Acronyms, abbreviations in which each letter is the first letter of a word in a phrase, are customarily capitalized. But not always. Laser, for example, is an acronym that stands for light amplification by stimulated emission of radiation; the word is now so common that nobody thinks of it as an acronym, and subsequently nobody capitalizes it. This seems to be governed by the same mechanism as the disappearance of hyphens in compound words: as words get more common, they tend toward the style of normal running text—that is, lowercase.
Benelux is another acronym, standing for Belgium Netherlands Luxembourg, but it’s not written BeNeLux. A growing convention, which I first came across in Robert Bringhurst’s The Elements of Typographic Style, dictates that if an acronym is pronounced as a word, then it should not be written in all caps. (As opposed to initialisms, which are pronounced as a series of letters. Compare Nato to USA.)
Still, plenty of people capitalize NATO and AIDS and NASA, and I don’t think anyone would argue that doing so is incorrect. (People have certainly argued about stranger things, though.) But one case comes to mind wherein capitalizing certain acronyms is seen as gauche at best: The neographic texting/Internet shortcuts, most notable among them lol.
People who capitalize LOL have long been the subject of Internet ridicule. There is no shortage of forum messages, Facebook pages, tweets, or blog posts about the practice. The Internet community, so varied in other respects, seems to be in agreement here. And just as Apple iOS’s autocorrect feature has caused strife for other reasons, people seem to hate that it capitalizes LOL for them. Why is this?
The consensus is that capitalizing LOL is the purview of old people and other e-newbies. And no millennial worth his weight in iPhones wants to be seen in this light. “We get why you people might think it should be capitalized like a normal acronym,” the collective voice of the Internet seems to say, “but you need to get with the program and realize it’s not.” It’s quite interesting that the convention evolved such that this acronym (along with others, like ikr, idk, btw) should be treated quite differently than normal.
What’s going on here? The preference stems from the pervasive practice of writing casual text in all lowercase. Casual text values simplicity and speed, and pressing that shift button is seen as unnecessary. In such environments, sentence starters, proper nouns—even the letter I—tend to be written in lowercase. Given that such acronyms are found almost exclusively in casual contexts, it makes sense that it would need to be written in lowercase as well.
It seems lol is here to stay, and it’s being used in more and more places. It’s crawled from the trenches of Internet subculture to some less-important business emails, which has been quite a journey. I don’t foresee that it’ll go much further, but who knows. In any case, it does seem to be shifting a bit as it goes. For example, I am seeing Lol more and more often: The first L is capitalized when the word begins a sentence; in other words, we see this neographic token in environments where not all orthographic norms are flouted (we relent to capitalize the first letter in each sentence, but no way are we going to capitalize LOL).
On a somewhat unrelated note, you might be interested in the equivalents of lol in other languages.