Is the Shiba Inu on Solana more cost-effective? Calculating the real situation of playing with Shiba Inu using the Kelly formula

Author: Frank, PANews

Speculating on meme coins seems to be an unchanging wealth code in the crypto circle. It is filled with the most magical stories of getting rich quickly in the cryptocurrency field and is a dedicated track for many hoping to make a fortune from a small investment. From Ethereum to BSC, and now to Solana. On one hand, the stories of skyrocketing prices have allowed a few lucky individuals to embark on the road to freedom. On the other hand, they have left the vast majority of investors with nothing after repeatedly speculating on meme coins.

Currently, there is a notion that although speculating on meme coins has more losses than wins, winning once can yield many times the investment, making it a high-quality gold-digging track. From a scientific investment perspective, is participating in Solana projects a reasonable decision? Next, PANews will conduct a comprehensive analysis of this track using the Kelly Criterion from the perspectives of practicality, win rate, and odds.

Assuming you have a principal of $1,000, and each time you invest in a Solana meme coin, it either goes to zero or you can earn 10 times the return, should you invest, and if so, what proportion should you invest?

Is Speculating on Solana Meme Coins More Cost-Effective?

Solana has become the most dazzling public chain coin in this round of market. Within a year, its highest increase reached 15 times, backed by a significant rise in on-chain data. According to Defillama data, on December 22, 2023, Solana's highest daily on-chain trading volume reached $2.6 billion, surpassing Ethereum's highest daily trading volume of $2.5 billion in 2023, briefly becoming the most actively traded public chain. This active performance is inseparable from the enthusiasm for speculating on meme coins on Solana.

Compared to traditional Ethereum meme coins, trading meme coins on Solana has the following characteristics: low gas fees, high trading enthusiasm, and fewer backdoors in token contracts.

Gas Fees: The average on-chain transaction fee on Ethereum ranges from a few dollars to several dozen dollars. In contrast, Solana's on-chain fees can be almost negligible.

Fewer Backdoors in Token Contracts: Compared to the various contract vulnerabilities on Ethereum meme coins, such as high tax schemes and siphoning schemes, Solana, due to its mechanism, has almost no other contract backdoors except for inflation and contract permissions (these two can also be easily seen on on-chain data websites).

Lower Trial and Error Costs: The price of the mainnet token SOL on Solana is much lower than that of Ethereum, which also provides a friendlier entry threshold for players looking for meme coins on Solana. Many players invest about $10 with 0.1 SOL, while this amount is often insufficient to cover a single transaction fee on Ethereum.

These conditions make meme coins on Solana appear to be a good opportunity to turn a bike into a motorcycle. But is that really the case?

The "Slaughterhouse" Where Players Always Lose

Players familiar with meme coins know that the gameplay of speculating on meme coins is almost a game of luck. This gameplay is more akin to gambling or a lottery than investment. If we view speculating on meme coins as a gambling game, the Kelly Criterion serves as a mathematical formula to assess whether one should participate in this game and what proportion of funds should be allocated for each bet.

The Kelly Criterion is a mathematical formula used for optimizing fund management in investment and gambling. Its core idea is how to allocate funds to maximize long-term growth rates when faced with bets that have a positive expected value. The Kelly Criterion was proposed by John L. Kelly in 1956, initially for solving information transmission problems in telephone lines, and later proved to be very effective in gambling and investment fields.

The basic form of the formula is:

F: The proportion of funds to be invested

B: Odds (if you invest $1 and can earn $10, the odds are 9)

P: Win rate (if you invest 100 times and win 3 times, the win rate is 3%)

Q: Loss rate (q=1-p)

Using this formula, one can calculate the capital proportion to be used for each investment or bet to maximize long-term capital growth. An important feature of the Kelly Criterion is that it considers the balance between risk and return, helping to avoid high-risk situations caused by over-investment.

Let's calculate how much capital proportion should be invested in meme coin trading on Ethereum and Solana based on the Kelly Criterion.

We extract 24-hour data for calculation. During the sample period, 1,743 new meme coin projects were issued on the Solana chain, while the average on Ethereum is currently about 213.

Here we set a condition for a potential meme coin. There are more than 100 holders, and the 24-hour increase exceeds 10 times.

Under this condition, the number of potential meme coins in 24 hours on Ethereum is 7, while on Solana, it is 28.

Assuming we have a principal of $1,000, and our winning criterion is to buy a meme coin and achieve a 10-fold increase. The odds are 10, with Ethereum's win rate: 7/213=3.28%. Solana's win rate = 1.6%.

The Kelly Criterion values for both:

Ethereum:

Solana:

Formula Interpretation:

Based on the data, we can see that the Kelly Criterion value for Ethereum is -0.06, while for Solana, it is -0.08. When the value calculated by the Kelly Criterion is negative, it indicates that the expected return on investment or betting is negative based on the given odds and win rate. In other words, this is an investment or bet with an expected loss. In this case, the Kelly Criterion is essentially telling us not to engage in this investment or bet.

As a professional meme coin player, you can monitor the market continuously for 24 hours, buying into a project the moment it goes live, and selling when the market rises 10 times. How much capital should you invest in meme coin trading? According to the calculation from the Kelly Criterion, you should not participate in this game at all, as over time it will only lead to the loss of your principal.

Conclusion

The reason is that the game of meme coins seems to have high odds (often seeing people posting gains of 10 times or more), but it overlooks the survivor bias. Ordinary players face several challenges in winning this game: first, they cannot buy into every project at the first opportunity; second, very few players can truly withstand volatility and fully realize a 10-fold increase; third, it is difficult to raise the win rate above 10%. Therefore, from a mathematical perspective, even though meme coins on Solana have many more user-friendly advantages than those on Ethereum, it remains a "slaughterhouse" where players always lose.

Of course, the Kelly Criterion is merely a rational investment suggestion for the proportion of investment. If calculated at 10 times the odds, it is only worth considering participating in this game if you can maintain an investment win rate of over 10%.