Over 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 share in the next big thing. The challenge for anyone putting their money into that minefield-posing-as-a-goldmine is to distinguish digital treasure from the many, many scam-ridden penny stocks of the digital economy. A new study has put a number to just how prevalent those garbage assets have become: About a quarter of the new crypto tokens launched last year—counting only those that gained any value at all—were clear-cut, short-term cons, scamming buyers within a week of their release.
In a portion of its annual crime report released today, cryptocurrency tracing and blockchain analysis firm Chainalysis published a new study of so-called “pump-and-dump” scams that involve 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 their entire holding without warning. That causes the value to crash, thus “dumping” the devalued asset on the marks they tricked into buying in. In its research, Chainalysis focused on one particular form of pump-and-dump schemes, those carried out by the creator of a new token, rather than scammers who manipulate a preexisting one for profit.
“Looking at our blockchain data, we realized the best way we could contribute is by looking at tokens created for the express purpose of a pump-and-dump by 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 tokens. How many are legitimate, and how many are scams?”
The answer: a whole lot of them are scams. Looking across the million-plus crypto tokens created in 2022, Chainalysis found that only a tiny fraction of them, 9,902, ever convinced anyone to buy them and thus gained any value. Of those, they found that fully 24 percent were brazen, short-term pump-and-dumps perpetrated by the token's creator, dumped within their first week on sale.
Even more shocking, perhaps, was the number of serial offenders in that world of token scams. By tracing the profits of pump-and-dumps, Chainalysis followed the money to the crypto wallets of hundreds of serial scammers. They found that 445 individuals or organizations pulled off more than one short-term pump-and-dump last year. Of those, 23 carried out more than 10. One very busy pump-and-dump entrepreneur had carried out no fewer than 264.
Despite the prevalence of those one-week scams—and the amount of effort some scammers appear to have put into carrying them out repeatedly—Chainalysis found that they weren't particularly profitable. The total haul (or loss, for the scammers' victims) was just $30 million, a mere 0.5 percent of the $5.9 billion in total scam revenue that Chainalysis measured for 2022. But the findings nonetheless highlight just how thoroughly the crypto token world has been corrupted by scammers of the most shameless sort.
Given that the average haul for pump-and-dumps that Chainalysis measured was just over $3,000, Grauer argues it's a low-risk, low-reward scam, likely carried out by people in countries where a few thousand dollars goes further than in the West. “Maybe they live in a part of the world where that’s a lot of money,” Grauer says. “These are people systemically extracting small amounts of money when they can, and it must 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 started using its software tools to investigate a token-based scam that victimized some of the country's citizens. (Chainalysis declined to reveal which token.) After that case, the company's researchers decided to see if they could build a filter to spot and count pump-and-dumps more broadly. “We thought, ‘Let’s build that out. Let’s take this boilerplate example and expand it,’” Grauer says.
The researchers ultimately built a tool to scan blockchain data for any token that was sold off by its creator or issuer within the first week after its release, hitting its peak and then losing at least 90 percent of its value by a day later. To further hone its filter, Chainalysis also integrated data from the service Token Sniffer, which looks at the open-source code of tokens to check for signs of scams, like code elements designed to prevent the quick sale of tokens on the decentralized exchanges where they're typically traded. That relatively strict definition means the total number of pump-and-dump scams in 2022 was likely far higher than the roughly 10,000 Chainalysis conservatively measured.
While Chainalysis was able to pinpoint many of the worst culprits in that scam ecosystem, it didn't try to find those scammers' real-world identities. But Grauer says in many cases the scams could be easily traced to accounts where their profits were cashed out on centralized exchanges, many of which have know-your-customer requirements, and thus possess identifying information they could hand over to law enforcement. That suggests a government agency could probably use Chainalysis' findings to start sending subpoenas to exchanges and identifying scammers—perhaps even the most prolific ones that Chainalysis has pointed to.
But for now, Grauer says, it's perhaps revealing enough just to see how awash in scams the token economy truly is, and exactly which con artists are the source of the problem. “With pumping and dumping, we can show: Here’s the cohort of bad actors. Here they are, 445 of them,” Grauer says. “We can identify them. We can see them. And it’s quite powerful to see how many there are.”
