Cryptocurrency has transformed the financial landscape, creating unprecedented opportunities for investors and businesses alike. However, with these opportunities come risks — one of the most pervasive being pump and dump crypto schemes. Among the many variations of this type of fraud, crypto coin pump scams stand out as a particularly insidious tactic that preys on unsuspecting investors.
In this article, we’ll explore how pump and dump schemes, including crypto coin pumps, operate, why they’ve become so widespread, and how you can protect yourself. Finally, we’ll discuss how Inquesta Forensic’s cryptocurrency fraud services can help victims identify fraudulent activity and recover their losses.
What Is a Crypto Coin Pump?
A crypto coin pump involves the artificial driving up of the value of a digital currency or token, often through coordinated hype or the spreading of misinformation. These schemes typically target those cryptocurrencies with low market capitalisation and trading volume, as they are seen as being easier to manipulate.
Fraudsters will leverage a wide variety of different tools and methods to build momentum around their pumped coin, enticing unsuspecting investors to buy in.
What Is a Pump and Dump Crypto Scheme?
A pump and dump crypto scheme is a fraudulent tactic that takes the manipulation of a coin pump a step further. Perpetrators first orchestrate a rapid increase in the price of an asset through deceptive practices (the pump). Once the price peaks, they sell off their holdings for profit (the dump), leaving investors with tokens of rapidly depreciating value.
The emergence of cryptocurrencies, especially low-cap coins, has created a breeding ground for these schemes. Fraudsters often exploit the anonymity and unregulated nature of the crypto market to orchestrate pump and dump scams, preying on inexperienced investors.
Notable Pump and Dump Scheme Examples
Notable examples of pump and dump schemes include Jordan Belfort’s Stratton Oakmont, which aggressively promoted penny stocks throughout the ‘90s, eventually being showcased in the 2013 film The Wolf of Wall Street — a depiction which highlights how unscrupulous parties (brokers in this case) manipulated stock prices for their own personal gain.
In the cryptocurrency world, one of the most infamous examples occurred in 2018, when a group orchestrated a pump and dump scheme on Binance using the, at the time, relatively unknown coin, Viacoin. By leveraging Telegram groups, the scheme’s perpetrators were able to artificially inflate the coin’s value by upwards of 300% in an incredibly short period of time, before selling off their holdings and leaving unsuspecting investors to deal with the aftermath.
Another noteworthy case is the Save Droid scandal, where false claims about a major acquisition caused a massive surge in token prices, only for fraudsters to abandon the project shortly after the boost took place.
These examples highlight the pervasive nature of pump and dump schemes across both crypto/digital and traditional markets, underscoring the need for vigilance and increased regulatory oversight.
Why Cryptocurrencies Are Susceptible to Pump and Dump Schemes
Cryptocurrencies, particularly those with low market capitalisation, are an ideal target for pump and dump schemes for several reasons, including:
- Lack of Regulation: Unlike traditional markets, the cryptocurrency space operates as a largely unregulated environment. This can unfortunately create a breeding ground for potential fraudulent activities.
- Volatility: Cryptocurrency prices are inherently volatile. This makes it much easier for fraudsters to create significant price swings to attract people without suspicion.
- Decentralised Nature: The decentralised structure of cryptocurrencies means there is no single authority to oversee or prevent manipulation — meaning fraudsters can continue unchecked for longer than more traditional types of fraud.
- Anonymity: Blockchain technology allows perpetrators to hide their identities, complicating efforts to hold them accountable.
How Does a Pump and Dump Crypto Scheme Work?
The mechanics of a pump and dump crypto scheme are relatively straightforward, yet highly effective. This is what makes it so popular amongst tech-savvy criminals. It involves selecting a balloon (the coin), blowing it up (attracting investors), before popping it (the dump phase).
Here’s a more detailed look at the stages of such crypto pump and dump schemes:
Selection of a Target Coin
Fraudsters will first of all choose a cryptocurrency to utilise or their scheme. They will usually look for the following features:
- Low liquidity
- Limited popularity or awareness
- Little associated cost to buy in bulk
These characteristics are essential for criminals, as it marks the coin as easier to manipulate, allowing for maximum gain.
Coordinated Hype Campaign
Social media platforms are a double-edged sword in the cryptocurrency world. While they can offer valuable information, they also serve as breeding grounds for pump and dump schemes.
Fraudsters often leverage platforms like Twitter, Telegram, and Discord to spread misinformation. Paid influencers or bots may also be used to amplify their campaigns, making them appear more legitimate. It’s important to critically evaluate the source of any investment advice you encounter online and verify its authenticity through reliable channels.
Methods implemented to increase hype in their scheme include:
- Fear of Missing Out (FOMO): Fraudsters will look to exploit investors’ fear of missing out on potentially massive gains by creating a sense of urgency. They will often use claims like “once in a lifetime” or “act before it’s too late” to raise anticipation..
