Aping it like Sand Hill Road
The parallels between shitcoin sniping and pre-seed VC investing (Part 1/3)
Table of Contents
Introduction
No doubt by now you’ve heard of various Solana or Base meme coin stories in this fourth crypto bull run. It’s a well-known rule of thumb that crypto/web3 follows a pattern of having a bull run every four years. This roughly coincides with the Bitcoin halving schedule, but also involves various macroeconomic factors. These bull runs always end up minting new millionaires and billionaires. Maybe you’ve daydreamed about being one of them? Well, I do not advocate for participating in this activity, but I write this for people looking for relevant information anyway. In this three-part article series, I’ll explain what shitcoin (a.k.a. meme coins/tokens) sniping is and share an absolute ape’s guide on how to get started.
Those familiar with venture capital might see some parallels between shitcoin sniping and pre-seed investing:
Returns are dominated by the power law.
Two key ecosystems represent the majority of bets.
FOMO can cloud judgements on deal economics.
Other similarities, such as the number of shots on goal and reserves for follow-ons, will be examined in the third article. There might be unfamiliar terms, so I’ve compiled a glossary at the bottom of this article.
Why am I even writing about crypto?
As some of my closest friends know, I have dabbled in crypto since 2012. First getting interested in the then-new Litecoin, I eventually started mining it myself in 2013 during arguably the first crypto bull run and continued in 2014 with an AMD R9 290X in my dorm.
Yet, as fate would have it, I never ended up putting serious money where my mouth was. While I shilled my friends to buy into Ethereum (ETH) in early 2017, I dropped my own bag early through that run and didn’t pick it back up until way too late in the next cycle. Some of those friends are now retired, having made 8-figure gains from their early investments and involvement in DeFi. Now, it’s only apt that I write about the current wave of crypto in my very first series of Substack articles, and share some similarities I have observed with VC pre-seed investing.
With news of people making 100X+ returns on memes like jeo boden, MAGA, and dogwifhat since December, this crypto cycle is once again seeing renewed retail investor interest hoping to hit the jackpot. The influx of new money into crypto has naturally lured back unscrupulous developers who have been hiding since the last great cycle. Over time, this crashes the market, and the cycle repeats. It’s crucial for new traders to develop a basic immunity to scams. Right now there is a temporary slow down from the adjustment that happened 2 weeks ago, which could be a good time to pick up the basics in anticipation of a rebound.
In part 1 (this article), I will explain:
What shitcoin sniping is
How to pick an ecosystem to play in
How to track PnL and isolate noise
In part 2 (next article), I will share the absolute basics of how to start trading on decentralized exchanges
In part 3 (last article of the series), I will cover a set of strategy, tactics, and execution for shitcoin sniping commonly seen in the last 5 months.
The scope of this series will only cover a manual trading setup, nothing algorithmic or quantitative. This article is intended for people with no real exposure to crypto trading beyond buying on custodial accounts or centralized exchanges like Revolut or Coinbase.
I hope that those who read this will gain a more intuitive understanding of how to participate in this zero-sum game and learn some basic due diligence skills to lower the very considerable risks of immediately losing their shirt. Make no mistake, you will likely lose your shirt regardless. At this point, the consistent money-makers are the platforms that facilitate these trades, those who have automated their trading strategy with low latency bot scripts, and those who would have made money by just buying the lottery anyway. So, yea, disclaimers, nothing here is financial advice, try this at your own risk.
Meme Trading Overview
Meme coins are cryptocurrencies that have no inherent value (some might argue this of all cryptos) beyond that of speculation. These coins typically involve funny pictures or concepts related to happenings around the world. There are four common paradigms for meme token investing and trading currently:
Sniping new meme token listings on DEX (decentralized exchange)
Buying into meme token pre-sales/fair launches on launchpads
Building positions in existing meme coins that have high payoff potential
Launch your own memes
This series will only cover the first paradigm, I will likely write separate series for each of the other ones.
