What do you do with memecoins? Apparently you collect them, says the SEC

I have no idea if memecoins like dogecoin and fartcoin should be legally defined as securities, and thus come under the purview of securities regulators like the Securities Exchange Commission (SEC). Securities law is confusing. But what I do know is that the SEC's latest notion that memecoins are simply "collectibles" that people buy for "entertainment, social interaction, and cultural purposes" is naive, even dangerous.

Here is the SEC's statement:

Source: SEC

The SEC's wording is dangerous because it effectively whitewashes memecoins into the same relatively benign social-economic bucket as baseball cards, postage stamps, and Roman coinage. Memecoins don't belong there. Dogecoin and its ilk are not collectibles—they belong to the same bin (a much more dangerous bin!) as HYIPs, chain letters, ponzis, bubbles, MLMs, memestocks, lotteries, pump and dumps, and casino games. 

I don't think I'm alone in saying that I'd be okay if my 11-year old kid wanted to carefully build a collection of culturally-significant items they could fuss over after school. Comic books? Pokemon cards? Fossils? Sure, that's all good. But I'd be appalled if they went to a casino to play slots or threw away their allowance for HYIPs and MLMs. By characterizing memecoins as mere collectibles, and not as the gambling/ponzis devices they actually are, the SEC is anointing them as suitable for everyone, including our kids. It's gross that any government agency would do this.

To me the differences between memecoins and collectibles are obvious, but for those still reading, including anyone at the SEC, here's my logic:

Almost no one buys memecoins with the same earnest obsessiveness as a collector. Spend any amount of time in ancient coin collecting forums and you'll see what a true collecting mentality looks like, the immense amounts of sifting, classification, and curation that it entails, and the knowledge of cultural minutiae: "Why is Constantine II facing left on this coin, but facing forward on in this one?" By contrast, dogwifhat, SPX6900, $Trump, Pepe, Shiba Inu and other memecoins don't toggle the same grading and taxonomizing parts of our brains, nor do they invoke our instincts to build complete sets of culturally meaningful items. It's just frenetic buying, selling and number-go-up. And that's because ancient Roman coins and memecoins are fundamentally different economic goods. Memecoins are for the most part pure financial gambles with a facade of culture. Roman coins are cultural objects to the core, with a touch of financialization.

As its justification for classifying memecoins as collectibles, the SEC relies on the fact that memecoins are "inspired by internet memes, characters, current events, or trends." Think Dogecoin's shiba inu theme, or fartcoin's fart meme. This somehow uplifts them into having the status of cultural artifacts.

This is silly. If you read about the history of chain letters, for instance, you'll see that their originators often linked their letters to some sort of theme or meme. Even so, we would never say that chain letters are collectors items. Las Vegas slot machines often have themes (i.e. fruit, El Dorado City of Gold, or ancient Egypt), but let's not fool ourselves: having a theme doesn't transform a slot machine into something other than a slot machine.

No, memecoin buyers—like chain letter participants and slot machine players—want to make money, quickly. Plain and simple. That a get-rich-scheme adopts a meme doesn't redeem or transform that scheme into a collectible. The meme is a mere superficiality that serves to differentiate one gambling machine from another. It's not something that most buyers actually believe in.

I get that the line between collectibles and speculation isn't always clear—sometimes an item can be both. I lived through the early 1990s comic book collecting boom, and I can tell you that things got a little ponzi-ish. When 14-year old me bought all five covers of X-Men #1, I was only 50% motivated by a collector's maniacal desire to complete a set, the other 50% being a gamble on price. However, at the end of the day policy requires us to draw lines and make categories. For the most part, comic books have functioned as collectibles, not gambling, and deserve to be classified as such, and thus regulated as such. As for memecoins, while there are probably a few people who diligently collect sets of memecoins, for the most part they are all gambling and ponzi-ishness. And that's how they should be treated by policy makers—not as mere postage stamps.  

I'm not saying the SEC should be in charge of overseeing memecoins. If the SEC wants to wipe its hands clean of memecoins, that's fine, I guess. Some other agency will have to take charge. But why is the SEC whitewashing memecoins as it is exiting the building? By using its platform to advertise memecoins as mere collectibles, the SEC just made them seem harmless. That's reckless.

