Cryptocurrency investors spent an estimated $4.6 billion on tokens suspected of being part of “pump and dump” schemes in 2022, according to a report from blockchain analytics firm Chainalysis.
Pump and dump schemes typically involve the creators of a token orchestrating a campaign of misleading statements, hype, and Fear Of Missing Out (FOMO) to persuade investors into buying the tokens, while secretly selling their own stake in the scheme at inflated prices.
Chainalysis analyzed all tokens launched in 2022 on the BNB and Ethereum blockchains and found just over 9,900 bore characteristics of a pump and dump scheme. Of the 1.1 million new tokens launched last year, only over 40,500 fit the criteria of having a minimum of 10 swaps and four back-to-back days of trading on decentralized exchanges (DEXs) in the week after its launch.
If a token from this group saw a price decline in the first week of 90% or greater, Chainalysis deemed it likely the token was a pump and dump. The firm found that 24% of the 40,500 tokens analyzed fit the secondary criterion.
Chainalysis estimated that only 445 individuals or groups are behind the suspected pump-and-dump tokens — suggesting creators often launch multiple projects — and made $30 million in total profits from selling their holdings.
The most prolific purported pump and dump creator Chainalysis identified — who was not named — is suspected of single-handedly launching 264 such tokens last year. Teams launching new projects and tokens can remain anonymous, which makes it possible for serial offenders to carry out multiple pump and dump schemes.
Despite the concerning statistics, in a separate report, the firm noted revenues from crypto scams were cut almost half in 2022 largely due to depressed crypto prices.
Cryptocurrency scams remain a major issue for investors in the space, with the Chainalysis report being just the latest example of how prevalent pump and dump schemes are in the crypto industry.
The report highlights the need for investors to conduct proper research before investing in any cryptocurrency project. Investors need to be aware of the risks associated with investing in these projects, and should always be wary of any project that promises unrealistic returns.
It is also important for investors to be aware of the red flags associated with pump and dump schemes. These include sudden price spikes, a large number of new users joining the project, and a sudden increase in marketing activity.
Investors should also be aware of the potential consequences of participating in a pump and dump scheme. These schemes often involve the creators of the token manipulating the market in order to artificially inflate the price, which can result in investors losing money when the price eventually drops.
In addition, pump and dump schemes can be illegal in some jurisdictions. As such, it is important for investors to ensure they are aware of the applicable laws in their jurisdiction before investing in any cryptocurrency project.
Overall, the Chainalysis report provides a useful reminder to investors to be aware of the risks associated with investing in cryptocurrency projects. By conducting proper research, investors can ensure they are investing in legitimate projects and not falling victim to pump and dump schemes.
