According to Jordi Alexander, founder of Selini Capital, memecoin launches were initially promoted as a contrast to utility coins by allowing VC insiders to invest at significantly lower valuations and then sell to the public post-launch. However, the reality is that memecoin launches often still provide insiders with a significant advantage.
Currently, the trend for launching memecoins is leaning towards utilizing the Solana blockchain, which is perceived to be faster and cheaper compared to Ethereum. The network's popularity stems from its involvement in various projects such as Trump memecoins and Libra tokens endorsed by Milei, which has caused controversy in political circles. Participants in the market view this as a replay of previous crypto cycles due to the intertwined network of contributors involved in creating, launching, and selling these cryptocurrencies.
Initially emerging a few years after the arrival of Bitcoin, the first memecoins were a humorous take on popular internet memes. On Solana, Bonk Inu became a breakout memecoin following the collapse of the FTX exchange. The token gained quick popularity in late 2023 as traders aimed to profit from the trendy, albeit essentially useless, dog-themed token. This success marked a turning point for Solana as it moved past the shadow cast by Sam Bankman-Fried's debacle in the crypto world.
While memecoins seemed to have an organic rise in the upstart network initially, their recent explosive growth, fueled by notable figures like Donald and Melania Trump and Argentine President Javier Milei, has unveiled a network of hidden players dominating this now multi-billion dollar segment of the cryptocurrency market. Industry insiders feel that this has transformed the sector into an insider trading ground, where those with inside information capitalize on profitable trades, leaving retail investors to face the losses.
The realm of Solana blockchain memecoins is fraught with risks for those unfamiliar. Latecomers can easily observe the potential pitfalls, as exemplified by the plummeting prices of tokens like the Trump memecoin and Melania token. Additionally, SOL, Solana's native token, has also experienced a significant drop in value since mid-January, further showcasing the vulnerability of the market.
Key opinion leaders or KOLs, who are prominent social media influencers, play a crucial role in promoting memecoins to their vast audience. These influencers often receive tokens at discounted rates before a token's official launch in exchange for endorsing them. Although memecoins claim to offer a fair launch model where all tokens are released simultaneously to the public, this practice is rarely the case, as per Mohamed Ezeldin from Animoca Brands.
Influencers often collaborate with creators through trading groups known as "cabals," which specialize in launching memecoins. These groups are frequently involved in creating and manipulating the prices of various memecoins to exploit unsuspecting retail investors. This unethical practice has even led to instances of pump-and-dump schemes, revealing a darker side to the memecoin market.
Despite the controversies and risks associated with memecoins, regulatory bodies like the US SEC have clarified that these assets are not considered securities, likening them to collectibles. The SEC staff noted that memecoins often lack utility or functionality and are accompanied by warnings about their speculative nature. As a result, sellers of memecoins are not required to register with the agency, and buyers do not have protection under federal securities laws.
Overall, the memecoin market continues to thrive despite the uncertainty and potential pitfalls associated with it. Industry experts foresee sharp price declines for some memecoins in the future, emphasizing the need for caution when participating in this volatile market.