How to spot a Pump-and-Dump cryptocurrency scam


The cryptocurrency market is extremely sensitive to common pump-and-dump scams. Since many rules are unclear and difficult for regulators to enforce, lightly traded cryptocurrencies are prime targets for crooks and other nefarious players.

Understanding how a pump-and-dump scam works, why the cryptocurrency market is particularly sensitive, and how to identify a pump-and-dump scam will help you avoid getting caught up in these schemes.

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What is a pump and dump scam?

Pump and dump scams have been around since the conception of a securities market. The idea is that a person or a group of people buy a lightly traded asset such as a penny stock when its price is low.

They then begin to broadcast positive news about the asset. Most often, this positive news is completely made up.

As more and more investors invest in the asset, the price continues to rise. Once the price is fully “pumped”, the scam artist sells his stake to buyers who still arrive. As they own a substantial percentage of the shares outstanding, the price collapses.

Pumping and dumping systems are a form of fraud. The initiators of the scheme plan to take money from innocent investors by encouraging them to buy an asset based on false information. When these investors buy, the pumper sells, which lowers the price. The result is big gains for the scammer and losses for all who have been swindled.

There are a number of laws that make this illegal in the securities market. The Securities Act of 1933 specifically states that it is criminal “to obtain money or property by means of any misrepresentation of material fact or failure to state material fact”. You can find similar language in the Securities Exchange Act of 1934. A pump-and-dump can also be considered electronic fraud, as fraudsters typically use communication methods such as email, direct messaging, platforms. social media or direct phone calls to pump up the Stock.

One way to avoid a pump-and-dump system is to focus on stocks traded on a well-known stock exchange like the New York Stock Exchange or the Nasdaq. These exchanges have strict listing requirements that do not allow stocks that are most susceptible to pump-and-dump scams. In the cryptocurrency market, stick to well-known and widely adopted cryptocurrencies such as Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) and well-known exchanges like Coinbase (NASDAQ: COIN) and Binance should keep you out of trouble.

OTC stocks are more likely targets for fraudsters. In the movie “The Wolf of Wall Street,” based on the activities of brokerage firm Stratton Oakmont, brokers focused on stocks traded with pink leaves. Pink leaves have no reporting or registration requirements, making them vulnerable to patterns like pumping and dumping.

Understanding cryptographic pumps and dumps

The crypto industry remains the Wild West. There are dozens of exchanges and it is relatively easy to issue a new cryptocurrency. Hence, this is fertile ground for lightly traded currencies and scammers who can pump and dump these assets.

Typically, a pump-and-dump crypto system begins with an organizer bringing together influencers into a private online group. They will coordinate the purchase of the target crypto asset to avoid price spikes. Once they’re ready to pump the asset and win over the general public, influencers will share trade insights with their followers on social media. The organizers will then coordinate the sale, for example the landfill, in order to make everyone pay, leaving the public investors to hold the bag.

What makes crypto particularly susceptible to this ploy is that organizers don’t have to look very hard for lightly traded crypto assets. They can just create them. The barrier to entry to creating a new cryptocurrency is just a little coding research and knowledge.

Additionally, newly formed cryptocurrencies are largely unregulated. A person or group can create a token and make senseless claims about its use, and they are unlikely to suffer repercussions when those claims turn out to be nothing but false promises.

For example, several members of FaZe Clan, an esports and influencer group, promoted a new cryptocurrency called SaveTheKids in the summer of 2021. The coin promised to help children around the world, but it turned out to be just a scam. Organizers and influencers made tens of thousands of dollars and their followers ended up with a worthless crypto token. Needless to say, no child was helped.

How to spot a pump-and-dump crypto scam

It is easy to identify a crypto scam by pumping and dumping after the fact. But it doesn’t do a lot of good for cryptocurrency investors when the stack is drawn and they end up with the bag. Knowing the signs of a potential scam before it happens is beneficial for investors.

The first step to avoiding a pump and dump scam is to do your research. If you see a relatively unknown cryptocurrency presented by strangers on the internet, don’t rush to get in. Look for the token, find its white paper, and read it. Determine who is behind it and what the goals are. You should do this for any cryptocurrency to determine if there is any long-term potential for it to rise in value.

If the token has been around for a while but the development of the project seems to have disappeared, it is better to avoid it. If the project does not have a clear objective, if it has advantages that seem unrealistic, if its development roadmap is not well thought out or if it is associated with bad previous actors, these are all alarm signals as well.

If you don’t generally follow influencers in finance, especially cryptocurrency experts, but all of a sudden the people you follow are talking about a cryptocurrency, that’s another big flag. Red. Ask yourself why this fashion influencer you follow is talking about cryptocurrency.

If you discover a potential crypto investment on social media, it is best to check if the project has its own website and social media presence. Go straight to the source instead of relying on third-party information.

If you can’t find any red flags in the documentation or in the way the investment is promoted, take a look at the way cryptocurrency trades. If it’s on a well-regarded stock exchange, it’s more likely to be a safer investment. If you have to dig into an unfamiliar DeFi exchange, you’ll want to dig deeper into the backlog.

Most exchanges will show you all open orders for an asset, along with the order history. Check the trend on trading volume. If it has increased recently and the volume seems to be tending to increase, be careful. If you see large walls of the crypto asset on the buy side, it is possible that a large group is making sure that the price of the coin does not fall below that price. Likewise, you can see large walls of vendors to make sure the price doesn’t go up too quickly as the organizers pile up around the room.

If you suspect that a cryptocurrency is the subject of a pump-and-dump scam, it is best to avoid it. It is impossible to know without inside information when the organizers are planning to sell. If you have inside information, however, you are probably better off contacting the Commodity Futures Trading Commission (CFTC) and providing them with the information.

The CFTC issued an advisory in late 2019 warning investors of potential pump and dump scams. It offers bonuses to all whistleblowers. This means that you don’t have to do anything illegal and could earn more money by being an informant.

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