Cryptocurrencies have long been a breeding ground for scams, and the notorious “pump and dump” scheme remains one of the most prevalent. According to a new report by the analytics firm Chainalysis, 24% of tokens released in 2022 may have been involved in such schemes, which aim to quickly boost the value of an asset and then sell it off for a quick profit.

What is a “Pump and Dump” Scheme?

A “pump and dump” scheme is a fraudulent practice that involves promoting a particular asset to unsuspecting investors, often using misleading information, to inflate its price rapidly. Once the price has been artificially inflated, the scammer sells off their holdings, leaving other investors holding an overvalued asset that quickly loses its value.

This type of activity is not exclusive to the crypto market and is also common in traditional finance. However, the crypto market is particularly susceptible to these schemes due to the ease with which new tokens can be launched, often by anonymous teams, providing ample opportunities for fraudsters to promote pump and dump schemes.

Chainalysis Report Details Pump and Dump Fraud

In a new report published on February 16th, Chainalysis outlined a case study of a project that was promoted in this way. In December 2021, a scammer used social media to promote a project, which they launched a short time later. The individual launched a smart contract for the token, funding a new liquidity pool for it on a popular decentralized exchange (DEX).

The scammer was able to quickly boost the price of the token within hours, with hundreds of victims buying in. However, on the same day of the token’s launch, the creator sold off all their tokens, leaving buyers with a worthless asset. The fraudster reportedly made a profit of about US$20,000 (R$104,000) from this scheme.

In its report, Chainalysis analyzed all tokens launched on the Ethereum and BNB blockchains in 2022, identifying 9,902 projects with a pump and dump scheme out of 40,521 tokens released last year. These 9,902 projects saw a price drop of 90% or more in the first week of trading, suggesting that the creators sold off their assets quickly.

Using Token Sniffer, which scores new tokens based on their trustworthiness, Chainalysis analyzed the 25 projects with the biggest price drops in the first week. All 25 tokens scored zero, indicating they were almost certainly designed for pump and dump schemes. Token Sniffer also found that many of these tokens contained malicious “honeypot” code that prevented new buyers from selling the token, which is a telltale sign of a pump and dump scheme.

The report suggests that 445 individuals or groups represented 24% of the 9,902 suspicious projects, with these creators estimated to have made a total of $30 million (R$157 million) in profits from these schemes.

Concluding Thoughts

While $4.6 billion in cryptocurrency spent on these suspect tokens may seem like a small figure compared to the overall transaction volume in 2022, it is still a substantial amount of damage to unsuspecting investors. Chainalysis’ report highlights the need for greater regulation and transparency in the crypto market, and for investors to exercise caution and research any project before investing in it. By understanding the risks of pump and dump schemes, investors can protect themselves from falling victim to these fraudulent activities.