencies characterized by herd behaviour over utility, inverse crowdfunding and zeronomics.


Reference:


Comments

Subscribe to Our Newsletter

  • Instagram

© 2035 by TheHours. Powered and secured by Wix

bottom of page