Twenty-four per cent of tokens created in 2022 share on chain characteristics of pump and dump schemes were scams according to Chainalysis.
In traditional finance, pump-and-dump schemes occur when holders of a tradable asset, such as stock in a company, heavily hype and promote the asset to other investors, causing the price to rise rapidly as new investors buy.
This would then allow the holders to sell their overvalued shares at a profit, causing the price to plummet, and leaving the newer investors stuck with a low-value asset.
The firm noted that pump-and-dump schemes had become common in the crypto world. It stated that this was largely due to the relative ease with which bad actors could launch a new token and establish an artificially high price and market capitalisation for it.
It explained that while more than 1.1 million tokens were launched in 2022, most got virtually no traction.
The blockchain insight firm said, “In total, buyers not believed to be associated with the tokens’ creators spent a total of $4.6bn 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.
“We estimate that the creators of these tokens made a total of $30m 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, we found that 445 individuals or groups accounted for 24 per cent of the 9,902 suspected pump and dump tokens launched in 2022.”
Chainalysis stated that pump and dump schemes were destructive in the cryptocurrency world due to the ease with which new tokens could be launched and the social media-driven nature of crypto investment news and discussion.
It added that while crypto might be at an inflection point which could spark mass adoption, these schemes would make it difficult for the public to perceive crypto as a credible store of value.
