New Crypto Tokens Commonly Used in Pump and Dump Scams: Report

Crypto may be a 21st century phenomenon, but it seems scammers are involving it in some ancient tricks to reap a profit.

Nearly a quarter of new cryptocurrencies launched on the Ethereum and BNB blockchains last year and evaluated in a new study had the hallmarks of artificially inflated assets. Blockchain analytics firm Chainalysis identified more than 9,000 tokens that appeared to have the features of a classic “pump and dump” scheme – a form of fraud in which holders of a tradable asset, such as stocks or crypto, use misleading information to increase the cost of the asset before they sell their stake.

When the original owners dump their holdings, the value of that asset declines, leaving the new buyers with an investment that is dramatically devalued or perhaps even worthless.

What the data says

• In a study of the 1.1 million tokens created in 2022, Chainalysis found that 40,521 had received enough trading action on the crypto market to be evaluated. Of these tokens, about 1 in 4 (9,902) saw a devaluation of at least 90% in the first week, a red flag indicating a pump and dump scheme.

• This proportion of tokens may not seem significant compared to the overall picture, but Chainalysis found pump and dump victims spent $4.6 billion in crypto after buying from that pool of 9,902 suspicious tokens.

• Those token creators walked away with an estimated $30 million in profits after selling their holdings, according to the report. Chainalysis also found that many of the suspicious tokens involved in apparent pump and dump schemes had common ownership.

• Chainalysis says that while it’s impossible to say for sure whether the more than 9,000 coins identified were scams, a service called Token Sniffer supported the firm’s analysis. The Token Sniffer scores new tokens on a scale of zero to 100 to determine if they have any red flags. Of the 25 tokens with the biggest price drops analyzed in the Chainalysis study, Token Sniffer scored them all at zero (meaning they were very suspicious), and many contained malicious coding that prevents new investors from selling.

Crypto, social media and fraud

• As a new form of investment, crypto allows bad actors to more easily get away with fraud, according to Chainalysis. The firm says it is relatively easy to launch a new token and influence its price by inflating the initial trading volume and controlling the token’s supply – all anonymously.

• “Pump and dump schemes are uniquely destructive in the cryptocurrency world due to the ease with which new tokens can be launched and the social media-driven nature of crypto investment news and discussions,” the report said.