In the discourse among cryptocurrency investors right now, one ever-present narrative is that investing in meme coins like Dogwifhat, (WIF -0.39%) Dogecoin, (DOGE -0.51%) and Shiba Inu (SHIB -0.09%) can confer such high returns that it offers a higher chance of making "generational wealth" than traditional investments like stocks. In their parlance, generational wealth is roughly what one would expect -- a sum of wealth that's sufficient for investors to retire on their earnings and pass on a similarly cushy situation to their progeny.

Are the meme coin boosters onto something? Could it really be possible to make oodles of money from buying some of the riskiest and most speculative financial instruments that exist? Answering the question is a bit more complicated than a simple yes or no, so let's unpack the relevant issues in detail.

Chasing generational wealth with meme coins is a hazardous proposition

Let's get one thing out of the way to start. Mathematically, it is indeed possible for small investments in cryptocurrency to deliver absurdly high returns, the likes of which are vastly beyond all but the most successful of equity investments. For instance, if you'd bought $1,000 of Dogecoin five years ago, you'd now have close to $63,000, so you can imagine how much cash you'd have with a larger investment.

But the chance of such an outcome actually happening is close to zero for most investors, for a handful of reasons.

First, there was hardly any mention of Dogecoin in the public discourse in April of 2019, which makes it very unlikely that an investor would choose to buy it. That's especially true given that the coin did not have any catalysts on the horizon, as there is no team advancing it or promoting it.

Second, most investors do not have the conviction or patience to hold onto highly risky coins for the time it takes for them to appreciate significantly in value. In short, the probability of being able to hold Dogecoin or another coin with a similar trajectory like Shiba Inu is minimal. As the coin's value shoots into the stratosphere, investors with a low cost basis are likely to feel the pressure to sell, as there is nothing other than hype to drive further increases.

Finally, the probability that an investor would actually select Dogecoin or another coin that would later experience a meteoric ascent is not high. There are many thousands of meme coins in existence. Most go to zero, a bunch languish indefinitely, a gaggle grow moderately, and only a select few go on to reach market caps in the tens of billions.

So don't get caught up in the euphoria of cryptocurrency investors who are marketing their meme coins as paths to generational wealth. Even if you have the foresight to invest in a future winner when its price is low and there's minimal hype, the challenge of holding it through the ups and downs it will experience is going to be more than most can bear.

There's a reasonable way to advance your financial goals with cryptocurrency investments

Despite the facts above, there are still ways to responsibly invest in cryptocurrencies, including in meme coins, for the purpose of wealth-building. Just be sure to temper your expectations and prepare to put in a fair amount of work, as you'll need to do plenty of research and be ready to hold for the long haul.

The most obvious plays right now are coins like Bitcoin or Solana, which have the benefit of favorable macro tailwinds due to the recent halving of the size of Bitcoin's mining reward blocks, as well as plenty of attention from the public and the most serious of cryptocurrency investors. While Bitcoin and Solana will still be somewhat volatile in comparison to stocks, and their riskiness is fairly high, if you can commit to holding them for at least the next five years the odds will be in your favor.

Solana specifically is the way to go if you want exposure to growth resulting from other people's meme coin investing. Most of the meme coin activity this year and last year has been on the Solana chain, and its low fees and quick transactions make that likely to continue for at least a while longer.

Furthermore, assuming your portfolio is already adequately diversified, it is acceptable to dabble in meme coin investments, so long as you obey the following five rules:

  1. Don't invest more capital than you can afford to set on fire without caring whatsoever
  2. Don't allocate more than 5% of your portfolio's value to meme coin investments as a segment
  3. Invest only in well-established meme coins with market caps that are consistently above $300 million even after major drawdowns
  4. Invest only in meme coins with large and active communities on social media
  5. Invest only in meme coins with memes that are appealing to a mass audience; nothing offensive, niche, or confusing

In addition to the above, if you can manage to identify meme coins that the market recently dumped, but for which there are still many active coin holders, it'll increase your chances of success.

But be aware that you'll still need to have an ironclad risk tolerance and diamond hands to squeeze the most money out of these investments, so they aren't right for most people.