What is token sniping and why?
Shitcoin sniping is a trading strategy that involves buying into new meme coins that have recently been listed on DEXes in hopes of significant gains within a matter of minutes to hours. The term “sniping” used to strictly refer to buying tokens immediately after they’ve been listed, but it has since been generalized to mean buying new tokens relatively soon (minutes to hours) after their first listing.
Crypto volatility is well known; even blue-chip coins can see day-to-day fluctuations of 10% or more. Once a relatively new coin hits mainstream news, it rarely still has room to grow by 2-10X; most of the time, it is too late to get in with limited upside. Some of the most exciting opportunities in crypto trading are new coins that can go up by 100X-1000X+ in a matter of hours (yes, these happen quite frequently). Below are some example trades by people on four new meme coins from just last week, screenshots taken from Dexscreener. Entries where “bought” is empty indicate that the maker bought in during a pre-sale/fair launch before the token got listed on a DEX (to be discussed in the future). Note most of these trades happened within the first 24H of a coin’s listing.
Here we see the top trader turning $1K into $388K on a new token:
A new token last week where many traders turned a few hundred dollars into tens of thousands. Someone who got in especially early turned $453 into $850K:
Another new token where people turned a few thousand into 100K+, one person turned $34 into $61K:
Once again, a new token where several traders turned a few hundreds dollars into tens of thousands:
Web3 degenerates milking GME related meme coins for 10X+:
This is where the first parallel with pre-seed investing comes in: meme coin sniping follows the power law. The vast majority of new meme coins either fail or are scams, but a single correct early bet can cover your costs on over hundreds of wrong bets, scoring a fund returner. Theoretically, a good due diligence and execution strategy can ensure a positive expected value (EV) in terms of payout over a sufficient number of trades. In shitcoin sniping, an algorithmic vs. manual approach strictly trades off between your EV and volatility. That is, an algorithmic approach has lower EV and lower volatility, while a manual approach can have a very high theoretical EV but is extremely volatile. We will examine some examples from institutional vs. retail trades in part 3.
Scope Your Battlefronts
Those new to crypto could quickly get overwhelmed by the number of moving parts in DeFi. The infrastructure can get convoluted, and most of the UI/UX in web3 outright suck. To limit the amount of learning you have to tackle at once and avoid making mistakes with things you are not familiar with, it is best for new traders to:
Pick only one blockchain ecosystem to start playing in.
Track transaction PnL in the native token of the network rather than in fiat.
Isolate yourself from noise.
Picking an ecosystem to play in
For meme coin trading, there are currently only two ecosystems worth playing in: Solana and Base. To see why, here are the factors to consider:
Volume of transaction
Price and volatility of the network’s native token
Number of new token listings in a given 24H period
Historical performance of meme coins
Gas/network fee
TPS (transactions per second) supported
Network comparisons (12th May 2024)
Note: These are approximate figures taken on a single day of the month. New token listings counts taken from Dexscreener. I will not get into a debate on TPS here and whether transaction failure rates should be accounted for. Observed TPS here do not necessarily represent max supported TPS.
From the above summary, it’s quite clear that Solana and Base stand out in the number of new tokens listed per day. They also both have good volume and low network fees. On any given day, new tokens (launched within the last 24 hours) account for about one-third of transaction volume on both networks, demonstrating the number of people and the amount of money participating in meme coin trading within these ecosystems. A cursory examination of popular meme coins since Dec 2023 would also reveal that Solana and Base (mostly Solana) have had some of the most successful new meme coins so far in the current wave.
This is where another parallel to pre-seed investing comes in—Solana and Base are like the Bay Area and New York of meme coin ecosystems (hegemonic and up-and-coming, respectively). Perhaps stretching the analogy a bit, BSC would be akin to Beijing (Chinese), and ETH to London (old and faltering). I would recommend new traders start on Solana, where there’s one less step to get started (to be discussed) and which has had more successful meme coins than Base so far.
