Last year, despite a turbulent landscape in the crypto world, rug pulls continued to plague the market. According to a recent report by Chainalysis, more than half of Ethereum ERC-20 tokens listed on Decentralized Exchanges (DEXs) in 2023 met criteria indicative of potential pump and dump schemes.
What is a Pump and Dump Scheme?
In a pump and dump scenario, unscrupulous actors persuade investors to purchase a token before swiftly offloading a significant portion of the supply. This sudden sell-off causes the token's value to plummet, leaving unsuspecting investors with worthless assets. Often, scammers engage in wash trading, artificially inflating trading activity to create a false sense of demand and value.
Chainalysis identified a staggering 90,408 possible ERC-20 pump and dump schemes last year, resulting in $241.6 million in profit for the perpetrators. Surprisingly, the average profit per token dump amounted to a modest $2,672, highlighting the relatively low return for rug pullers.
Detection of “Rug Pull” Schemes
To detect pump and dump schemes, Chainalysis analyzed tokens that experienced at least five trades on DEXs before a single address withdrew over 70% of the liquidity, essentially depleting the token's market liquidity to less than $300. This left investors holding tokens they couldn't sell, indicating potential market manipulation.
It's important to note that while Chainalysis identified cases meeting these criteria, not every instance could be definitively proven as a pump and dump scheme.
Despite the relatively low individual profits, some manipulators proved to be prolific earners. Chainalysis uncovered one wallet orchestrating 81 possible pump and dump schemes, resulting in a staggering $830,000 in profit.
Regulator's Steps to Overcome the "Rug Pull" Scheme
Pump and dump schemes disproportionately harm retail investors and contribute to the negative perception surrounding cryptocurrencies. Regulatory bodies, such as the Securities and Exchange Commission (SEC), have taken action against perpetrators involved in these schemes. For instance, former New Jersey correctional officer John DeSalvo was convicted of fraud over a pump and dump scheme involving the Blazar token. DeSalvo's fraudulent activities, which lured investors with promises of a "crypto pension," resulted in significant financial losses for unsuspecting investors.
The prevalence of rug pulls underscores the need for heightened vigilance within the crypto community and regulatory oversight to protect investors from falling victim to such schemes. As the crypto market continues to evolve, stakeholders must work together to mitigate the risks associated with market manipulation and safeguard the integrity of the ecosystem.
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DISCLAIMER: This article is informational and does not constitute an offer or solicitation to sell or buy any crypto assets. Trading cryptocurrencies is a high-risk activity. Cryptocurrency prices are volatile, in that prices can change significantly over time and Bittime is not responsible for changes in fluctuations in cryptocurrency exchange rates.
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