Experts believe that pump and dump schemes come under the financial fraud category, where tradeable asset holders use tactics to deceive other investors. Once the value of the asset reaches a profitable level, the holders sell off their holdings causing the price to fall, as reported by Chainalysis.
According to Chainalysis, pump and dump is an investment scam where the frauder buys an inexpensive coin by market capitalisation, promotes it, and then sells it once the price rises. Insights from the platform stated that over 1.1 million tokens were launched in 2022, the majority of which got no traction, in terms of decentralised exchanges (DEXs). Their criterion was to count tokens that achieved around ten swaps and four consecutive days of trading in the week after their launch. With that criteria in place, the number of new tokens fell from 1.1 million to 40,521. Their next parameter involved identifying a 90% price decline or more in the first week of trading, which could suggest the token’s originators and earliest holders dumped the token quickly. Token Sniffer highlighted that 25 tokens all scored zero, indicating that they were ready for a pump and dump. Token Sniffer discovered that many of them contained malicious “honeypot” code to restrict buyers from selling tokens.
On the basis of information by Chainalysis, buyers not believed to be associated with the tokens’ creators spent nearly $4.6 billion worth of cryptocurrency, receiving around 9,902 suspected pump and dump tokens. Estimates have shown that token creators clocked $30 million worth profits from selling off their holdings before the tokens’ value decreased.
Moreover, Chainalysis noted that the same wallet provided initial liquidity for several tokens that allegedly fit the pump and dump criteria, suggesting those wallets share common ownership. Using this methodology, it was found that 445 individuals or groups constituted around 24% of the 9,902 suspected pump and dump tokens launched in 2022. Reportedly, the most prolific suspected pump and dump token creator identified released 264 tokens in 2022.
(With insights from Chainalysis)