Is it better to bribe Trump by purchasing his memecoin or his stock?

Noah Smith writes a provocative article about memecoins as a novel mechanism for bribery payments. A foreign dignitary looking to gain influence over Donald Trump would like to pay him a giant bribe, but doing so directly is prohibited by all sort of laws. Luckily, Trump has just issued his own memecoin, TRUMP, of which Trump owns 80% of all coins. So why not just buy the TRUMP token, thereby pushing its price up and gifting Trump with even more wealth, in return gaining a degree of influence over policy?

The best part is that no money actually changes hands, so it's probably less risky from a legal perspective. The dignitary can just plead "I thought it would go up!", says Noah.

Now, I'm not so sure that crypto is ushering in anything unique here. Consider that Donald Trump also owns shares of Trump Media & Technology Group Corp (DJT), which are NASDAQ-listed "tradfi" shares that predate crypto. Why not just buy DJT shares, pump their price higher, and collect favors from Trump? No crypto involved. 

In fact, a year before Noah wrote his article about memecoin bribery, Robert Maguire of Citizens for Responsibility and Ethics in Washington (CREW), worried about precisely such a scenario. Any entity wanting to "cozy up" to Trump need only buy a bunch of DJT shares on the NASDAQ, enough that they "get Trump’s attention, but low enough that it doesn’t break the five-percent threshold that triggers SEC disclosure."

Consider that Donald Trump and family members hold a 59% ownership stake in DJT equity, which isn't too different from the 80% of TRUMP that they own. Both assets have market caps of around $7 billion. So pushing up the price of DJT will certainly enrich Trump just as much as trying to nudge TRUMP higher. So here's my question: What's the best way to bribe the current President of the United States of America, by pumping the TRUMP memecoin or pumping old-school DJT shares?

Before answering it, I want to pause for a moment to reflect. The fact that I am even writing a blog post on the topic of bribing an American president shows how far along a certain dystopian financial timeline we have gone. Back to the timeline.

I see two reasons why the memecoin probably presents a better pseudo-bribery option than the tradfi stock. 

The first reason is that it's safer to pull off. DJT is listed on just one exchange; the NASDAQ. And the NASDAQ exists in the U.S., which has the most robustly-regulated and well-trusted securities markets in the world. One duty the government requires of NASDAQ is that it surveil transactions in real-time for abusive trading behaviour, so any sketchy DJT purchases could end up being reported by NASDAQ to the authorities. Furthermore, to get access to NASDAQ-listed shares, a brokerage account is required, and that'll require the would-be briber to pass through the brokerage's identity checks.  

On top of that, systems like the Consolidated Audit Trail, a government-mandated system tracking U.S. equity and options trades, gives regulators themselves a means to monitor market activity and investigate potential misconduct.

So a foreign dignitary is taking a bit of a risk if he or she goes the DJT route.

By contrast, the TRUMP memecoin is hosted on a blockchain, basically a borderless and open decentralized database, not a carefully-guarded database confined to the U.S. The result is that TRUMP can be listed anywhere, including on shady offshore crypto exchanges like ByBit or KuCoin, which surely aren't checking customers for pumps. To boot, these offshore exchanges perform only cursory identity checks, if any.

To further protect him or herself, a would-be briber can initiate the pump by sending funds from an offshore exchange, say KuCoin, to a decentralized exchange, or DEX, and only then push the price of TRUMP higher. DEXes are even more hands-off than offshore exchanges; they don't perform any surveillance or identity checks.

The riposte to this is that all blockchain transactions are public and observable, so a bribe conducted on a DEX could be traced. Ok, sure. But while blockchain transactions are visible, they aren’t directly tied to real-world identities. Blockchains are pseudonymous. It's a bit like going to a masked ball. Everyone can see who the dancers are, but as long as everyone has their mask on a degree of anonymity is preserved.     

So to safely get away with bribing Trump, it sure seems that his memecoin is the better option than NASDAQ-listed DJT.

Now for the second reason why the memecoin is better for bribery: it packs more punch per dollar.

