The ease of creating a new token — it can be done virtually cut-and-paste — is one reason they are so popular in crypto, Chainalysis said.
In its 2023 Crypto Crime Report, blockchain intelligence firm Chainalysis revealed that a staggering 1,105,239 tokens were launched last year.
Although "launched" may be a strong word, because if you weed out those that did not have more than 10 swaps and four consecutive trading days in their first week, that number drops to 40,521.
Which is still quite a lot.
However, 9,902 of those — nearly one quarter — saw a "90% price drop in the first week after launch" which suggests they may have been developed for pump and dump schemes, Chainalysis said.
Investors spent as much as $4.6 billion buying those nearly 10,000 tokens, the firm added. But scam promoters actually made a mere $30 million dumping their own holdings, it added.
That said, it's likely that "in some cases, teams involved with token launches did their best to form a healthy offering, and the subsequent drop in price was simply due to market forces or other challenges of the relatively new digital asset space," the company noted.
Pump and dumps are relatively simple schemes that have been around far longer than crypto. The basic version goes: a promoter heavily hypes and promotes a token (or stock, or some other asset) to drive up the price until enough people start buying it for the promoter to quickly sell all of his assets before the price crashes.
The ease of creating a new token — it can be done virtually cut-and-paste — is one reason they are so popular in crypto, Chainalysis said. Another is the "social media-driven nature of crypto investment news and discussion."
Small Number of Scammers
While that $4.6 billion is "relatively trivial" compared with the trillions of dollars in annual transaction volumes, it's still a lot of money lost. Especially considering how comparatively paltry the returns were.
Looking at 25 tokens with the biggest first-week price drop, Chainalysis found that all received a zero rating from Token Sniffer, a service that scores new tokens for trustworthiness, docking points from a possible 100 for "scam-like characteristics."
Among other things, it found that many "contained malicious "honeypot" code that prevents new buyers from selling the token — one of the surest possible signs that the coin is part of a pump and dump scheme."
When looking for wallets that provided initial liquidity for several tokens on its pump-and-dump list, Chainalysis found 445 that account for about one quarter of those almost 10,000 suspect tokens.
