Crypto Scammers: Behind Scenes Of Pump-And-Dump Schemes

Crypto Scammers: Behind Scenes Of Pump-And-Dump Schemes
Crypto Scammers: Behind Scenes Of Pump-And-Dump Schemes

While cryptocurrency has revolutionized the way we think about finance, it’s also given rise to a new form of fraud, known as pump-and-dump schemes. 


According to the experts behind the Kyros AML compliance software, these scams boil down to artificially inflating the price of a cryptocurrency and then quickly selling it for a profit. In 2022 alone, these schemes generated a staggering $4.6 billion in investments. What is even more surprising is the fact that these scams are often executed using a simple 5-step playbook, with only two steps dedicated to the actual pumping and dumping process.


This article delves into the inner workings of pump-and-dump schemes, revealing how they work and the devastating impact they could have on unsuspecting investors.


1. The Launch 


The first step in the playbook involves the launch of the token contract. In other words, scammers create a contract, usually for a new and unknown token. Since these tokens are newcomers to the crypto scene, they have little to no value at the beginning. This leads us directly to step two – increasing liquidity.


2. Liquidity Increase


The second step is centered around increasing a token’s liquidity on the market. This is the moment that scammers create a sense of legitimacy around the token and draw in the majority of unsuspecting investors. There are a number of ways to go about this step, but the most common ones are:


  • increasing token supply – scammers create more tokens and release them on the market, thus increasing the overall supply. If done correctly, such actions will attract more buyers.

  • allowing trading on DEXes – decentralized exchanges (DEXes) are platforms that allow users to trade cryptocurrencies without intermediaries. By allowing trading on DEXes, scammers draw up the illusion of demand, thus making the token appear more valuable.

  • creating fake trades – scammers may construct fake buy and sell orders to make the token appear more popular than it is. Such actions could in turn convince unsuspecting buyers to invest in the token, ultimately driving up its price.


3. Pump


Now that a token’s liquidity has (allegedly) increased, we’ve come to the third step in the playbook – pumping. During this stage, scammers hype up the token in hopes of increasing its value.


The most common way to go about this is to use fake social media accounts to create buzz around the token. Scammers may also partner up with influencers to create a sense of legitimacy and transparency around the entire endeavor. Finally, to provide an added illusion of legitimacy, they may create fake partnerships with other companies.


In sum, all these tactics are aimed at luring in investors, convincing them to buy the token, which will then be shilled to other potential victims, perpetuating the scam.


4. Liquidity Decrease 


The fourth step is the one that experts would argue is pivotal for the scam’s success. During this stage, scammers will resort to several different tactics to decrease a token’s liquidity on the market. In most cases, they will aim to reduce the supply and prevent further trading on DEXes.


This creates an illusion of scarcity, which then leads to an increase in demand and in price. The hope is to attract more buyers, ideally, ones willing to purchase the token at a higher price. However, this is only a temporary situation, as the next and final step is the dump – the point where the scammers cash out their profits, leaving investors with nothing but worthless tokens.


5. Dump


Once the price of a token becomes high enough, scammers will sell it off and convert the profits into stablecoins, such as USDC, USDT, or DAI, native tokens like ETH or BNB, or bridged cryptos.


As a result of this massive and sudden sell-off, the token naturally loses its value, leaving people with nothing more than a worthless investment.


To prevent new buyers from reselling the token right away, pump-and-dump scammers resort to using “honey pot” codes. Simply put, these types of code lock in the buyers’ funds for a certain period, preventing them from selling the token during the pump-and-dump process.


In 2022 alone, over 1.1 million pump-and-dump tokens were launched. A staggering 96% of them didn’t last more than four days on the market, with only 3.6% surviving past the fourth day. Out of the 40k pump-and-dump tokens that survived to see Day Five, around 9.9k generated $4.6 billion, specifically $460,000 per scam project.