Memecoin Craze on Solana

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 fueled the rapid growth of memecoins on Solana. This has led to the rise of a large number of covert participants who control a significant chunk of the multi-billion dollar memecoin market.

As a result, insiders or those in the know can 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, with developers riffing on internet memes as a joke.

The first somewhat successful memecoin on Solana was Bonk, launched shortly after the collapse of FTX and Sam Bankman-Fried’s empire. At that 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. Notably, both Trump and Melania launched their official memecoins on Solana, which have since depreciated significantly.

Libra, the memecoin that generated political controversy over Milei’s endorsement, was also launched on Solana.

Market participants told Bloomberg that Solana is attracting more controversial memecoins due to the interconnected network of participants behind the creation, launch, and sale of the tokens. In fact, some see it as a repeat of earlier crypto cycles.

The Insider Advantage

Retail investors pay a heavy price when they are late to invest. For instance, Trump’s memecoin has lost nearly 85% of its value, dropping from around $74 the day before his inauguration to around $11. Similarly, Melania’s memecoin is down nearly 95% from its peak of around $13.5. Libra also lost most of its value immediately after its launch. These losses are predominantly borne by late investors.

Jordi Alexander, founder of digital-asset trading firm Selini Capital, 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 insiders are referred to as KOLs (key opinion leaders), who are often social media influencers. They are involved in memecoin projects before launch and typically receive large quantities of the memecoins or secure them at deep discounts in exchange for promoting them.

Most memecoin projects claim to practice a “fair launch” model where all tokens are made available simultaneously to the public, but this is rarely the case, according to Mohamed Ezeldin, head of tokenomics at Animoca Brands.

Memecoin Cabals Carry Out Pump and Dump

Cabals are groups specializing in launching memecoins, connecting influencers with memecoin creators. Joseph Edwards, head of research at Enigma Securities, believes these cabals often manipulate the price of memecoins to exploit investors.

In layman’s terms, cabals create pump-and-dump memecoins that attract buyers at launch but lose most of their value immediately afterward. Hayden Davis’ Kelsier Ventures, involved in Libra’s launch, is one such group.

Edwards remarked:
> “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.”

A common mechanism used by cabals to outsmart retail investors is ‘sniping,’ leveraging trading bots to buy memecoins during launch and sell quickly for short-term gains. Snipers were particularly prominent during the Trump memecoin launch, where certain wallets acquired tokens at negligible costs and quickly dumped them, causing price crashes.

Platforms facilitating the creation and launch of memecoins, like Pump.fun and Meteora, have exacerbated this issue. Trump, Melania, and Libra memecoins were all launched using Meteora. Ezeldin stated:
> “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.”

A Lesson for Retail Investors

In February, the U.S. Securities and Exchange Commission (SEC) clarified that the agency does not consider memecoins to be securities. They likened memecoins to digital collectibles with no functionality or utility, meaning creators and sellers aren’t required to register with the SEC, denying memecoin investors federal securities protections.

Ark Investment Management’s Cathie Wood believes that regulators are sending a clear message, and retail investors will learn from their losses, noting:
> “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.”