Tracking PnL
Once you’ve picked your ecosystem, there are two common setups for trading pairs:
Trading the native token for meme coins (e.g. Solana for Jeo Boden)
Trading a supported stablecoin for meme coins (e.g. USDC for Jeo Boden)
There are good arguments for both setups and it is really a matter of preference.
Arguments for the first setup:
Network fees are paid in native tokens.
It simplifies and clarifies bookkeeping for PnL.
Arguments for the second setup:
You get clear visibility into your actual PnL in fiat terms at all times.
There’s is typically no price and volatility impact because native token to stable coin exchange rates are priced in due to price discovery and swap routes between DEXes.
Depending on your outlook on native tokens, you might choose one setup over the other. The main convenience for tracking and keeping native tokens is that whenever you execute a transaction, you must pay a network fee. Network fees are always paid in the network’s native token. So on Solana, for example, even if you wanted to swap meme coins only with USDC, you would need to hold some Solana to pay network fees regardless. It would suck if you ran out of Solana at a crucial exit point and couldn’t pay for your transaction. Another convenience of having a consistent token for all your trading pairs and network fees simplifies bookkeeping and gives you a better view of your actual investment performance.
An example PnL tracking setup could be a spreadsheet with the following columns:
Isolate yourself from noise
Given that you are smart enough to have not gotten involved with meme trading up to this point, you already know that there are any number of fake influencers out there who try to shill cryptos. While some influencers can make or break a token, most are just noise. Finding the right influencers should be a separate exercise and be secondary to basic due diligence and strategies.
Another distraction that I find common with new traders is an affinity towards copy trading whales (individuals or entities that hold a lot of crypto) who have made successful trades or following devs who have apparently made successful projects in the past.
The problem with copy trading are the following:
Truly exceptional whale traders have hundreds if not thousands of wallets for separate trades; there is no good way to discern and copy all of them.
Followable meme whale wallets tend to be bullet trails—i.e., they are whales because their bet(s) already paid off. They almost never have better insight than you into what might blow up next, and copy trading their holdings will most likely trap you into coins that have already failed instead.
Copy trading is typically too slow. Meme coins get pumped and dumped on the order of minutes to hours. Any execution latency beyond seconds could see a trade turn from profit to loss. By the time you’ve identified a good new asset that a whale has picked up and started trading it, the pump has likely already passed.
Meme devs who have created successful projects often actually rugged their own projects in the beginning. Coins often succeed in spite of their devs as communities that got scammed pick up the project (Community takeovers will be discussed in the future).
The exceptions to the above are:
When you find meme whales who have genuine social media clout, these people can make or break tokens with a few tweets (e.g. Ansem on Solana). However, it’ll be hard if not impossible to identify which wallets belong to tier-1 influencers.
Meme devs who have repeatedly made good projects without rugging and have close influencer/KOL connections that can market their projects.
This is where we find the third parallel with pre-seed investing—FOMO and fake hype machines can lead you down the wrong bets. Only get into a deal when the economics make sense, rather than get influenced by what fake KOLs are shilling or doing. As mentioned, there are some influencers that can really pump tokens, but it’s hard to identify who is real and who is fake when starting out—I haven’t quite figured it out myself. As such, it is best to stick to fundamental due diligence at first—despite how little there is. I will cover these in part 3.
Why Try Now?
I write this article for people who are curious about meme coin trading, and I am in no way advocating for participation. Meme coin trading is about as valuable to the economy as playing poker, which is to say, hovering at about—if not below—zero. Even still, it can be entertaining for those who have the risk appetite.
Generated with Shadow AI
For those who want to try anyway, now could be a good time to enter because a correction has just happened. Based on recent meme coin activity, web3 funding, and macroeconomic tailwinds, the bull run is unlikely to be over until at least Q4 2024 or Q1 2025. This means that with the recent drop in Solana and ETH prices, the risk for entering now would be lower than it has been in the last two months.