A memecoin lacks what equity researchers refer to as fundamental value. Its price is solely a function of Sam's expectations of what future buyers like Jill will pay for it, with Jill's expectations conditioned on what she thinks Sam will pay. They are pure bundles of speculative energy. As I've referred to them in other posts, memecoins are decentralized ponzi games, zero-sum lotteries, or Keynesian beauty contests.

By contrast, DJT is a stock, and stocks provide their owners with a claim on the underlying firm's 1) profits and 2) its assets in case it is eventually wound-up. There is a "something" that buyers and sellers can coordinate on, so that unlike a memecoin, a stock is more than a pure nested expectation games. That's not to say that stocks don't have a big "meme" component (think Gamestop), but the degree to which this guessing game is played with stocks is unlikely to ever reach that of memecoins.

The existence of fundamentals makes pumps less effective. As a pump begins to drive the price of DJT higher, the underlying fundamentals will start to give certain existing investors a reason to sell (i.e. "it's now too expensive relative to earnings"), and that selling will dull the pump. Since there are no fundamentals for TRUMP memecoin buyers to latch on to – any price is as good as another – a memecoin pump never gets throttled by fundamental sellers.

To sum up, someone who has $10 million to bribe Donald Trump will want to demonstrate to the President that their purchases drove the price of the target asset higher: it'll be far easier to demonstrate this by pumping the frictionless memecoin than the burdened-by-fundamentals stock.

Now, if you've gotten this far and think this post is actually about how to bribe Trump, it's not. It's about the often fascinating differences (or not) between crypto and traditional finance. In my view, they aren't really so different. Crypto fans may think there's a financial revolution going on, but there's nothing new under the sun.

You might wonder: is the frictionlessness of a memecoin, its lack of fundamentals, and the ensuing incredible ease by which it can be bribe-pumped a new feature that crypto has brought to the table? Not really. There's no technical hurdle preventing the NASDAQ from listing a non-blockchain version of the TRUMP memecoin on its own old-fashioned Oracle database. People could buy and sell this NASDAQ-listed meme-thingy instead of that blockchain version of TRUMP. But securities law gets in the way. Listing an unadulterated ponzi game on a national stock market has never been legal, at least not in my lifetime. Why putting one up on a blockchain is legal is beyond me, but look over there, the President just did it.

At the speed the train is leaving sanity station and heading to financial silly land, I suspect listing pure ponzis on the NASDAQ will soon be an accepted thing. Memeassets everywhere! Bribes for everyone!

Memecoins are the point

Cypherpunks wanted to change the world. We ended up with memecoins.

Our story begins with some very smart and idealistic developers, known as cypherpunks, creating a new technology know as a blockchain. Blockchains are databases, but decentralized. Advertised as being "censorship-proof," they reduce the possibility of users being subjugated to third-party interference.

Cypherpunks have always wanted their tamper-proof databases to flourish, go mainstream, and improve regular people's lives. A video from 2015 pans out from an interconnected power plant, grocery store, hospital and airplane before loftily declaring that Ethereum, one of today's largest blockchains, will be "the secure backbone for everything from e-commerce to the internet of things."

Some of you may remember another famous video from the mid-2010s, in which a young Vitalik Buterin, co-creator of Ethereum, challenged viewers: "What will you build on top of Ethereum?"

The world has responded. Forget interconnected power plants and grocery stores. The most popular thing being built on top of blockchains are memecoins. 

A memecoin is a pure gamble. These valueless tokens, typically created anonymously, usually have a mascot, or meme, loosely associated with them, some well-known examples being dogecoin, pepe, HarryPotterObamaSonic10Inu, gigachad and dogwifhat. A memecoin provides no dividends and leads to no productive activity. Its price depends entirely on subsequent players emerging to repurchase it at a higher price. The result is a hyper-volatile pyramid betting game.

via Twitter

Memecoins don't quite jive with the cypherpunk dream of creating a fairer system, one in which everything, including all of high-finance—and by that I mean banking, payments, insurance, and investments—has migrated over to blockchain nirvana. A memecoin is the epitome of low-finance. It belongs in the same gutter as some of the grimiest members of the financial world: lotteries, slots, chain letters, raffles, HYIPs, and other zero-sum games.

