Preheat oven to 350 degrees F (175 degrees C). Grease two 12-cup muffin tins or line cups with paper liners.
Combine cake mix, water, eggs, and oil in a bowl. Stir to moisten; beat with an electric mixer on low speed for 2 minutes. Pour into prepared muffin cups.
Bake cupcakes in the preheated oven until lightly golden, 16 to 20 minutes.
Divide coconut into 3 equal portions. Place 2 portions into separate resealable plastic bags; place remaining portion on a plate. Add blue food coloring to one bag and red food coloring to the other; seal bags and shake until coconut is evenly colored. Pour colored coconut onto separate plates.
Remove paper liners from cupcakes; frost tops and sides. Press each cupcake gently into the 3 plates of coconut, completely coating all sides. Draw a star shape on top using the decorating gel. Make a hole in the center of the star with a toothpick; insert a licorice piece "fuse."