With additional reporting by Brenden Rearick
On April 20, SafeMoon (CCC:SAFEMOON-USD) overtook Dogecoin (CCC:DOGE-USD) as the top-searched cryptocurrency in the world. The one-month-old DeFi token had all the makings of a breakout success: a large social media following, a function that penalizes sellers, and a rapid return to satisfy even the most demanding moonshot investor. $10,000 invested in SafeMoon in March would have turned into over $2 million by mid-April.
But as the old saying goes, “up like a rocket, down like a stick.” As more Twitter (NYSE:TWTR)-fueled investors piled in, prices inexplicably collapsed. In just two weeks, $8 billion of investor money has vanished.
That hasn’t stopped investors from doubling down. The token still adds almost 20,000 new holders daily, and current stakeholders are strident as ever. To these believers, SafeMoon has “more potential than Dogecoin.” Skeptics are derided as “FUD” mongers — sowers of fear, uncertainty and doubt.
It’s easy to dismiss these SafeMoon bulls as one-off fanatics. The community almost seems to have a life of its own.
Yet, SafeMoon investors only reflect a broader acceptance of “cult stock” investing — a notion popularized by Tesla (NASDAQ:TSLA) and GameStop (NYSE:GME). Much like conspiracy theorists, many investors join exclusively for the community. Profits are seen as a vindication of one’s beliefs rather than the outcome of any logical investment strategy.
As social media influence continues to grow, investors can expect to see more hustles like SafeMoon. Because in a world where 1.5 million investors can believe in a cryptocurrency that is “solely built to gain attention,” smart operators will have no trouble finding their next marks.
Investors beware. The SafeMoon crypto hustle of 2021 is only the start of things to come.
The Rise of SafeMoon
SafeMoon started with an intriguing principle. Rather than allow investors to sell their tokens freely, the protocol instituted a 10% “exit tax” on would-be sellers. Not only would that reduce the chance of people selling when prices declined — an issue that long troubled the Dogecoin community. It would also redistribute half of the exit tax to existing holders.
In theory, the system would reward long-term SafeMoon holders at the expense of disbelievers (i.e., sellers). Cryptocurrencies like Dogecoin turn over their entire market capitalization every few days. At that rate, SafeMoon investors would theoretically double their tokens each month.
Concurrently, the DeFi token launched a slick marketing campaign on Twitter and other social media platforms. These increasingly elaborate posts were aimed at garnering grass-roots interest. With some luck, SafeMoon’s marketing team could get their investment community to do their work for them.
The plan worked. Within six weeks of its March 8 launch, the token had amassed 100,000 Twitter followers. By late April, SafeMoon would reach an all-time high, driven by influencers from YouTube star Jake Paul to DJ Afrojack. NFL players Damarious Randall and Sidney Jones IV also weighed in.
The Dark Side of the (Safe)Moon
Yet, SafeMoon’s rise also raised eyebrows. On April 21, cryptocurrency influencer Lark Davis called the new token a Ponzi Scheme.
“SafeMoon is worth almost 7 billion fully diluted,” Mr. Davis noted. “…Seems that scams always pump the hardest.”
A day later, controversial cryptocurrency watchdog War on Rugs issued its first warning on the currency.
“Scam Advisory #115 – SafeMoon. Reason: Owner owns more than 50% of the liquidity and refuses to fix it. He could pull LP and sell tokens, creating a rug pull. Likeliness of losing all funds: Absolute”
Central to these accusations were allegations of fraud and misdirection – claims that third-party audits of SafeMoon’s code have since justified.
- Self-Dealing. Since March, the official SafeMoon Deployer account has sent trillions of SafeMoon tokens to about three dozen private accounts. Many of these accounts have gone on to cash these tokens out for millions worth on Binance.
- Centralized Control. While half of SafeMoon’s 10% “exit tax” tokens are sent to existing holders, the other half goes directly to the contract owner, an unknown entity with total control over the token’s protocol. The owner also “has the permission to 1. change the address that can receive LP tokens, 2. Lock the contract, 3. exclude/include addresses from rewards/fees,” among others“ without obtaining the consensus of the community” according to a third-party audit.
- Deficient Technology. The SafeMoon codebase is 96% based on an earlier contract, RFILIQ. SafeMoon also includes the spelling errors and questionable functions that prominently feature in the parent contract.
- Virtually Unlimited Supply. DeFi exchange Binance has long warned investors that “An overwhelming large max supply, or, one address with an overwhelmingly large percentage of the supply … is a large red flag.” SafeMoon has both. Its maximum supply of 1000000000000000000000000000000000000000000000000000000000000000000000000000 tokens is roughly equal to the number of atoms in a hundred million galaxies, and its largest accounts are those funded at initial deployment. (note: even ignoring the “burned” wallet, many of the tokens still seem to be in the developer’s control)
- Inadequate Token Burn. SafeMoon’s management team has long touted their “burn” ability to reduce supply and maintain prices. But since the token started trading, only 0.4% of coins were burned after March 15. SafeMoon’s definition of “current owners” for the 5% exit tax also seems arbitrarily assigned.