Cypherpunks and their fellow travelers are offended by memecoins. They want their blockchains to be used for more noble reasons:

• it’s sucking the energy out of crypto [link]
• it is a complete bastardisation. a total mockery, a clown show [link]
  
• things have hit an all-new bottom with 2024: racist, sexist, and other shitheaded memecoins which are merely a vehicle to transfer wealth from the many to the most obnoxious people on the planet [link]
  
• besides undermining the long-term vision of crypto that has kept so many of us in the space, memecoins aren't very technically interesting [link]

Buterin, too, gripes that "even the non-racist memecoins often seem to just go up and down in price and contribute nothing of value in their wake." Trying to find a silver-lining, he implores memecoin makers to donate a portion of their supply to charity, sort of like how raffles are used to fund good works. 

Cypherpunk's frustration with memecoins understandable. But I don't think the cypherpunks should be complaining. Guys, what exactly did you think your zero-rules financial substrates were going to be used for?! Memecoins are the point.

Memecoins as the fundamental unit of blockchains

People have a natural predilection to gamble, but gambling has a bad wrap and so many gambling games have been declared illegal. Memecoins are a great example of this, their presence being prohibited on society's official financial venues including its stock exchanges and commodity markets, as well as its casinos and online betting sites.

Up in Canada, which has historically been a haven for scummy finance, the closest you can get to floating a memecoin is by taking the junior gold route. Start by incorporating a gold exploration company, buy the rights to some worthless property in an isolated region of northern Canada, list the company on a junior stock exchange, promote your sham as the next big gold mine, and sell out to the latecomers. You're basically created a memecoin; a token based on nothing. 

But this is an arduous way to run a memecoin. You still need to disguise yourself as a regular firm, publish audited financial statements, and hire a board of directors, plus you'll have to provide your real name, which means potential lawsuits or criminal charges. A pure memecoin, say like dogwifhat, which isn't burdened by any of these costly real-world obligations, would never get permission to be listed, even on Canada's shadiest junior stock exchange.

Enter blockchains, which are inherently anarchic. Blockchains allow folks to deploy illegal and unregulated betting games without the authorities being able to step in and say: "Hey, you can't do that." With mainstream exchanges and casinos being closed off to them, it's no wonder that memecoins have come to dominate the new medium.

If your blockchain doesn't experience a constant stream of memecoin issuance, it's effectively dead. Hordes of crazy gamblers buying and the selling meaningless, non-productive coins is a sign of a flourishing and fertile censorship-resistant financial medium. Sleezy promoters competing to draw attention to their favorite memecoin on social media isn't "sucking the energy" out of crypto; it's the whole point of crypto.

Source: Twitter

As for the cypherpunk idealists complaining about memecoins, they need to accept the fact that blockchains will probably never become the "backbone of everything." Instead, blockchains will continue to serve as a major hub for grimy low-finance; stuff like memecoins and ponzis that can't make the jump to official venues. Many of these low-finance services will be illegal or shady or distasteful, because those are precisely the things that need protection from third-party interference. (And to be fair, certain banned low-finance services can be quite useful.) If you're going to hock censorship-resistance to the world, don't grumble about who shows up at the table.

Memecoins have sometimes been described as a potential gateway drug or Trojan horse for broader adoption of blockchains. "Once they try dogwifhat, they won't be able to resist my quadratic voting project." But that's just wishful thinking. Serious and "respectable" high-finance services, say like insurance and banking—the stuff we all need for day-to-day life—are by necessity legal and thus welcome on mainstream habitats, and so these services and their users need never gravitate to the same rule-free substratum that memecoins have.

What will you build on top of blockchains? Memecoins. Memecoins are the fundamental financial unit of crypto.

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P.S. I must be running out of material because I wrote an early version of this post back in 2018 for Breakermag

The dollar isn't a meme

"Currencies are not memes that only have value because governments say they do," writes Brendan Greeley for the Financial Times. 

I agree with him.

