Freshly elected US President Donald Trump has exercised his usual degree of modesty and named his newly launched cryptocurrency or memecoin, $Trump.

And like the man himself, the coin's price is extraordinarily volatile. The price ran up to $75 (Rs 6,475), fell below $60 (Rs 5,180), went back to $75

Freshly elected US President Donald Trump has exercised his usual degree of modesty and named his newly launched cryptocurrency or memecoin, $Trump.

And like the man himself, the coin’s price is extraordinarily volatile. The price ran up to $75 (Rs 6,475), fell below $60 (Rs 5,180), went back to $75, fell below $40, then rose back to $60 and had fallen to $31 (Rs 3,400) at the time of writing. And this was just in two days.

It has now been joined by a $Melania coin, promoted by his wife.

The Official Melania Meme is live!You can buy $MELANIA now.  https://t.co/8FXvlMBhVfFUAfBo2jgks6gB4Z4LfZkqSZgzNucisEHqnNebaRxM1P pic.twitter.com/t2vYiahRn6

Donald Trump was not a success at running businesses. His wealth was mostly due to what he was given by his father.

But he may now have found a way of monetising his fame. Ironically it is using a cryptocurrency, the leading example of which he has described as a “scam”.

Even by Trump standards, it is quite extraordinary that an incoming president would create such a large conflict of interest days before assuming office.

What are memecoins?

While the first cryptocurrency, Bitcoin, has failed in this goal, it was at least created with the idea that it would have a use as a payments instrument.

Memecoins by contrast do not even pretend to have any potential use. They are purely speculative tokens.

Probably the best known memecoin is Dogecoin. It was originally created as a joke. Its Australian co-creator described it as a “piss take”.

But supportive tweets by Elon Musk, who once called it the “ people’s crypto”, have led to spurts in its price. DOGE is even the acronym of the agency Musk will be running for Trump; the Department Of Government Efficiency. In 2021 its price went from less than 1 US cent to almost 60 cents. It is now 35 cents.

The 100 largest cryptocurrencies include memecoins such as Shiba Inu (named after the dog breed featured on the Doge internet meme), Pepe (named after a cartoon frog), Bonk, Fartcoin and Floki (named after Musk’s dog).

Many memecoins are part of “pump and dump” schemes. These involve the coin creators talking them up and then quickly selling, leaving the buyers with worthless coins.

What does “market capitalisation” mean?

You may have seen claims that $Trump is “worth” around $7 billion, Fartcoin $2 billion and $Melania around $1 billion. What does this actually mean?

It is a reference to the so-called market capitalisation. $Trump’s peaked at $15 billion, but is currently $7 billion. To put the $8 billion drop into context, it is equivalent to around half the value of large Australian companies like Coles and Santos.

These reported market capitalisations need to be interpreted with some caution.

They are calculated analogously with those for shares of listed companies. So, for example, Australia’s largest company, the Commonwealth Bank, currently has around 1.7 billion shares on issue and they are trading at around A$150 so the market capitalisation is around A$250 billion.

But that does not mean if every shareholder wanted to sell today they would collectively get A$250 billion. Once a large number of shareholders start selling, the share price would drop by a lot. Only the first sellers would achieve the current price.

At least there is a very large and liquid market for listed shares in large companies. They have a fundamental basis in solid profits they have earned and they have a balance sheet with assets. This is not the case with memecoins, which neither make profits nor have any underlying assets.

Furthermore, unlike a large traded company, creating a new coin is not that difficult. A 13-year-old child reportedly made A$46,000 by creating one.

But if you create 100 million coins, and I buy one for $10, does this really mean your coin is worth $1 billion?

Why should buyers be wary?

$Trump's own website includes a disclaimer noting $Trump is not “an investment opportunity” nor “a security”.

If you are thinking about gambling on it, don't say you were not warned.

John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.