Millionaire Investors Are Buying Meme Coins. Should You Be Too?

It's no surprise that millionaire investors are loading up on Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH). After all, these two cryptocurrencies have been market outperformers for more than a decade.

It's a bit surprising, though, that these same investors are also adding meme coins to their portfolios. According to the latest Motley Fool research, 86% of high-net-worth cryptocurrency owners have invested in a meme coin like Dogecoin (CRYPTO: DOGE) or Shiba Inu (CRYPTO: SHIB).

So what's going on here, and what might it mean for the way you construct your portfolio?

In search of higher returns

One plausible explanation is that these millionaire investors are simply looking to turbo-charge the performance of their portfolios. After all, the most commonly cited reason for investing in crypto, according to the Motley Fool research, is the potential for strong returns. By sprinkling in meme coins here and there, it's theoretically possible to generate stratospherically high returns.

Image source: Getty Images.

But is that really the case? Just look at the long-term performance of Dogecoin, which is easily the most popular cryptocurrency held by millionaires. During the fabulous bull market rally of 2020-2021, Dogecoin skyrocketed in price from mere pennies to an all-time high of $0.74.

But since then, it's all been downhill for Dogecoin. It currently trades for a price of just $0.10, and even efforts by billionaire Elon Musk have failed to prop up the price of Dogecoin. If you bought Dogecoin at the peak of its popularity in May 2021, then you're down 86%.

Will meme coin ETFs help?

An interesting development is the recent launch of meme coin exchange-traded funds (ETFs). There are now ETFs offering single-crypto exposure to Dogecoin, and there are plenty of applications in the works for other meme coin ETFs. These ETFs look and act much like the highly successful Bitcoin ETFs that do nothing but hold Bitcoin.

Arguably, there are some minor diversification benefits to be had here. After all, the top five meme coins now account for roughly 1% of the crypto industry's total market value. So if you're looking to add a modicum of additional diversification to your portfolio, you might consider a meme coin to add into the mix.

But wouldn't it make far more sense to hold a broadly diversified meme coin ETF that holds dozens, if not hundreds, of different meme coins? That way, you wouldn't be fully leveraged to the fate of the cute Dogecoin dog. You would also be able to tap into the upside potential of cats, frogs, penguins, or whatever other animal-themed meme coin is currently soaring in value.

Should you invest in meme coins?

It's completely understandable why investors are willing to put their money into meme coins. The potential for instant 10- or 100-fold returns can be very alluring. And the introduction of new meme coin ETFs gives them even more mainstream appeal.

But think long and hard before you decide to invest in a meme coin. Roughly 60% of meme coin investors end up losing money, and another 5% break even. For two-thirds of investors, meme coins simply aren't worth it.

Even those who do profit from meme coins make such a small amount of money ($100 or less) that it may not even be worth it, except as a form of pure entertainment. It's only a tiny group of meme coin investors who actually make the big bucks. From my perspective, there are far better investment alternatives elsewhere.

Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.