The memecoin phenomenon that began two years ago on the Solana blockchain seemed to emerge naturally. However, it has since attracted notable figures, including former U.S. President Donald Trump and his wife, Melania Trump, along with Argentine President Javier Milei.
These high-profile endorsements have significantly accelerated the growth of memecoins on Solana, leading to the emergence of numerous hidden players who hold substantial portions of the multi-billion dollar memecoin market.
As a result, those with insider knowledge can execute highly profitable trades, while many retail investors face substantial losses.
A Recreation of Previous Crypto Trends
Memecoins began appearing a few years after Bitcoin’s inception, as developers jokingly played around with internet memes.
The first relatively successful memecoin on Solana was Bonk, which launched shortly after the collapse of FTX and the downfall of Sam Bankman-Fried’s empire. Amidst the crypto market’s decline, investors were eager to turn a quick profit.
Since then, Solana has positioned itself as a faster and cheaper alternative to Ethereum, becoming the go-to blockchain for launching memecoins. For example, both Trump and Melania introduced their official memecoins on this platform, both of which have significantly depreciated since their debut.
The memecoin called Libra, endorsed by Milei and stirring political discussions, was also launched on Solana.
Market participants have noted that the allure of Solana as a host for increasingly controversial memecoins stems from the interwoven network of creators and sellers behind these tokens. This has prompted some to liken the situation to earlier phases of the crypto market.
An Insider Advantage
Retail investors often pay dearly when they enter the market too late. For instance, Trump’s memecoin has lost roughly 85% of its value, dropping from around $74 the day before his inauguration to about $11, according to data.
Similarly, Melania’s memecoin has fallen nearly 95% from its peak of approximately $13.5. Libra also experienced a steep decline shortly following its launch. Most of these losses are absorbed by those who invested too late in the game.
Jordi Alexander, the founder of digital asset trading firm Selini Capital, which deals in tokens including memecoins, remarked:
“Memecoin launches were marketed as a counter to ‘utility’ coins where VC insiders could invest at drastically lower valuations and sell to retail later… In reality, memecoin launches frequently exhibit just as much—if not more—of an insider advantage.”
Some insiders, known as KOLs or key opinion leaders, are often influential social media figures with a substantial following. They tend to be visibly involved in memecoin projects prior to their launches, frequently receiving large quantities of the coins or the opportunity to purchase them at reduced rates in exchange for promotion, encouraging their followers to invest.
Although many memecoin projects advocate for a “fair launch” model providing simultaneous access to the public, this is often not the case, according to Mohamed Ezeldin, head of tokenomics at Animoca Brands.
Memecoin Cabals and Market Manipulation
‘Cabals’ are specialized groups that facilitate the launch of memecoins, connecting influencers with their creators. Joseph Edwards, head of research at Enigma Securities, suspects these cabals engage in creating and allegedly manipulating the prices of memecoins to exploit investors.
In essence, these cabals orchestrate pump-and-dump schemes, drawing initial buyers to launch the tokens, only to see a rapid loss in value right after. Kelsier Ventures, linked to the launch of Libra, is one such organization. Edwards explained:
“There were numerous market makers involved in this behavior in 2021—dark pool liquidity… They would assist these tokens in launching, and it would turn into a pump-and-dump scenario every single time.”
A common tactic employed by these groups to outsmart retail investors is ‘sniping.’ This involves using trading bots to swiftly purchase memecoins at launch, with the intent to sell them quickly for short-term profits on otherwise worthless tokens.
Sniping became particularly highlighted during the Trump memecoin launch, where specific wallets acquired the token at minimal costs and then sold off quickly after, resulting in a price drop.
Moreover, the emergence of platforms on Solana that support the creation and launch of memecoins has exacerbated these issues. Notable platforms include Pump.fun and Meteora, which were used for the launches of the Trump, Melania, and Libra memecoins.
“With platforms like Pump.fun becoming prevalent, it allows individuals to concentrate solely on ROI rather than any fundamental value,” Ezeldin remarked, referring to the return on investment, adding:
“Investors in memecoins are fixated on getting in as early as possible and exiting close to the peak. We have thus developed a zero-sum game.”
A Cautionary Tale for Retail Investors
In February, staff from the U.S. Securities and Exchange Commission clarified that they do not classify memecoins as securities, equating them to digital collectibles devoid of any functionality or utility.
This means that creators and sellers of memecoins are not required to register with the SEC, which significantly limits federal securities protections for memecoin investors.
However, Cathie Wood of Ark Investment Management believes that the regulators’ message is clear and that retail investors will ultimately learn from their memecoin-related losses. She commented:
“Some of these meme assets will experience severe declines in value. Experience is a powerful teacher for those who have lost money.”
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