The dollar-as-meme claim is often made by cryptocurrency enthusiasts. That this idea would emanate from the cryptocurrency community makes sense, since cryptocurrency prices are a purely meme-driven phenomenon. There is no cryptocurrency for which this is more apparent than Dogecoin, a cryptocurrency started as a joke and sustained by shiba inu gifs, but it applies equally to Doge's older cousin, Bitcoin. The harder you meme the higher a cryptocurrency's price, as the image at top suggests.

And so for cryptocurrency analysts, getting a good understanding of a given coin's value is a matter of picking through its underlying memes and meme artists. 

But if cryptocurrency analysis is ultimately just meme analysis, what sort of analysis applies to dollars?

Dollars issued by banks are secured by the banks' portfolio of loans, Greeley reminds us. And so they are subject to credit analysis, not meme analysis. An analyst appraises the quality of the bank's investments in order to determine the soundness of the dollar IOUs the bank has issued.

As for central banks like the Fed, they are just special types of banks, says Greeley, and so the dollars they issue are also subject to credit analysis.  

The idea that the money issued by central banks—so-called fiat money—is subject to the same credit analysis as any other type of debt security is a point I've also made on this blog. There are certainly some odd features about Fed dollars or Bank of Japan yen, but ultimately they are just another form of credit.

What sort of credit is fiat money? There are many different kinds of credit instruments, from bonds to deposits to banknotes, each with its own unique features. To see where central bank money fits, I've made a chart that illustrates how credit instruments differ across three different criteria (click to expand).

The first criteria along which to compare credit instruments is whether the instrument is redeemable on demand by the holder or not. That is, if I own a given credit instrument, or IOU, can I bring it back to the issuer, or debtor, at a time of my choosing and redeem it for something?

The second category concerns the instrument's maturity. Does it stay outstanding forever i.e. in perpetuity? Or is it term debt? When a credit instruments has a term, that means that it expires after a predefined period of time, the debtor cancelling it and paying back the the original amount lent.

The final category is whether the instrument pays interest or not.

By toggling these various features, we arrive at the eight different types of credit instruments, examples of which I've listed on the right side of the graphic.

As you can see, the Fed's dollars, the ECB's euros, and the Bank of Japan's yen are type 5 and type 6 credit instruments. Central banks issue two types of money: physical banknotes and electronic balances (sometimes known as reserves). Electronic central bank reserves pay interest. Banknotes do not.

Apart from that, banknotes and electronic balances are very similar instruments. Neither of these two credit instruments is redeemable on demand. That is, you can't bring a banknote back to the issuer at 5:30 PM Friday and redeem it for something. (This same lack of on-demand redeemability characterizes bonds and certificates of deposits.) And they are both perpetual, much like a perpetual preferred share or non-expiring coupons/gift certificates.

Removing a credit instrument's redemption-on-demand feature doesn't stop it from being a credit instrument. It just changes it into a different type of credit instrument. Yes, probably an inferior one, but a credit instrument nonetheless.

For instance, if a retractable bond (type 3) suddenly loses its retractability feature (and is no longer redeemable on demand by its owner) it doesn't stop being a credit instrument. It simply switches to being a regular bond (type 7). Likewise, if a perpetual puttable preferred share (type 1) loses its puttability, it doesn't stop being an IOU. It becomes a new type of credit instrument, a regular perpetual preferred share (type 5).

This same principal applies to those credit instruments we call money. Decades ago the Fed's dollars were redeemable on demand into gold, and thus they were a type 1 or 2 credit instrument. When the Fed removed redemption back in 1934, dollars didn't become mere memes. Rather, they were converted into a different type of credit instrument, a type 5 or 6 credit instrument.

Once a credit analyst has figured out what kind of credit instrument they are dealing with, their work is only half done. Next they have to go back and look at the underlying issuer. How solid is it? Does it have sufficient assets to guarantee the credit instruments it has issued? Do it generate enough income to keep paying interest? Is the issuer linked to affiliates, parents, or other third-parties who might strengthen or diminish the issuer's credit?

As you can see, none of this is meme analysis. It is credit analysis.

