Pump and dump schemes in traditional finance are quite simple: Holders of a tradable asset, such as stock in a company, will “heavily hype and promote the asset to other investors, often using misleading statements, causing the price to rise rapidly as new investors buy,” the Chainalysis team explains in a new report.
Chainalysis notes in a blog post that the holders will then “sell their overvalued shares at a profit, causing the price to plummet, leaving the newer investors stuck with a low-value asset.”
Unfortunately, pump and dump schemes “have also become common in the crypto world.”
Chainalysis points out that this is largely “due to the relative ease with which bad actors can launch a new token and establish an artificially high price and market capitalization for it “on paper” by seeding the initial trading volume and controlling the circulating supply.”
Additionally, teams “launching new projects and tokens can remain anonymous, which makes it possible for serial offenders to carry out multiple pump and dump schemes.”
As mentioned in the update, we can “see an example of what a typical crypto pump and dump scheme looks like on-chain … in Chainalysis Storyline, using an undisclosed token example.” The token bears “all the telltale signs of a pump and dump scheme, with the asset’s price dropping 90% in the first week of trading following the token creator dumping their holdings.”
In an example shared by Chainalysis, the firm noted that the creator “launched this token’s smart contract and funded a new liquidity pool for it on a popular decentralized exchange (DEX) in December 2021, after promoting the launch to crypto enthusiasts on social media.”
Hundreds of victims “bought the token on that DEX, allowing the price to rise quickly in a matter of hours.” However, within the same day of launch, the creator “sold off all of his tokens, leaving buyers holding the bag.” Overall, the fraudster “made just under $20,000.”
As noted in a report from Chainalysis:
“Of the 40,521 tokens launched in 2022 that gained sufficient traction to be worth analyzing, 9,902, or 24%, saw a price decline in the first week indicative of possible pump and dump activity.”
According to the report, it is possible, of course, that in some cases, teams involved with token launches “did their best to form a healthy offering, and the subsequent drop in price was simply due to market forces and challenges stemming from less established infrastructure for market creation in the digital asset space.”
While it’s impossible “to know the promotional strategy or intentions behind all 9,902 tokens, Chainalysis did check the 25 with the biggest first-week price drop on Token Sniffer, a service that scores new tokens on a scale of zero to 100 based on their trustworthiness and docks points for any scam-like characteristics.”
According to Token Sniffer, those 25 tokens “all scored zero, indicating that, according to Token Sniffer’s evaluation criteria, they were almost certainly designed for a pump and dump.”
Token Sniffer also “found that many of them contained malicious “honeypot” code that prevents new buyers from selling the token — one of the surest possible signs that the coin is part of a pump and dump scheme.”
In total, buyers “not believed to be associated with the tokens’ creators spent a total of $4.6 billion worth of cryptocurrency acquiring some of the 9,902 suspected pump and dump tokens we identified — a relatively trivial amount compared to the trillions in crypto transaction volume in 2022, but still a substantial amount of damage for unsuspecting investors.”
Chainalysis added:
“We estimate that the creators of these tokens made a total of $30 million in profits from selling off their holdings before the tokens’ value plummeted. In many cases, the same wallet provided initial liquidity for several tokens that fit our pump and dump criteria, or provided funding to the wallet that did, suggesting those wallets share common ownership.”
Using this methodology, they found “that 445 individuals or groups accounted for 24% of the 9,902 suspected pump and dump tokens launched in 2022.”
The most prolific suspected pump and dump token creator they identified “launched 264 tokens that fit [their] criteria in 2022.”
The report added:
“Pump and dump schemes are uniquely destructive in the cryptocurrency world due to the ease with which new tokens can be launched and the social media-driven nature of crypto investment news and discussion. Many believe that cryptocurrency is approaching an inflection point that could spark mass adoption, but that could be difficult if the general public perceives cryptocurrency as rife with pump and dump schemes designed to prey on newcomers. “