Almost 24% (or 9902) of short-listed crypto coins contained relevant markers for pump-and-dump schemes

Pump and dump schemes are basically a type of financial fraud that involves artificially inflating the price of an asset, through misleading or false information, before selling the asset at a profit when the price reaches a high point. In the context of cryptocurrencies, pump-and-dump schemes typically involve a group of individuals who collaborate to buy up a particular cryptocurrency in large quantities, thereby driving its price.

They then use various methods, such as social media posts, chat rooms, and online forums, to spread false or misleading information about the cryptocurrency, such as exaggerated claims about its future potential or adoption. This misinformation (or pumping) can help to generate hype around the cryptocurrency, which in turn attracts more buyers and further drives up the price.

Once the price of the cryptocurrency has reached a certain level, the group will start selling off their holdings in large quantities, causing the price to crash (dumping). This leaves other investors, who may have been misled by the false information, holding a worthless or near-worthless asset, while the pump-and-dump group makes a profit. Now that you know how the scam works, let’s look at some of the previous year’s data to see how much of a problem this is in the Cryptoverse. 

According to the data by Chainalysis, there were some 1.1 million tokens launched in 2022. But they didn’t take all of them into consideration when conducting this analysis — only the ones, which gained some traction in the crypto ecosystem. Their criterion was to count tokens that achieved a minimum of ten swaps and four consecutive days of trading in the week following their launch. The most prolific suspected pump-and-dump token creator identified launched 264 tokens that fit their criteria in 2022 (above).

With that criterion in place, the number of new tokens falls from 1.1 million to 40,521 (3.7% of the total). Their next criterion involved identifying a steep price drop of 90% or more during the first week of trading, which may indicate that the token’s creators and initial holders sold off the token rapidly, thus serving as a rigorous measure to evaluate a token’s potential as a pump and dump scheme. Out of the 40,521 tokens launched in 2022, 9,902, or 24% that got traction (0.9% of the total), experienced a price drop in the first week that suggested possible pump-and-dump activity.

Although it was next to impossible to discern the marketing strategy or motives behind all 9,902 tokens, Chainalysis reviewed the 25 tokens that experienced the largest price drop during the first week on Token Sniffer — a service that ranks new tokens on a scale of zero to 100, evaluating their trustworthiness and penalizing them for exhibiting scam-like characteristics.

The evaluation revealed that all 25 tokens scored zero, implying that according to Token Sniffer’s assessment criteria, they were likely intended for a pump-and-dump scheme. Token Sniffer also detected malicious “honeypot” code in several of these tokens, which prevents new buyers from selling the token, representing one of the clearest indications that the coin is associated with a pump-and-dump scam.

A total of $4.6 billion worth of cryptocurrency was spent by buyers not associated with the creators of the 9,902 suspected pump-and-dump tokens that were identified. Although this amount is relatively insignificant compared to the trillions in crypto transaction volume in 2022, it still inflicted a considerable amount of damage on unsuspecting investors. The creators of these tokens made an estimated $30 million in profits by selling off their holdings before the value of the tokens dropped.

Chainalysis indicates that in many instances, the same wallet provided initial liquidity for multiple tokens that met their pump-and-dump criteria or supplied funding to the wallet, implying shared ownership of these wallets. Using this approach, they identified 445 individuals or groups who accounted for 24% of the 9,902 suspected pump-and-dump tokens launched in 2022.

As with any investment, it is essential to do thorough research and exercise caution before investing in any cryptocurrency or other asset. Investors should also be aware of red flags such as promises of guaranteed returns, unsolicited investment opportunities, and pressure to invest quickly. If digital assets are to move toward mass adoption, they will need to move past this public perception about the majority of cryptos being pump-and-dump schemes.

Originally Published on Medium

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