Uncovering Pump-and-Dump Schemes in the Cryptocurrency Market
As the popularity of cryptocurrencies continues to rise, so do the number of fraudulent schemes plaguing the market. According to a recent report by Chainalysis, almost a quarter (24%) of cryptocurrency tokens launched last year exhibited signs of a pump-and-dump fraud scheme.
Understanding Pump-and-Dump Schemes
In traditional finance, pump-and-dump schemes involve fraudsters artificially inflating the price of an asset they hold stocks in by promoting it to other investors. Once the price reaches a certain point, they sell their over-valued shares for a profit, causing the price to plummet. This deceptive practice has now made its way into the world of cryptocurrency.
The Rise of Pump-and-Dump Schemes in Crypto
Crypto tokens, which are tradeable digital assets built on another cryptocurrency’s blockchain, have become an attractive target for scammers due to the ease of launching new tokens and establishing artificially high prices. The anonymous nature of token creators also allows for repeat offenders to carry out multiple pump-and-dump schemes.
Chainalysis Report Findings
Chainalysis analyzed 1.1 million tokens launched on the Ethereum and BNB blockchains last year. The report revealed that virtually all of these tokens saw minimal activity following their launch. Of the tokens that did gain traction, 24% experienced a 90% price drop within the first week, indicating pump-and-dump scams.
The report also highlighted that some individuals were responsible for multiple scams, with the most prolific individual launching 264 suspect tokens in 2022. Despite the relatively small amount of $4.6 billion spent by investors on these suspected tokens, the creators were able to make $30 million in profits by selling off their holdings before the tokens’ value plummeted.
Protecting Investors from Fraud
As the cryptocurrency market continues to evolve, it is crucial for investors to remain vigilant and conduct thorough research before investing in any token. By staying informed and being aware of the risks associated with pump-and-dump schemes, investors can protect themselves from falling victim to fraudulent activities.
Overall, the prevalence of pump-and-dump schemes in the cryptocurrency market serves as a stark reminder of the importance of due diligence and caution when navigating this rapidly expanding industry.