An Investigation Finds nearly a Quarter of Fraudulent New Cryptos

A new analysis from blockchain intelligence group Chainalysis indicates that almost a quarter of the new cryptocurrencies launched in 2022 displayed characteristics of "pump and dumps" which are a form of fraud.

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Pump and dump tactics have a long history in the stock market, where they are considered to be a form of securities fraud. The investors who hold stock will promote it in order to pump up the price, and then dump it at inflated levels on unsuspecting investors who will buy into the hype before it all comes crashing down on them.

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“The crypto world has also become familiar with pump-and-dump schemes,” according to analysts at Chainalysis. “For those who follow crypto markets closely, this shouldn't be a surprise.”

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“By seeding the initial trade volume and controlling the circulating supply, bad actors are able to establish artificially high token prices and market capitalizations ’on paper,” the Chainalysis analysts explained. Cryptocurrency allows people launching projects to remain anonymous, which can facilitate serial offenders committing crimes.

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The number of tokens launched last year was more than 1.1 million, according to Chainalysis. However, the vast majority of them did not make it, with less than 41,000 categorized as having an impact on the crypto ecosystem, based on exchange activity. In the first week of trading, almost 10,000 of the tokens that meet the definition experienced a price decline of more than 90 percent, which, in the analysts' words, was indicative of a possible pump-and-dump. 

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As it happens, these tokens could have easily fallen flat if they weren't making an impact on the crypto ecosystem, as defined by Chainalysis. However, it appears that the fact that these tokens had an impact on the crypto ecosystem indicates that there could have been real momentum behind the price going up, even if major holders didn't sell their holdings.

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In accordance with Chainalysis' research, it was determined that unsuspecting investors spent around $4.6 billion in cryptocurrency to acquire tokens in the highlighted pump-and-dump schemes, while the creators of tokens that were dumped made $30 million. 264 such likely frauds were attributed to one prolific suspect who pumped and dumped, according to Chainalysis.

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In an industry replete with high-profile fraud charges this year, including FTX and Celsius, this latest research on crypto schemes does little to inspire confidence.

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Washington, D.C.-based Crypto Council for Innovation conducted a national poll late last year that found more than 50% of crypto holders want action against scams.

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Cory Gardner, the group's chief strategist of political affairs, said in a statement after the poll was released that Congress is key to ensuring clarity and consistency. Having served in both the House of Representatives and the Senate as a Republican, Gardner is a former Congressman.

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Cryptocurrencies face a number of existential threats at the moment, including gathering storm clouds amid ongoing scrutiny by the U.S. regulatory authorities, but it is investor confidence that is key to the future of the industry. Unless cryptocurrency can be perceived by ordinary retail investors as a stable, legitimate asset class - similar to stocks or bonds, or real estate - the cryptocurrency industry will have difficulty recovering from its current problems.

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“There is a growing belief that cryptocurrency is approaching an inflection point that could spark mass adoption. However, this could be difficult if the general public perceives cryptocurrency as a medium for pump-and-dump schemes designed to prey on newcomers,” the Chainalysis analysts said.