What is Safemoon and how does it work?

 

Safemoon is a cryptocurrency that launched in March 2021 and attracted attention after its price skyrocketed in April of that year. It has since lost essentially all of its value, falling nearly 99 percent since its April 2021 peak. It was designed to reward long-term holders and charges sellers a 10 percent fee, with part of that fee going back to existing holders.

How does Safemoon work?

Safemoon is a cryptocurrency, which are digital currencies that exist solely online and hope to be used as a medium of exchange. Like more popular cryptocurrencies such as Bitcoin and Ethereum, Safemoon is powered by the distributed ledger technology known as blockchain. Safemoon was created on the Binance Smart Chain blockchain and has a market cap of only about $88.4 million (as of July 7, 2022), compared to about $396 billion for Bitcoin.

Safemoon was designed in a way to encourage long-term investment and discourage selling, but it has failed to catch on after its initial spike. It does this by charging sellers a 10 percent fee, with half of the fee going to Safemoon’s existing holders and the other half to be used in a liquidity pool, in an effort to better maintain price stability.

Blockchain security firm CertiK found during an audit of Safemoon that its owners acquire tokens created from the liquidity pool, giving them control over tokens created as part of the fee. CertiK flagged this as a major issue in its report and recommended Safemoon improve its security features.

Safemoon’s developers also manually reduce the amount of Safemoon in circulation regularly in an effort to reduce supply and increase the price. The price did soar shortly after being introduced in March, reaching an all-time high of $0.000014 on April 20, 2021, according to CoinMarketCap. It has since fallen nearly 99 percent from its peak.

Risks to consider

Like almost all cryptocurrencies, Safemoon is an extremely speculative asset with no intrinsic value. You should be prepared for the possibility of losing your entire investment if you choose to purchase Safemoon. Here are some other risks to consider.

• Volatility: Since it was introduced, the price of Safemoon has been extremely volatile, rising more than 20,000 percent before tumbling nearly 99 percent. Because most cryptocurrencies have no underlying value, your return is based on what you can sell it for to someone else.

• Regulation: Cryptocurrencies are quite new, and governments are just beginning to understand what they are and what their impact could be. China was forceful in its response, banning cryptocurrencies in 2021 due to the financial risks they pose and the speculative trading they created. Regulation could also come in the form of higher tax rates on cryptocurrency gains. Check out Bankrate’s cryptocurrency taxes guide to learn about basic tax rules for Bitcoin, Ethereum and more.

• Speculative bubble: While bubbles are more easily seen with hindsight, there are signs that cryptocurrencies were part of a speculative frenzy. The name Safemoon itself seems to have been chosen to capitalize on the current mania by conveying an asset that is both safe and “going to the moon,” rather than having a real underlying purpose. This should be a red flag to serious investors.

• Liquidity: For traders looking to get in or out of Safemoon quickly, the fact that the currency’s founders discourage selling through a 10 percent fee could make liquidity a challenge. Additionally, Safemoon doesn’t trade on the major crypto exchanges, but instead is bought and sold on Pancake Swap, which allows trading in many cryptocurrencies.

Bottom line

Safemoon is a cryptocurrency that was designed to encourage long-term investment and discourage selling, but it’s an extremely volatile asset that comes with a number of other risks too. Those who buy this kind of risky asset should be prepared to lose their entire investment.