To recap, dollars issued by the Federal Reserve are perpetual credit instruments that lack an on-demand redemption feature. To determine how solid the Fed's perpetual non-redeemable credit instrument are, you'd want to do an analysis of the Fed's finances. That should also include investigating the soundness of the Fed's parent, the U.S. government. Does the parent's finances further enhance the Fed's credit, or detract from it?

So dollars don't only have value because the government says they do. Just like Tesla's financial health determines the value of Tesla bonds, the financial health of the issuing central bank (and its parent) is  key to determining the value of central bank money.

If you want to do meme analysis, stick to Dogecoin and Bitcoin.

Why did Dogecoin take off but Feathercoin didn't?

Dogecoin makes us all shake our heads. Introduced in December 2013 as a joke, Dogecoin is now worth over $50 billion, more than Ford Motor Co. Meanwhile Feathercoin, a more serious cryptocurrency that debuted in April 2013 (and initially worth more than Dogecoin), is currently valued at a tiny $10 million.

Here's the December 2013 list of top cryptocoins. After the first 3, all of them are pretty much dead/inactive except for the one that was started as a joke and is now worth $17 billion. 🤷https://t.co/ImBu5CUxpr pic.twitter.com/R0tPBWl35C

— John Paul Koning (@jp_koning) April 14, 2021

How are we supposed to understand the strange thing that is Dogecoin?

Let's start by exploring what these odd instruments are. While Dogecoin and Feathercoin seem like an entirely new phenomenon, I'd suggest that they're both really just an updated version of a fairly old financial instrument. You may remember those chain letters your parents used to get in the mail. "Send $5 to each person on the list, then copy it (adding your name to the bottom) and send to their friends," the letter would say. "Then wait for the money to flow in."

Old fashioned chain letters were simple ranked lists that propagated through the post. Propagation occurred in a decentralized manner. There was no "schemer" administering the whole thing. Each player was responsible for abiding by the letter's rules.

Dogecoin (along with Feathercoin) is an updated version of your parent's decentralized chain letter. To begin with, the deployment mechanism is different. Doge propagates over the internet, not the post. Secondly, Dogecoin software ensures honesty. By contrast, old fashioned chain letters – reliant as they were on pen, paper and photocopy machine – were dogged by cheaters who snuck their name to the top of the list.

Rather than have people manually append their names to the list, Dogecoin software creates all the entries in at the outset. And instead of being hierarchical, all spots in the Dogecoin list are equal, or fungible. (All of this goes for Feathercoin, too.)

But other than that, the core concept of a chain letter remains the same: those who already have a spot in the decentralized list are paid off by late-comers.

Sophisticated markets have sprung up to serve those who want to buy & sell these modern honest and fungible chain letters. PayPal, Robinhood, and newly-public Coinbase all let users buy Dogecoin. And so Dogecoin has been effectively fused into the regular financial system.

This degree of mass adoption never happened with your parent's chain letters. Prior to the emergence of cryptocurrencies, chain letter list entries weren't fungible. And so secondary markets never developed. Lacking any sort of integration into regular finance, the chain letters of the 1980s and 90s never went beyond being a sketchy underground phenomenon.

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Fans of honest & fungible chain letters (or HFCLs) like to explain them by adopting the complicated rhetoric of monetary economics. Feathercoin says it is for "feather lite payments." More famously, Bitcoin has been variously marketed as a "coin", a store of value, digital gold, or a form of electronic cash destined to "replace fiat currency." This has given the cryptocurrency sector a certain gravitas.

But as Joe Weisenthal points out, Dogecoin doesn't have any of these pretensions. It's just a fun token with a Shiba Inu dog as a mascot. And so all of the rhetoric that traditionally gets attached to cryptocurrency is conveniently stripped away. We get to see Dogecoin and Bitcoin for what they truly are, HFCLs.

Dogecoin's cuddly Shiba Inu has proven be a great tool for propagation, better even than bitcoin's marketing strategy of co-opting the stodgy lingo of monetary economists. In the chart below, I compare the market capitalization of the first 2,690 days of Dogecoin and Bitcoin respectively.

