Solana Summer: The dangers and red flags of trading cryptocurrency

By Harley Thomas

[NOTE: The following piece is not intended as financial, investment, or any other form of advice, but merely intended as observations to consider when conducting due diligence into potential investments into cryptocurrency and other digital assets. Investments into cryptocurrency are conducted at an individual’s own risk, and the list below of items to consider is not an exhaustive list.]

As the temperature rises, so too does the lure of cryptocurrency trading. And this summer has been dubbed as “Solana Summer”, due to the popularity of the Solana Blockchain, the cryptocurrency market’s best performer in the past year.

Solana has appealed to many traders due to its high-speed transactions and low gas fees to trade on the blockchain. However, behind the temptation of making a rapid exponential 100x (or in some cases 1000x+) gain on the value of an initial investment, there lies the cold winter of scams, “rug pulls” and “pump-and-dump” schemes.

The price of Solana has surged from $0.57 in June 2020 up to $184.89 this July. This resulted, briefly, in Solana flipping Binance Coin (BNB) to become the fourth largest cryptocurrency by market capitalisation (at approximately $87.05 billion). Among all this excitement, though, it is important for potential investors to implement proactive measures to avoid cryptocurrency scams and having to resort to reactive measures.

The illusion of “making a quick buck”

One of the most seductive aspects of cryptocurrency trading is the potential for rapid and large-scale profits. For example, in June 2024, the controversial social media influencer Andrew Tate saw his namesake coin “Daddy Tate” go from a market capitalisation of approximately $33,000 to an all-time high of approximately $218 million – in the space of three days. A $100 investment initially would, in theory, have seen the value of your investment soar to approximately $661,0000 (had you invested in the extreme infancy of the coin).

Stories of overnight millionaires often fill the headlines and proliferate on social media, but what is not shown is that this only represents a small percentage of the reality of crypto trading. A large percentage of people actually lose their investment, or a significant proportion of it. The get-rich-quick examples are actually extremely rare, and this is important to consider.

For those investing, you should always invest only that amount of money you are willing (and can afford) to lose. To equip yourself to approach the market in the right mindset, here are some important elements to consider, along with a number of red flags.

The influence of social media

Social media plays a significant role in the cryptocurrency market. Influencers and online communities can drive massive price movements through coordinated buying or selling. However, this also opens the door to pump-and-dump schemes, where the price of an asset is artificially inflated before being sold off by those who orchestrated the pump.

During “Solana Summer”, social media buzz has contributed to rapid price increases. While community support is a positive aspect and helps to build sustainable crypto projects, traders must be cautious and critically evaluate the information they encounter online, and not treat the information given out by influencers as gospel.

Security risks

Security is a paramount concern in the cryptocurrency space. While Solana boasts high speeds and low fees, it is not immune to security vulnerabilities. Hacks and exploits are prevalent, with decentralised finance (DeFi) platforms being particularly attractive targets for cybercriminals.

In August 2022, Solana suffered a major hack that compromised over 8,000 wallets, resulting in millions of dollars in losses. While the platform has taken steps to enhance security, the risk remains. Traders must ensure they use reputable wallets, enable two-factor authentication, and consider using hardware wallets for added security.

Key elements of consideration when making an investment

Below are just a few non-exhaustive areas for potential investors to look at when considering making cryptocurrency investments.

1. Liquidity. High liquidity indicates a market with a high volume of transactions, where buying and selling can occur swiftly without causing significant price changes Conversely, low liquidity means fewer transactions, leading to more substantial price volatility when trades are executed. It is important for potential investors to consider the liquidity of a project: to be able to measure the ability to withdraw profits from any gains, but also the ability to implement stop losses.
2. Large holdings by single or collective wallets. It is important to consider, particularly with low-market cap, newly-launched coins, the distribution of the coin supply in terms of holdings by individual wallets. For example, if one particular wallet holds a large percentage of the total supply of the coin (particularly the developer of the coin), this is a major red flag and increases the likelihood of the project being “rug pulled”. Using software such as Photon enables you to identify any holdings by the developer of the coin.
3. Burnt/Locked Liquidity Pool (“LP”). When a new coin launches on a decentralised exchange, it is added to an LP. The creator of the pool receives LP tokens as a claim to the valuable Solana and/or the newly-launched coin. The LP allows the coin to become tradeable and is required to buy/sell the coin, when a coin is purchased in Solana. If the coin begins to increase in price, you could end up with a large LP of Solana as people rush to buy. It is important that the LP of Solana is locked/burned to ensure that the developer can no longer lay claim to the LP and remove the liquidity from the project.
4. Freeze authority. When considering investment into cryptocurrencies, it is important to consider whether or not freeze authority is enabled. Often scammers create a new token and retain freeze authority over it, restricting investors' ability to trade the coin once purchased. This is a red flag, especially for meme tokens.
5. Sufficient due diligence. It is important before making any investment to do substantial research and due diligence, including analysing whether the above red flags are present. Using a website such as Dexscreener or Dextools is extremely helpful in this regard.

As raised previously, the above is not intended as financial or investment advice, but merely to be used as a point of reference with any potential investment into cryptocurrency or other digital assets. It is important before making any investment into digital assets that you conduct comprehensive due diligence, and only invest an amount which you are willing and can afford to lose, due to the volatile nature of the investment.

Harley Thomas is a forensic accountant and senior investigator at asset recovery litigation practice Martin Kenney & Co (MKS) in the BVI (www.martinkenney.com)