View of cryptocurrency fans, and as the future of money for the world. The underlying blockchain technology allows crypto to work by creating a digital ledger that records transactions, which would apparently create a more secure form of currency. But where there is money to be made, crooks are not far behind.
Crypto pumping and dumping systems are designed to take advantage of people while making a lot of money for scammers. They usually involve influencers who are given financial incentives to tell people to buy a certain digital coin in order to increase its value. Once the value increases, scammers and influencers sell their coins and pocket the profits, while everyone else sees their investments lose value.
These schemes mark the latest twist in the ever-changing history of cryptocurrencies, which have created millionaires while ruining others due to their persistent volatility. Even Dogecoin, a cryptocurrency created as a joke, has caught the attention of the general public thanks to prominent figures such as Tesla CEO Elon Musk, who told last week’s B conference that ‘he “pumps, but does not throw”.
He is not the only one.
Earlier this month, the popular esports organization FaZe Clan suspended several members who participated in a crypto-pump-and-dump disguised as a charity campaign while winning tens of thousands of dollars.
With cryptocurrencies becoming easier to develop, crooks take advantage of people who have developed FOMO, or “fear of missing out,” and seek to jump on new crypto coins in hopes of getting rich. .
Here’s what you need to know about crypto pumps and dumps.
What is a pump and dump scam?
A pump and dump is a securities scam usually involving stocks. Scammers create fake hype on a stock in order to generate interest. Once investors start buying stocks, the price of the stock goes up. When the price hits a certain point, the scammers behind the bogus hype sell all of their stocks. This drives the share price down, leaving new investors to hold the bag.
The movie The Wolf of Wall Street portrays the infamous pump-and-dump scam carried out by investment firm Stratton Oakmont in the ’90s.
How does this cryptocurrency scam work?
It doesn’t work much differently than it does with stocks. A certain crypto asset is inflated by people in order to increase the value.
âAs prices rise, pump makers are pouring their assets into the FOMO they generated, resulting in a drop in prices that leaves new buyers holding a bag of assets that are now worth less than they were. they were bought, thus creating one and often irrecoverable loss, âsaid Douglas Horn, chief architect of Telos Core Developers.
What is different is what is used for the pump and the dump. Bitcoin, Etherereum, and Dogecoin are well established cryptocurrencies, and it takes someone following Musk to increase or decrease their value. However, since creating a complete blockchain system for a currency takes a lot of time and effort, those familiar with coding can create their own crypto tokens, which are digital assets using an already existing blockchain like Bitcoin. or Ethereum.
These tokens, also known as coins, can be easily created like Shiba Inu, which the developers have ironically referred to as the âDogecoin killerâ. Developers can also create billions of these coins, which means they go for fractions of a penny. A Shiba Inu token, for example, costs $ 0.0000065, so you can buy 100,000 tokens for less than $ 1.
Since someone can easily create billions of tokens that cost next to nothing, you just need to convince enough people to buy these super cheap coins. This can be done through Discord channels, forums, or social media, or by having an influencer promote the coin in exchange for their own treasury of coins.
If the crooks have 1 billion tokens worth $ 0.000001, it’s only worth $ 1,000. But if they can increase the value of a token by just one decimal place, their coin pool is now worth $ 10,000. If they throw it away quickly, its value will plummet.
Another small difference from pump-and-dump crypto is the term. Although it is known as the pump and dump, in crypto circles the scam is referred to as a âcarpet drawâ because the carpet was pulled directly from investors. Part of getting people to buy these super cheap tokens is to say that they are “carpet proof” which means that there are measures in place to prevent people who have a large number of chips. coins to sell them within a certain period of time.
What are some examples of cryptocurrency pumps and dumps?
In July, four members of the FaZe Clan participated in a pump and dump operation for a token called SaveTheChildren. Professional gamers, along with other influencers, have been pushing the coin to their followers. Once the price increased, they began to sell the tokens given to them as part of the scam, with some earning around $ 30,000.
Another piece called SafeTrade was sold as “rug proof” earlier this year. Once people started buying, the organizers sold their pieces and left everyone in the dust.
A 2020 study from Sydney University of Technology and Riga’s Stockholm School of Economics found 355 cases of crypto-pump-and-dump scams over the course of seven months. The organizers of these scams have made millions.
Are pump and dump scams illegal?
For stocks, yes. For cryptocurrency, no.
The Securities and Exchange Commission is the government regulator that investigates securities scams such as insider trading and pumps and dumps. It does not yet have similar rules for cryptocurrency and does not plan to implement crypto regulations, at least for 2021.
How to avoid cryptographic pumps and dumps?
It is important to understand whether FOMO contributes to your decision to invest in a cryptocurrency or not. It may seem like everyone gets rich with Bitcoin or Dogecoin, but they are not.
The next is to do your homework. Crypto coins or tokens can be created quite easily by people who understand coding. If there’s a new coin that’s supposed to make you rich, do some research on the web to find out more. The initial coin offering, or ICO, will have a “white paper” that will provide details about the coin, who is behind it, what its purpose is, and so on.
Then there is a question of buzz that is generated. One way for crooks to market their coin is to go to spaces where people are interested in cryptocurrency, such as Discord channels, social media, and forums. If all of a sudden a person starts promoting a brand new token, chances are they are launching a scam.
Beware of any influencer you might follow who barely mentions cryptocurrency and randomly starts promoting a token. In the case of the FaZe Clan members, they promoted the coins with a social media campaign and handed out thousands of free coins to their followers, which in turn inspires other followers to purchase coins – FOMO strikes again. If you want financial advice, get it from a professional, not someone whose claim to fame is to be good at a video game.
Finally, if you are still interested in investing, don’t invest more than what you are prepared to lose. It’s possible that with the right time, an investor could make money through pumping and dumping, but it’s best to assume that the money you use to buy tokens will be gone forever.