The SafeMoon team has largely brushed aside these concerns. Instead, they have offered reasons to trust them with the “keys to the kingdom.”
“Risks in regard to ‘rug-pulls’ or anything else is mitigated due to the fact that every member of SafeMoon would be subject to litigation and likely a swift prison sentence,” the team said to third-party cryptocurrency certifier CertiK. “Additionally, outside of the law, our social lives would be in ruin, and we would not be able to show our faces in public again, let alone get another job.”
SafeMoon investors, meanwhile, have remained committed. Twitter users continue to attack short-sellers as “desperate,” looking for a project to hate on and targeting SafeMoon.
Same Same, But Different.
It’s not the first time that investors have trusted the keys to the kingdom to a self-ruling party. Tech investors have long grudgingly bought shares in firms like Facebook and Snap, where founders maintain a controlling interest. Foreign exchange investors, too, implicitly put their faith in foreign government every time they swap for a currency. These investors essentially trust these self-governing parties to do the right thing.
But the rise of cryptocurrencies like SafeMoon has taken this to a new level. Not only does the token’s developer have absolute control over the cryptocurrency, this individual is also entirely anonymous: a fact SafeMoon advertised on their website before quietly removing it earlier this month.
The anonymity of SafeMoon’s keyholder should trouble even the most impressionable cryptocurrency investor. When then-anonymous Satoshi Nakamoto created Bitcoin, he (or she) left the protocol open to the community to manage and edit. Nakamoto has zero control over your Bitcoin wallet today.
SafeMoon governance, on the other hand, resembles Big Brother of George Orwell’s Nineteen Eighty-Four — a totalitarian leader who remains virtually unknown. The management team maintains a high profile, but the token’s ringleader remains a complete mystery. It’s a narrative that should remind people of conspiracy theories made possible by identity politics.
Identity Politics Spills into Cult Stocks
It was only a matter of time before identity politics spilled into investing. For years, partisan media has made it easier for people to seek self-confirming evidence. Not only can internet users find alternative opinions online. They can also find alternative facts.
The same forces are now at work with investing. While early cult stocks like Solyndra and Wonga struggled to move beyond their core fanatical bases, today’s companies can use social media to reach millions.
Today, SafeMoon has almost a half-million Twitter followers and 170 thousand Reddit subscribers to buttress their 1.5 million account holders. On a trailing-30-day basis, the token beats out both Dogecoin and Bitcoin as the most searched-for cryptocurrency on CoinMarketCap. The SafeMoon community has grown a life of its own — an echo chamber of investors encouraging each other to invest more.
However, there are reasons mainstream investors should remain concerned.
Firstly, these cult investments can quickly disrupt the broader market. When Reddit investors banded together for GameStop’s January short squeeze, they brought at least two multi-billion-dollar hedge funds to their knees. Quick-thinking investors earned millions, while laggards lost out.
Secondly, the success of poorly governed investments can set an example for subsequent players. Investors should expect more centralized-control coins to rise on SafeMoon’s coattails.
And finally, the acceptance of cult stocks signals a broader shift in investor risk-taking. Today, the long-term price-to-earnings ratio of 37.8, only 15% lower than the dot-com peak in 2000.
Taken together, SafeMoon’s issues aren’t just an isolated incident of rapid investors looking for a home. Instead, it’s a broader shift of investor mentality where stocks become an identity.
SafeMoon to the Moon?
For current SafeMoon investors, no amount of arguing will ever convince them to sell. The mysterious developer’s “rake” is more like a membership fee than outright theft to these individuals. That means SafeMoon’s price will remain elevated for far longer than people expect.
But for new investors, SafeMoon has profound lessons. Those looking to find the next SafeMoon have no shortage of options:
- SafeXI. “Autonomous yield and liquidity generation protocol”
- FairLunar. “Community-driven meme token”
- Safeicarus. “Forever deflationary supply. We burned 97% of the total supply after launch”
- Triforce Protocol. “Rewards to token holders” using its “deflationary token.”
The commonalities? CoinMarketCap listed them on the same day. Investors looking for other alternatives have PinkMoon, SafeMars, SafeEarth, Secured MoonRat, MoonShot, MoonStar, MoonToken and hundreds of other look-alikes.
But want to get genuinely wealthy? Then create a coin yourself.
Why waste time trying to find the next SafeMoon when you can create a quadrillion-coin cryptocurrency yourself with a zero-dollar entry price? All you need is copy-paste an existing token’s code (as SafeMoon did), find yourself a snappy name, and start promoting it on social media. Because in a year where “Scamcoin,” a joke coin made by a TikToker, can reach a $70 million valuation within an hour (and then become an almost $1 billion coin before getting shut down by its creator), there’s no limit to the profits crypto barons can make.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.