Crypto Pump-and-Dumps are becoming more commonplace as cryptocurrency continues to rise in popularity, especially in unregulated exchanges.
Pump-and-dump schemes have existed in traditional finance for years, but due to the anonymity provided to users and the geographical dispersion of users and the fragmented cryptocurrency industry, crypto pump-and-dump schemes are easier than ever to perpetrate.
Essentially, a pump-and-dump is the practice of artificially boosting the price of a coin with no actual value (the pump), only to sell the coin at an inflated price (the dump) right before it crashes. People who participate in pump-and-dump usually are dishonest and trick newer investors into believing they are investing in a profitable investment, while they are profiting at the expense of these newer investors.
What are the Legal Consequences of Pump-and-Dump Schemes?
All of the regulatory authorities, including the U.S. Securities and Exchange Commission (SEC), U.K. Financial Services Authority (FSA), the E.U. Market Abuse Regulation (MAR) and the Indian Central Bank view Pump-and-Dump schemes as illegal.
There are two main reasons explained below that support this view:
1. Market manipulation
Pump-and-Dump fraudsters engage in coordinated buying or entice others to buy to create the illusion of a true market demand for the asset being sold.
2. Dissemination of Incorrect Information
Through the use of misleading information, fraudulent actors attempt to entice investors with promises of high returns based on false information; scammers will often create misleading advertising statements and use them to mislead their target audience into thinking that something has good potential for appreciation in future value or that there are imminent events that would be of interest to them as investors.
3. Loss of Market Integrity
“Pump-and-dump” methods frustrate retail investors and interfere with fair trading systems while causing a decrease in confidence in the integrity of financial markets. As a result, the loss of confidence in the integrity of the marketplace has resulted in regulatory agencies implementing very harsh sanctions against those responsible for “pump-and-dump,” including civil fines, asset forfeiture, suspension of trading, and, in some cases, imprisonment.
How Do Pump and Dump Schemes Operate?
Generally, the targeted businesses are microcap coins, newly issued tokens, or cryptocurrencies that are characterized by minimal liquidity. The flow of funds typically follows a predictable pattern:
1. Selecting a Coin With Low Trading Volume (Pricing)
Scammers will select a coin that is priced low but has very low trading volume. The majority of these tokens can easily be controlled and manipulated by the scammer due to the fact that even small amounts being purchased will impact the price greatly.
2. Scammed Buyers Pumping Coin
After accumulating a large amount of coins, scam artists begin to do a huge amount of marketing online to generate interest in their new coin. At this point, scammers promote their new projects via all forms of social media, including:
• Facebook & Twitter
• Telegram Groups
• Created Fake “Exerts” Endorsements
• Bulk Emailing
• Misleading Press Release
The goal of these promotions is to mislead the public into thinking that their new coin will “explode”, which will drive investors to start purchasing it without realizing the truth.
3. Price Increase/Fake Demand for Currency
With the increase in excitement about the project, more and more people will become interested in purchasing the currency. In turn, the currency’s price will continue to gain significant increases in value over a short period of time (compared to actual/legitimate demand).
The nature of cryptocurrencies creates a climate where scams like pump and dumps can happen more easily. This is because:
- There are no comprehensive legal/regulatory rules governing the industry
- Many anonymous and untraceable users trade
- Tokens can be created by anyone at any time with no restrictions
- News moves very quickly on social networks
- Most Crypto (Altcoins) do not have a very high volume of trades (low liquidity)
These factors make it simple for fraudsters and manipulators to act without the scrutiny associated with a stock market.
Protecting Yourself from Crypto Scams
The ongoing problem of pump-and-dump currency schemes is one of the largest problems facing the crypto community. Scams damage investors’ emotions, thwart trade, and ultimately create massive financial consequences for both victims and the legitimate trade community. By understanding how these types of scams operate, and what signs to look for, any individual or organisation participating in the cryptocurrency exchange system needs to take the time to investigate, avoid potential scams, and focus on using regulated exchanges, only using verified information as a safeguard.
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