In a recent study that Chainalysis published, an alarming revelation came to light, showing the practice of pump-and-dump schemes in cryptocurrencies. The movement becomes remarkably profitable for scammers, accumulating a sum of US$241 million. This type of scheme, which involves artificially inflating the price of a digital asset and then selling it at a much higher price, has significantly affected the ERC20 token market on Ethereum throughout 2023.
Ki Young Ju, founder and CEO of CryptoQuant, a renowned cryptocurrency analysis platform, extracted crucial data from the Chainalysis report, pointing out that 90,408 tokens participated in such fraudulent activities. This method of market manipulation is characterized by the exaggerated promotion of a digital asset followed by a massive sale at inflated prices. Therefore, it is considered a manipulative and illegal practice, as defined by the US Securities and Exchange Commission (SEC).
To identify manipulation, the analysis focused on tokens that were traded at least five times on decentralized exchanges (DEXs), suggesting artificial demand. Furthermore, it was observed that those responsible for the scheme removed more than 70% of the tokens’ liquidity, leaving less than US$300 in the DEXs’ liquidity pool, which resulted in the collapse of the market value of these tokens.
Scammers made $241M through a pump-and-dump scheme with 90,408 tokens on Ethereum network in 2023.
— Ki Young Ju (@ki_young_ju) February 2, 2024
Analysis focuses on ERC20 tokens on Ethereum to identify fraud
The Chainalysis study also highlighted the impressive volume of tokens launched on the Ethereum blockchain. There were more than 370 thousand tokens included, of which around 168,600 were available for trading on DEXs. However, deeper analysis revealed that 54% of these tokens available on DEXs fit the criteria that suggest the possibility of being involved in pump-and-dump schemes.
This practice not only harms investors with little knowledge, who are attracted to investing in overvalued assets. It also raises concerns about the integrity and stability of the cryptocurrency market. Spreading false or misleading information creates a buying frenzy. And so a mass sale by the scheme’s organizers ensues, leaving many investors with significant losses.
As the cryptocurrency market continues to evolve, detecting and preventing fraudulent schemes becomes essential. In this way, they protect investors to maintain trust in the digital ecosystem. This report serves as a critical reminder for investors to conduct in-depth research and exercise caution before engaging in digital asset investments.
The views and opinions expressed by the author, or anyone mentioned in this article, are for informational purposes only and do not constitute financial, investment or other advice. Investing in or trading cryptocurrencies carries a risk of financial loss.