The memecoin craze that started off two years ago on the Solana blockchain appeared to be organic. However, since then, the blockchain has drawn high-profile individuals, including U.S. President Donald Trump and his wife, Melania Trump, as well as Argentina President Javier Milei.
These high-profile individuals have fuelled rapid growth of memecoins on Solana. This has led to the rise of a large number of covert participants that control a significant chunk of the mutli-billion dollar memecoin market.
As a result, insiders or those in the know are able to pull off the most lucrative trades while the majority of retail investors bear the losses.
A repeat of earlier crypto cycles
Memecoins first started surfacing a few years after the creation of Bitcoin when developers started riffing internet memes as a joke.
The first somewhat successful memecoin on Solana was Bonk, which was launched shortly after the collapse of FTX and Sam Bankman-Fried’s empire. At the time, investors were desperate to make a quick buck after the crypto market collapsed.
Since then, Solana, which touts itself as faster and cheaper than Ethereum, has become the preferred blockchain for launching memecoins. For instance, both Trump and Melania launched their official memecoins, on Solana. Both memecoins have depreciated significantly since their launch.
Libra, the memecoin that generated political controversy over Millei’s endorsement, was also launched on Solana.
Market participants told Bloomberg that Solana is attracting more and more controversial memecoins because of the interlocking network of participants behind the creation, launch and sale of the tokens. In fact, market participants see it as a repeat of earlier crypto cycles.
The insider advantage
Retail investors pay a heavy price when they are too late in investing. For instance, Trump’s memecoin has lost nearly 85% of its value, down from around $74 the day before his inauguration to around $11, according to CryptoSlate data.
Similarly, Melania’s memecoin is down nearly 95% from its peak of around $13.5, CryptoSlate data indicates. Libra also lost most of its value immediately after its launch. These losses are mostly borne by those who were too late to invest.
Jordi Alexander, founder of digital-asset trading firm Selini Capital, which makes markets for tokens including memecoins, told Bloomberg:
“Memecoin launches were being promoted as an antithesis to the ‘utility’ coins where VC insiders were able to invest at 100 times lower valuations and sell to retail after launch…In truth, memecoin launches often have as much — if not more — of an insider advantage.”
Some of these insiders are referred to as KOLs, or key opinion leaders, who are often social media influencers with large followings. They are visibly part of memecoin projects prior to their launch and often receive large numbers of the memecoins or get to buy them at deep discounts in exchange for promoting them and enticing their followers to buy.
While most memecoin projects claim to practice the “fair launch” model where all tokens are made available simultaneously to the public, this is rarely the case, head of tokenomics at Animoca Brands, Mohamed Ezeldin, told Bloomberg.
Memecoin cabals carry out pump and dump
‘Cabals’ are groups that specialize in launching memecoins. And it’s these cabals that help influencers connect with memecoin creators. Joseph Edwards, head of research at Enigma Securities, believes that these cabals are often involved in creating and allegedly manipulating the price of memecoins to exploit investors.
In other words, cabals create pump-and-dump memecoins that focus on attracting buyers for the launch but lose most of their value almost immediately after. Hayden Davis’ Kelsier Ventures, which was involved in the launch of Libra, is one such group. Edwards said:
“There were various market makers who were doing similar things in 2021 — dark pool liquidity…They would help these tokens launch and it would be a pump-and-dump every single time.”
One of the mechanisms commonly used by cabals to outsmart retail investors is ‘sniping.’ Sniping refers to the use of trading bots to buy memecoins during launch and selling them quickly to capitalize on the short-term gains of the otherwise worthless tokens.
Snipers gained most prominence during the Trump memecoin launch, when certain wallets acquired the token at negligible costs. These wallets quickly dumped the tokens after launch, causing the price crash.
Furthermore, the rise of platforms on Solana that facilitate the creation and launch of memecoins have made the problem worse. The most prominent platforms include Pump.fun and Meteora. Trump, Melania, and the Libra memecoins were all launched using Meteora.
“With the rise of platforms like Pump.fun, what it’s really allowed people to do is zoom in on those who are only focused on ROI and not focused on fundamentals or utility,” said Animoca Brands’ Ezeldin, referring to return on investment, adding:
“They’re [memecoin investors] just focused on ‘how can I get in as early as possible and how can I exit as close to the top?’ In doing so, we’ve created a zero-sum game.”
A lesson for retail investors
In February, the U.S. Securities and Exchange Commission (SEC) staff clarified that the agency does not consider memecoins to be securities. They likened memecoins to digital collectibles that have no functionality or utility.
Therefore, memecoin creators and sellers are not required to register with the SEC. But more importantly, it excludes memecoin investors from federal securities protections.
Ark Investment Management Cathie Wood, however, believes that the “message is loud and clear from the regulators,” and that retail investors will learn their lesson from their memecoin losses. She said:
“There will be some fearsome declines in the prices of some of these meme assets. And, you know, there’s nothing like losing money for the people to learn.”
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