Cryptocurrency pump-and-dump schemes: What you should know about these scams
Bitcoin, ether and dogecoin reached record highs in value this year, cryptocurrency fans view them as the future of money for the globe. The underlying blockchain technology allows crypto to work by creating a digital ledger that records transactions, which would seemingly create a safer form of currency. But where there's money to be made, scammers aren't far behind.
Crypto pump-and-dump schemes take advantage of people while making some big money for scammers. They can involve social media influencers who receive financial incentives for telling people to buy a certain digital coin in order to raise its value. Once the value goes up, the scammers and influencers sell their coins and pocket the profits, while everyone else sees their investments lose value.
Last month, a group began selling coins based on the hit Netflix show, Squid Game. The $SQUID coin had no ties with the show or Netflix but that didn't stop many from jumping on the hype train causing the value from one penny to $2,800 and then free-fall back down to pennies minutes later. This resulted in the scammer making $2 million while those who purchased the coin lost money.
These schemes mark the latest twist in the ever-changing story of cryptocurrencies, which have created some millionaires while bankrupting others through their persistent volatility. With cryptocurrencies becoming easier to develop, scammers are taking advantage of people who have developed FOMO, or "fear of missing out," and are looking to jump on new crypto coins in hopes of getting rich.
Here's what you need to know about crypto pump-and-dumps.
What is a pump-and-dump scam?
A pump and dump is a securities scam usually involving stocks. Scammers create false hype about a stock in order to generate interest. Once investors start buying shares, the price of the stock goes up. When the price reaches a certain point, the scammers behind the fake hype sell all of their shares. This causes the stock price to plummet, which leaves new investors holding the bag.
The movie The Wolf of Wall Street portrayed the infamous pump-and-dump scam conducted by Stratton Oakmont investment firm in the '90s
How does this scam work with cryptocurrency?
It doesn't work much differently than with stocks. A certain crypto asset is pumped up by people in order to make the value increase.
As the prices rise, the pump creators dump their assets into the FOMO they've generated, resulting in a price crash that leaves the new buyers holding a bag of the assets that now have a lower value than they were purchased at, creating significant and often unrecoverable losses," said Douglas Horn, chief architect of Telos Core Developers.
What's different is what's used for the pump-and-dump. bitcoin, ether and dogecoin are well-established cryptocurrencies, and it takes someone with the following of Musk to increase or decrease their value. However, since creating a whole blockchain system for a currency takes a lot of time and effort, those knowledgeable about coding can create their own crypto tokens, which are digital assets using an already existing blockchain technology like Bitcoin or Ethereum.
These tokens, also referred to as coins, can be created easily like Shiba Inu, which the developers have referred to as a "dogecoin killer" in a tongue-in-cheek manner. Developers can also create billions of these coins, which in turn means they go for fractions of a penny. One Shiba Inu token, for example, costs $0.000047, so you can buy 20,000 tokens for less than $1.
Since someone can create billions of tokens easily that cost hardly anything, all that's needed is to convince enough people to buy these super cheap coins. This can be done through Discord channels, forums or social media, or by getting an influencer to promote the coin in exchange for their own trove of coins.
If the scammers have 1 billion tokens worth $0.000001 then that's only worth $1,000. But if they can increase the value of a token by just one decimal point, their stash of coins is now worth $10,000. If they dump it quickly, that'll cause its value to crash.
Another small difference with the crypto pump-and-dump is the term. While it's known as a pump-and-dump, in crypto circles the scam is referred to as a "rug pull," as in the rug was pulled right out from under the investors. Part of enticing people to buy these super cheap tokens is to say they're "rug-proof," which means there are measures in place to prevent people who have a large number of coins from selling them within a certain time period.