Crypto Buyers Beware: 1 in 4 new tokens of any value is a scam
In just a little more than a decade, the crypto world has exploded from a single currency to millions of coins and assets, each promising a small stake in the next big thing. The challenge for anyone putting their money into the gold mine minefield is to separate the digital treasure from the digital economy’s many, many fraudulent penny stocks. A new study has put a number on just how widespread these junk funds have become: About a quarter of the new crypto tokens launched last year—with only those gaining any value at all—were clear, short-term downsides, fraudulent buyers within a week after release.
As part of its annual crime report released today, cryptocurrency tracking and blockchain analytics firm Chainalysis published a new study of so-called “pump-and-dump” scams involving crypto-tokens—blockchain-based digital assets that are, at least in theory , shares in some valuable company or project. In a pump-and-dump scam, the scammer “pumps” the price of an asset they hold, often with baseless hype, and then sells the entire inventory without warning. It causes the value to crash, thereby “dumping” the devalued asset on the brands they tricked into buying. In its research, Chainalysis focused on one particular type of pump-and-dump scheme, those carried out by the creator of a new token, rather than fraudsters manipulating an existing one for profit.
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“Looking at our blockchain data, we realized that the best way to contribute is to look at tokens created for the express purpose of pumping-and-dumping the liquidity provider,” says Kim Grauer, head of research at Chainalysis, using the term “liquidity provider” to mean the creator or issuer of a token. “There are millions of these symbols. How many are legitimate and how many are scams?”
The answer: quite a few of them are scams. Looking at several million crypto tokens created in 2022, Chainalysis found that only a tiny fraction of them, 9,902, ever convinced someone to buy them and thus gained any value. Of these, they found that a whopping 24 percent were brazen, short-term pump-and-dumps by the token’s creator, dumped during its first week on sale.
Perhaps even more shocking was the number of serial criminals in that world of token fraud. By tracking the profits of pump-and-dumps, Chainalysis followed the money to the crypto wallets of hundreds of serial fraudsters. They found that 445 individuals or organizations conducted more than one short-term pump-and-dump last year. Of these, 23 performed more than 10. A very busy pump-and-dump contractor had performed no fewer than 264.
Despite the prevalence of these one-week scams — and the amount of effort that some scammers appear to have put into carrying them out repeatedly — Chainalysis found that they weren’t particularly profitable. The total hit (or loss to the fraudsters’ victims) was just $30 million, just 0.5 percent of the $5.9 billion in total fraud revenue that Chainalysis measured for 2022. But the findings still highlight how thoroughly the cryptotoken world has been ruined by fraudsters of the most shameless kind.
Given that the average haul for pump-and-dumps measured by Chainalysis was just over $3,000, Grauer claims it’s a low-risk, low-reward scam, likely carried out by people in countries where a few thousand dollars go further than in the West . . “Maybe they live in a part of the world where there’s a lot of money,” says Grauer. “These are people who systemically withdraw small amounts of money whenever they can, and it has to be profitable for them, or they wouldn’t do it 264 times.”
Chainalysis began looking at pump-and-dumps in late 2021 when Dutch police began using their software tools to investigate a token-based scam that victimized some of the country’s citizens. (Chainalysis declined to disclose which token.) After that case, the company’s researchers decided to see if they could build a filter to detect and count pump-and-dumps more broadly. “We thought, ‘Let’s build it out. Let’s take this example and expand it,'” says Grauer.
The researchers eventually built a tool to scan blockchain data for any token sold by its creator or issuer within the first week of its release, peaking and then losing at least 90 percent of its value a day later. To further refine the filter, Chainalysis also integrated data from the Token Sniffer service, which looks at open-source tokens for signs of fraud, such as code elements designed to prevent quick sales of tokens on the decentralized exchanges where they are typically traded. The relatively strict definition means that the total number of pump-and-dump scams in 2022 was likely far higher than the roughly 10,000 string candles measured conservatively.
While Chainalysis was able to find many of the worst offenders in the fraud ecosystem, it did not try to find the real identities of the fraudsters. But Grauer says that in many cases the scams can easily be traced to accounts where their profits were paid out on centralized exchanges, many of which have know-your-customer requirements, and thus have identifying information they can hand over to law enforcement. That suggests a government agency could likely use Chainalysis’ findings to start subpoenaing exchanges and identify fraudsters — perhaps even the most prolific ones that Chainalysis has pinpointed.
But for now, Grauer says, it might be revealing enough just to see how awash in fraud the token economy really is, and exactly which fraudsters are the source of the problem. “With pumping and dumping, we can show: Here is the cohort of bad actors. Here they are, 445 of them, says Grauer. “We can identify them. We can see them. And it’s pretty powerful to see how many there are.”
