An Important Reminder for Investors as More Politicians Announce Meme Coin Drops

Key Points

• Investors have been putting money into select crypto products for many years.

• The prices of some of these products have risen dramatically, while others have become worthless.

• As more politicians look to take advantage of meme coin drops, you need to focus on what you are really paying for.

• 10 stocks we like better than Bitcoin ›

Donald Trump is a polarizing figure. But like him or not, he has a history of recognizing opportunity and jumping on it. Which is why he introduced a meme coin, giving people who like the current president an opportunity to buy yet another Trump-branded product.

As more politicians consider joining the meme coin fray, in an effort to raise money, you need to make sure you understand what you are actually buying.

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Why is the dollar worth a dollar?

To simplify a long and complex story, originally, people bartered. What changed hands varied, but the key is that there was a tangible value in what was being exchanged. Eventually, people needed a way to trade without having to provide a product or service and currency was used to facilitate the trade.

In the beginning, the currency was usually something that everyone agreed had value, like gold or silver. When paper money was created, it was often backed by gold or silver. Today, the only thing backing the value of most paper money is the government that issues it. This is known as a fiat currency.

So the dollar is worth a dollar because the U.S. government says it is worth a dollar. And, of course, because you believe it. That last part is where things get interesting, especially as it relates to meme coins or other crypto products.

What happens if nobody believes it?

If the world suddenly stopped believing that the U.S. government could actually back the dollar, it would fall in value. It could, theoretically, become worthless. That hasn't happened to the U.S. dollar, which supports a huge portion of global trade today. But it has happened to other countries' currencies. To put that into perspective, in some situations a country's dollar is not worth a dollar and may not even be worth the paper on which it is printed.

Bitcoin Price data by YCharts

This is what investors need to understand when they consider meme coins and crypto. The value of a meme coin sold by Donald Trump is only worth what people are willing to pay for it. Alone, it has no value at all. It isn't even a physical item. There is no government backing for the coin. The price of the meme coin is entirely derived from the sentiment of its owners.

California Governor Gavin Newsom has floated the idea that he, too, will issue a meme coin. That could be the presidential hopeful simply trolling the current president. Or it could be a new tool for politicians to raise campaign money. Time will tell. However, if you are tempted to buy a meme coin from a politician, you need to remember what's backing that meme coin.

The answer is nothing. Even if that politician is the U.S. president, the answer is still nothing. You are, effectively, just giving money to the issuer (the politician). Maybe there's enough buyer support that the price remains at or above what you spent. But the most likely outcome is that it won't. Or at least not over the long term.

Look no further than cryptocurrencies for proof of this. Sure, there are some high-profile cryptocurrencies, like Bitcoin (CRYPTO: BTC). But there are far more cryptocurrencies that have little to no value. In fact, as Bitcoin took off in value more and more people started to introduce their own cryptocurrencies in the hopes of making a quick buck. This isn't unique to crypto, it happens all the time on Wall Street, too, in different ways. But the outcome is often the same -- me-too products usually don't live up to the hype.

Bitcoin Price data by YCharts

Even the price of Bitcoin highlights the risk. Although it is generally considered an established cryptocurrency, it is still only backed by the sentiment of the people who own it. And thus, the value of Bitcoin has been highly volatile, with 25% or greater declines in value a fairly common occurrence. In fact, the value has dropped more than 60% four times, and often in shockingly quick fashion. This is what you get when the crowd defines the value of something.

Political meme coins are not really investments

When investors buy a stock, the inherent value is the value of the business in which they are investing. When consumers use money, the inherent value is backed by the issuing government, with the citizenry's consent that there is value. With meme coins and crypto the only value is in the sentiment of the holders of that product.

In 10 years, will a Trump meme coin or a Newsom meme coin have any value if the name attached to the product is no longer newsworthy? The answer is probably not, and thinking it will still have value is a sizable risk. These types of products are not investments -- they are, at best, gambles. But more likely, they should be viewed as nothing more than a political donation.

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Reuben Gregg Brewer has no position in any of the stocks, memecoins, or cryptocurrencies mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.