Financial scams can take many forms and are as old as money itself. Digitization in recent decades has brought with it new risks from which it is important to protect ourselves. When it comes to cryptocurrencies, this takes on even more importance, as their decentralized and anonymous nature makes them a new hotbed for scams.
How do pump and dump scams work in crypto?
First of all, a group of people get hold of a large percentage of a certain cryptocurrency development either by creating it or by buying a large amount. In the next step, they use different marketing strategies to popularize the currency and make many people buy it, increasing its price.
When they already have a considerable profit, they suddenly sell their share and drastically drop the price from one moment to the next. In those cases, most of the cheated users lose their money.
Is pump and dump legal ?
The act of manipulating investors through false information is illegal and punishable by fines, penalties and even imprisonment. In the United States, the body in charge of regulating financial fraud is the Security and Exchange Commission (SEC) and it recognizes pump and dump schemes as financial fraud.
However, in the case of cryptocurrencies, it is very difficult to enforce these regulations. This is because, in most cases, we do not know the identity of the scammers.
An emblematic case is that of Jordan Belfort, the famous stockbroker played by DiCaprio in the movie “ The Wolf of Wall Street ”. Precisely what they were doing in the film was convincing unsuspecting investors to invest in stocks of small companies with very little volume. When the price of these shares rose due to this new demand, they sold their share and kept the profit. Jordan Belfort ended up pleading guilty to fraud and was sentenced to 4 years in prison as well as a $110 million fine.
At that time, as the film shows, they had to call each person one by one to tell them about this "new investment opportunity." Today, through the Internet, scammers can reach millions of people without much effort.
How do pumps and dumps usually develop in crypto?
These schemes mutated over the years to adapt to changing market conditions. In the strong bull market of 2017, with the great popularity of Initial Coin Offerings (ICOs) , this was the scam method par excellence.
The modus operandi was as follows:
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They were writing a white paper detailing the incredible potential of a new protocol that was going to hit the market.
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They executed a marketing campaign publicizing this innovative project.
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They did an ICO and sold project tokens.
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Once the money was obtained, they abandoned the project and disappeared.
How to avoid getting into a pump and dump ?
Here are some tips to avoid falling for these scams:
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Avoid getting carried away by FOMO : Much of the effectiveness of scams like these is based on causing FOMO (Fear Of Missing Out). This is a very common feeling in bull markets where we see that some coins multiplied x10 or x100 their price, and we do not want to miss the next opportunity. Any advertising that encourages you to act quickly is suspicious.
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Check the news from reliable sources: It is common that, within the advertising campaigns, these platforms invent that they are associated with large companies or that they are backed by well-known exchanges . To verify this, it is advisable to look for an official statement from that cryptocurrency development company or exchange that confirms it. Last year, for example, a fake news spread saying that Walmart was going to accept payments with Litecoin. This was raised by large media outlets and caused the price of LTC to rise by more than 20%. Hours later the news was denied by Walmart.
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Be careful with unsolicited messages: Being within crypto communities and being active on networks such as Twitter, Telegram or Discord, it is very common for direct messages from strangers to reach us. Most are to tell us about an investment platform that pays high interest rates or some project that is supposedly about to be exploited. Needless to say, 99% of those messages are scams.
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Beware of pump and dump groups: Surprising as it may seem, there are entire groups dedicated to pumping and dumping different currencies. They usually tell you to buy such a coin because they are about to promote it and you can earn 300% or 400%. Apart from being unethical, it is false. In these cases, the same members of the group are the ones that are causing the rise and soon the organizers are going to sell all their coins and the price is going to crash.