After 2,690 days, Dogecoin's market cap has hit $52 billion. This outranks bitcoin's market cap of $7 billion when it was 2,690 days old. Bitcoin didn't breach the $52 billion level until day 3137, more than a full year (447 days) after Dogecoin did. 

Think of market capitalization – the number of list entries multiplied by their current market value – as a measure of an HFCL's success. But take that number with a grain of salt. If all existing list entry owners actually did try to sell at once, an HFCL's value would fall to zero.

Nor is this the first time that Dogecoin has moved ahead of its older HFCL cousin. As the chart above shows, Doge's market capitalization outranked bitcoin through much of its early life. It also took the lead around days 1,300 and 1,600.

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Bitcoin fans aren't pleased. Dogecoin is a bit like your embarrassing younger sibling, the one that you want to hide in the closet because he/she reveals a little too much of the family's foibles. Cryptocurrency is supposed to be about monetary revolution, not fun dogs.

Bitcoiners have adopted various mental blocks to avoid being associated with coins like Dogecoin and Feathercoin. This involves publicly tarring any coin that isn't Bitcoin as a memecoin or a shitcoin. Not only are Dogecoin and Feathercoin categorically different from Bitcoin, they claim, but the category that they belong to is an inferior one.

I'll grant there are some differences, but none as deep as bitcoiners might prefer. Yes, Bitcoin is a bit older than Doge and Feathercoin. And they all have very different marketing techniques i.e. fun vs serious. And one of them, Dogecoin, has been (pound for pound) a bit more successful. But apart from that, they're all the same thing. They are all HFCLs.

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Whenever experts warn against chain letters, the point they always bring up is that chains cannot be sustained indefinitely. For everyone to make money, a chain letter must grow exponentially. But at some point the math stops working. There won't be enough people left on earth to feed the chain letter.

Does cryptocurrency have to end in tears? 

I'm not so sure. Yes, HFCLs require a constant stream of new players to buy in so that earlier players can exit at a profit. At some high enough market capitalization, there simply won't be enough buyers on earth to pay off ensuing waves of sellers. The HFCL collapses.

It doesn't have to collapse to zero, though. After a 90% or 95% fall the HFCL's price will start to stabilize. The peak-collapse-trough-mania-peak-collapse-trough-mania cycle begins anew.

Feathercoin offers a good template. Feathercoin and Dogecoin were both part of a huge influx of new HFCLs in 2012 and 2013. This crop included Peercoin, Terracoin, Novacoin, Litecoin, Sexcoin, Worldcoin, Ixcoin, and hundreds of others. You can see some of them on the list in the tweet at top of this post. Funny enough, I wrote about the 2012-13 cryptocurrency wave on my blog: see here and here. (Wow, hard to believe I've been doing this for so long.)

Below is a chart of Feathercoin's market capitalization over the last eight years. It has generally moved around between a trough of $100k-$1m and a peak of $10m-$100m. (Note that I am using a log scale axis.) Buy Feathercoin early and hold till its peak and you've effectively turned $100 into $10,000. It is this whiff of huge gains that tempts people into playing HFCLs. Buy too late, however, and your $100 becomes $1.

Of the 2012-13 crop of HFCLs, many of them look like Feathercoin. They haven't grown, but they still exist. Dogecoin is different (and so is Bitcoin). It shares the same general peak-to-trough pattern as Feathercoin. But its peaks and troughs have been steadily rising. 

What I think is happening here is that there is a huge pent up demand to play HFCLs. They are a fun way to potentially make huge amounts of money. But this demand eventually gets focused on a few lucky chains. After all, the market doesn't need 200 HFCLs when two or three large one will do. 

How does the market settle on two or three? I suspect it probably comes down to luck. Finicky things like mascots, logos, influencers, and catchy names probably play a role too. In Bitcoin's case, being first is a huge benefit. And so most HFCLs sort of putter around like Feathercoin. They don't die. But they don't expand either. 

I suspect that Dogecoin and Bitcoin will eventually follow the same pattern as Feathercoin. Growth will peter out. Peaks will start to roughly align with previous peaks. Troughs will form at the same level as previous troughs. And in-between these peaks and troughs, huge fortunes will continue to be made and lost.