Cryptocurrency is one of the fastest-growing industries in modern history. Fueled by inherently decentralized blockchain technology, cryptocurrency has exemplified its potential to attract entire new markets of investors seeking less restrictive rules and regulations than more traditional trade markets like the NASDAQ
or S&P 500 (note the SEC would strongly disagree that existing regulations don’t apply). This draw has only been heightened following the immense growth in the value of cryptocurrencies like Bitcoin and Ethereum; however, it is this same lack of clear regulation that makes cryptocurrency prime pickings for financial scammers, especially for less-valuable cryptocurrencies or “altcoins”.
For instance, when altcoin Squid launched in October of 2021, the coin rapidly accrued in value in a matter of days, jumping to over $2,800 per token. By November, the coin’s price plummeted. Squid’s creators cashed out all available tokens for a lump sum of roughly $3 million, and all online profiles tied to the coin went dark, prompting many initial investors to label the coin as a pump-and-dump scam. It seems the coin, much like the show it was named for, had only one real winner.
Cryptocurrency is a highly volatile market prone to risks. Many of its investors understand this, but there are certain signs investors can spot that may sound the alarm as to whether a newly emerging cryptocurrency or altcoin may be little more than a pump-and-dump scam for its creators.
What is a Pump-and-Dump Scam?
Pump-and-dump scams are nothing new. These schemes have existed for as long as trade markets themselves. According to The Motley Fool, pump-and-dump scams operate when an individual or group of “investors” buy a sustainable amount of shares (in this case, coins) of an asset or stock when the price is low. Once purchased, that individual or group will begin to produce and distribute news about the asset in question—most of which is artifice. This attracts additional investors to the asset, causing its listed value to climb or “pump.” Once the asset’s price reaches a value high enough for the scam’s originator to cash out on, they then sell their stake to incoming investors, but since the originator owned a majority of the asset’s shares, the asset’s price (and value) begins plummeting.
If you read this description and thought to yourself, “that sounds like fraud,” you’re absolutely correct. Pump-and-dump scams aren’t only ethically wrong, but illegal, per the terms of The Securities Act of 1933, which outright prohibits the obtaining of, “…money or property by means of any untrue statement of a material fact or any omission to state a material fact”. Fraud remains fraud, regardless of the perceived lack of regulatory clarity surrounding cryptocurrency.
Regardless of their illegality, pump-and-dump scams continue plaguing the cryptocurrency industry and its investors. Minting new cryptocurrencies and altcoins is far quicker than waiting for traditional fiat-based stocks to accrue in value, and given that there are hundreds of globally available cryptocurrency exchanges, this makes crypto markets prime pickings for pump-and-dump scams. Though it’s not always easy, there are some telltale signs that might signal investors to such a scheme.
How to Spot and Avoid Pump-and-Dump Cryptocurrency Scams
Spotting a pump-and-dump scam is much easier after losing an investment to one than spotting it pre-emptively. As such, the first step in recognizing and avoiding one entirely is to conduct research prior to investing in one. If you suddenly see a ton of headlines, articles, or posts online about rampant buy-in to a new cryptocurrency, never be the first to rush an investment with it. Instead, look up the coin in question and read through the white paper behind it to uncover who its creators are and their motives behind minting it. If there isn’t a white paper, this can be your first clue that the coin is ramping up to become a new pump-and-dump scam.
Similarly, if development around a coin has gone to radio silence despite it being available for a longer time, this should also signal investors to a potential scam. Whenever an asset is performing well but its creators and/or lead investors are failing to mention it, this should raise a number of red flags to its authenticity. Furthermore, as with any tradable asset, every cryptocurrency should serve a distinct purpose that its creator(s) can showcase through a thought-out product roadmap. If that purpose is not clearly defined, or the roadmap has remained stagnant for a time with minimal or no updates, this could also serve as a warning to investors for a potential pump-and-dump scam.
The best way to avoid buying into a potential pump-and-dump cryptocurrency scam is simply to see how the coin trades over time. Likewise, the better known and established the exchange the coin is trading on is, the less likely it is to be a pump-and-dump. If its price spikes at routine intervals or seems to avoid dropping at periods when it should, there’s a greater chance that cryptocurrency schemers are behind the coin’s release, marketing, and price control. Always do your own research, and if something seems “too good to be true”, it probably is.