In the next article, I will provide a step-by-step guide on how to get your crypto from Coinbase and start trading on DEXes. To get notified about the next part, please subscribe to my Substack and follow me on Twitter.
Thank you to my wife Yijin, Kevin Zhang, Sheng Ho, and Andrew Li for helping review!
Glossary of Terms
Token: Interchangeable term with coin, cryptocurrency, cryptoasset, etc.
Blockchain network: A distributed ledger network. Different networks have different ecosystems and utilities. Some of the biggest ones right now are the BTC, ETH, and Solana networks. I won’t be going into the differences between L1s vs L2s, or EVMs, SVMs, etc.
CA: Coin address, an immutable string that represents the actual token itself on the blockchain network. The true representation of a coin’s identity.
Web3: Web 3.0, a catch-all term for a vision of the next iteration of the internet that can be trustless, permissionless, and decentralized.
Ecosystem: The platforms, exchanges, decentralized apps, systems, tokens, and community around a given blockchain network.
DeFi: Decentralized finance, financial systems and technologies built on top of blockchains. Often, any vaguely finance-related activity in the world of web3 falls under this umbrella.
CEX: Centralized exchange, businesses that help people trade cryptoassets, such as Coinbase, Binance, and FTX. All traditional finance businesses are “centralized”.
DEX: Decentralized exchange, a platform that facilitates peer-to-peer (P2P) transactions of crypto assets on a blockchain.
Swap: Used interchangeably with the verb “exchange”. Swapping or exchanging one token for another.
Pair: Refers to a trading pair listing of two tokens, typically the newly listed token and the native token of the blockchain. Basically, a “listing” on an exchange.
Custodial: Someone else manages your actual cryptocurrencies for you. If you don’t know anything about having a private key for your cryptoassets, then you’ve likely been using custodial crypto accounts.
Wallet: A non-custodial cryptocurrency wallet where you can manage and use your cryptocurrencies directly.
Dev: Short for developer, the person or team that actually created a cryptoasset.
ICO: Initial coin offering, the first time the cryptocurrency is offered for sale to someone besides the developer. The cryptocurrency may or may not be freely available to trade.
IDO: Initial DEX offering, the first time a cryptocurrency gets listed on a DEX and is freely available to trade by holders and anyone who wishes to swap it.
Gas fee/network fee: The cost to perform a cryptocurrency transaction as dictated by the blockchain network that the transaction happens on.
PnL: Profit and loss.
Rug: Short for rug pull, a generic term for an exit scam where the developer for a coin or web3 project disappears and cashes out through several different methods like liquidity pulls, fake projects, pump and dump, or simply disappearing with investor money.
Jeet: Someone who sells no matter what, sells for barely any profit, or panic sells.
Whales: Individuals or entities that hold a lot of cryptocurrency.
Makers: People who buy or sell a token, not to be confused with market makers in a traditional finance sense. DEXes use automated market making algorithms rather than order books.
Apes: Degenerates who trade memes, have high risk tolerance, and usually negative PnL.
Blue chip coins: The largest and most established cryptocurrencies that have large market caps, volume, and often history.
Stablecoins: Cryptocurrencies that are pegged to fiat currencies either by collateral, algorithms, or both. Theoretically the most stable and least volatile cryptocurrencies available. Most of the time, they are pegged to the USD (e.g., USDT, USDC, DAI).
Altcoins: Any cryptocurrency that is not BTC. There is overlap with blue chips and meme coins, and sometimes it simply refers to any coin that is not a blue chip token.
Meme coins/Shitcoins: Tokens that have inherently zero utility, the most volatile of any cryptocurrency asset class.
Liquidity pool (LP): On the most basic level, community/dev-funded blue chip tokens or stablecoins that actually back an asset and give it tradable value. In actuality, much more nuanced.
Burned: When certain tokens are permanently deleted and irretrievable.
Burned LP: Tokens that are permanently locked into the liquidity pool and not retrievable by whoever supplied that liquidity in the first place.