What You Need to Know About Crypto Pump-and-Dump Scams

In recent years, there’s been increased interest in cryptocurrency as a potential addition to an investment portfolio. However, with that interest often comes scams, including investment scams like pump-and-dump schemes.

Cryptocurrency pump-and-dump schemes work similarly to other pump-and-dumps. Basically, a bad actor hypes up an investment (the pump) to get people interested in buying. Once the price is pushed higher by demand buying, they sell their investment (the dump). Let’s take a closer look at the crypto pump-and-dump, and identify red flags so you aren’t left holding the bag.

What is a pump-and-dump scam?

A pump-and-dump scam usually centers around an investment “opportunity.” Schemers attempt to boost the price of investments through market manipulation in order to profit from the victims buying the asset at an inflated price. In some cases, the stock chosen might be relatively inexpensive, so it seems like an easy way to turn a small amount of money into a large profit.

In many cases, the investment is hyped up with the promise of access to “insider” knowledge or “getting in on the ground floor.” The investment might be shared through newsletters, on message boards, or via social media. As more people buy, the price rises and it appears as though buyers could potentially profit. Often, false information about the investment is used to attempt to convince people to buy shares.

Later, during the dump portion of the scam, the fraudsters liquidate their positions. They sell their shares of the investment at an inflated price, earning their profits. Eventually, there is more selling than buying, so the investment price drops. The people who bought shares while the price was on its way up, watch as their profits disappear and they are left with a large number of almost-worthless shares that they can only sell at a loss.

What is a crypto pump-and-dump scam?

A crypto pump-and-dump scam works similarly to a regular investment pump-and-dump. Normally, an “insider” will claim to have information about an exciting new cryptocurrency coin or token. They will share and provide information about how to buy the digital asset.

Often, the digital asset, usually an obscure altcoin (alternative coin), is discussed on Discord, Telegram, or in some other message group. Depending on the group, there might be members at different levels. Those who recruit others to the group might have a higher place in the hierarchy. When a new crypto token is identified or created, those who are higher up in the group get the information first. They can buy the crypto at a cheaper rate. Later, as they promote and pump up the crypto asset and the price rises, and there’s a great deal of price volatility, they can then sell their tokens to others and profit.

Part of the crypto pump-and-dump scheme is to encourage outsiders to buy. Everyone in the group pumps the same token in an effort to benefit. If enough people outside the group buy the chosen token, the price will rise dramatically. The members of the group can then sell and reap the profits. Those that are higher up in the group, with advanced knowledge of which token will be chosen, have the greatest chance of profiting the most.

Some tokens are created specifically to scam would-be investors. For example, the Squid Game pump-and-dump was one of the biggest in history, with the token having been created just to pump up the price and restrict buyers from selling. Then the developers sold their tokens, reaped more than $12 million, and simply disappeared.

How to spot a crypto pump-and-dump scheme

It’s important to pay attention to red flags in order to reduce your chances of being a victim of a crypto pump-and-dump. Here are some things to watch out for:

• New token with a rapid rise in price: One of the biggest red flags is when a new or unknown token suddenly sees a rapid rise in price. This can be an indication someone is trying to pump up the token.
• Restrictions around selling: Check the terms of buying the token. For example, in the Squid Game token scam, buyers were locked in and unable to sell tokens until some point in the future when game mechanics were introduced. Watch out for schemes where you’re required to hold the token, and you can’t sell when you’re ready.
• A lot of sudden hype around the token: If there’s a lot of sudden hype around a cryptocurrency token or project, that can be a red flag related to a pump-and-dump. If everyone seems to be talking about it on social media and insisting that you’ll miss out if you don’t join in, that could be an indication of a scam.
• No real utility for the token: Watch out for tokens that seem to be rising in price just because people are buying them. Look into the crypto project to see if it has a use case. If there’s no true use case or utility for the token, it might be used for a pump-and-dump.

What if I am a victim of a crypto pump-and-dump scheme?

Unfortunately, anyone can be a victim of a crypto pump-and-dump scam. Many of the people who run these scams design them to seem plausible. If you’ve been defrauded in one of these scams, you can take the following steps:

• Secure your crypto wallet: If you suspect a pump-and-dump, realize that a wallet you connected to an obscure exchange or website might be compromised. Secure the wallet or make sure it’s been disconnected from your bank account and can’t be accessed by others.
• Report the scam: You can report the fraud to the Federal Trade Commission (FTC) or the Commodity Futures Trading Commission (CFTC).
• Install a virtual private network (VPN): A reputable VPN can help you avoid phishing websites, cryptojacking, and infected links in the future. It can also protect you from hackers who might use a pump-and-dump scam to access your crypto wallet. There are good VPNs for crypto trading that you can use to increase your safety.

Tips for staying safe when investing in cryptocurrency

Any investment — including in cryptocurrency — comes with the risk of loss. Additionally, if a cryptocurrency exchange goes out of business, you could lose what’s in your account because cryptocurrency exchanges aren’t protected by Securities Investor Protection Corporation (SIPC) insurance, which protects against the loss of cash and securities held by a customer at an SIPC-member brokerage firm.

If you’re interested in investing in cryptocurrency, you can protect yourself by using the following tips:

• Start small: Only invest money you can afford to lose. Consider limiting your cryptocurrency investments to no more than 5% of your total portfolio.
• View cryptocurrency as a speculative investment: Because it’s a relatively new asset class, and it’s uncertain whether the future will include a mainstream use case for cryptocurrencies, it might make sense to view it as speculative. By treating crypto as a speculative investment, you might be willing to take additional steps to limit risk.
• Use a major cryptocurrency exchange: While there is no guarantee the crypto exchange won’t collapse, you’re more likely to find reputable tokens and coins on a major exchange rather than using a less well-known cryptocurrency market. Major cryptocurrency exchanges feature liquidity requirements and other criteria that offer access to vetted cryptocurrencies. For example, Coinbase, which is publicly traded in the U.S., is considered one that vets its listings. However, it’s still not protected by SIPC insurance.
• Research the cryptocurrency project Before investing, review the documents and white papers related to the token or coin or the blockchain platform. Find out what problem the platform is trying to solve, and understand the use case. Tokens and coins most likely to succeed in the long run have a practical purpose and a roadmap for potentially accomplishing that purpose.

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FAQs on crypto pump-and-dump scams

Bottom line

For those interested in adding diversity to their portfolios and have the risk tolerance for speculating, investing in cryptocurrency can be one way to potentially see gains. However, it’s important to note that there are risks with crypto investment, and there are many scams surrounding cryptocurrency.

Before getting involved, make sure to understand the risks, including the potential for identity theft. Take steps to protect your identity and your finances from identity fraud before you start investing in crypto. You can check out our identity theft protection guide for more information.

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Author Details

Miranda Marquit

About the Author

Miranda Marquit has been a freelance writer since 2005. While she primarily covers financial subjects, she has also covered technology, particularly internet trends. In addition to writing, Miranda is an avid podcaster. She is the co-host of the Money Talks News podcast, which covers a wide range of subjects related to money, including how to spot and avoid scams and how to invest in emerging technology. When not writing and podcasting, Miranda enjoys reading, traveling, and spending time outdoors.