- Herd Mentality: Increased hype surrounding a coin will create a bandwagon effect, whereby people will invest to follow the crowd. Social proof, even when fabricated, can be a powerful motivator for people.
- Greed: Promises of life-changing returns in only a short-period can often cloud the judgement of investors, resulting in them ignoring the common red flags.
By recognising these logical traps implemented by fraudsters, you can take a more objective approach to the evaluation of investment opportunities.
The Pump and Dump
As highlighted above, the pump phase involves artificially inflating a coin’s price to attract unsuspecting investors, while the dump phase sees perpetrators selling off their holdings at the peak, causing the value to crash and leaving regular investors with worthless tokens.
Red Flags to Spot a Crypto Coin Pump Scheme
The ability to recognise a potential crypto coin pump scheme is an invaluable tool for protecting yourself when looking to invest in the exciting world of digital currency. Here are a handful of common red flags to be aware of:
- Rapid Price Increases: If a currency experiences a sudden and unexplained price spike, there’s always a chance it could be a pump and dump crypto scheme.
- Exaggerated Social Media Activity: Be wary of anonymous accounts on social media channels promoting a coin you’ve not heard of with ‘too good to be true’ claims and promises of huge returns.
- Inflated Urgency/Pressure: Any messages from people encouraging you to ‘act fast’ so as to not’ miss out’ are classic signs of possible fraudulent activity — crypto-related or not — and should be viewed with extreme caution.
- Low-Cap Coins: Fraudsters often target coins with low market caps and limited trading volumes. If you’re new to such investing, consider starting out on more secure ground with better known coins.
Legal and Financial Consequences of Crypto Coin Pump and Dump Scams
Pump and dump schemes are illegal in all traditional markets. However, the digital currency space still remains a regulatory grey area. In the UK and across the world, authorities are doing everything they can to increase oversight into digital crime in order to stem this new wave of fraudsters,
Victims of pump and dump crypto schemes often face significant financial losses, and recovering any stolen funds can be a daunting task due to the anonymity of blockchain transactions, as well as the lack of a single centralised authority within cryptocurrency markets. It’s pivotal that you contact a specialist, with experience tracing transactions, on the blockchain.
For criminals found to have undertaken a crypto coin pump and dump, consequences can vary, but can include a lengthy time in prison depending on the severity of the crime.
The Growing Need for Regulatory Oversight
With the rise of digital currency-related scams, such as pump and dump crypto schemes, regulatory bodies are increasingly scrutinising various areas of the industry. Efforts are underway in many counties to establish much clearer guidelines and to enforce strict penalties for fraudulent activities.
In the UK, the Financial Conduct Authority (FCA) is actively working to protect consumers. They are issuing warnings about unregulated crypto platforms and scams. Additionally, in October ‘23, the UK introduced its Financial Promotions regime for cryptoassets. This stopped any business advertising digital currency to UK consumers without proper authorisation, whether with fraudulent intent or not. Now, firms must either be registered with the FCA or work with another authorised third party in order to have adverts approved.
Tips to Protect Yourself from Crypto Coin Pump Scams
As with any investment, the first and most important step to preventing losses begins with awareness and education. It’s vital that you research whatever you’re getting into and avoid following the advice of people you don’t know and have no reason to trust.
Follow these steps to protect yourself from crypto coin pump schemes:
- Conduct Thorough Research: Investigate the fundamentals of any cryptocurrency you are considering before investing a penny. Be wary of anything with vague goals, or making unverifiable claims.
- Avoid Hype: Remain skeptical whenever receiving recommendations of ‘sure-fire hits’ from anonymous sources or online influencers.
- Diversify Your Portfolio: ‘Don’t put all your eggs in one basket’ is a famous adage that often applies to investments. Don’t put your investments into one single cryptocurrency, especially if it has low market cap and/or trading volume.
- Seek Expert Advice: Consult with trusted financial or forensic professionals, such as Inquesta Forensic, if you suspect fraudulent activity.
How Inquesta Forensic Can Help
At Inquesta Forensic, we specialise in the investigation of cryptocurrency fraud, including pump and dump crypto schemes. Our team of expert forensic accounts is uniquely equipped to uncover even the most complex of fraudulent activities, to help the victims recover their losses wherever possible.
Our expertise in the field of digital currency fraud include the following:
- Blockchain Analysis: By utilising advanced tools, we can trace transactions across the blockchain, to identify possible patterns of fraud, and pinpoint where lost funds are now.
- Expert Testimony: Our experts are qualified to provide credible testimony in court, acting as expert witnesses, strengthening your case against fraudsters.
Why Choose Inquesta Forensic?
With a reputation for excellence in forensic accountancy, Inquesta Forensic is a leader when it comes to investigating cryptocurrency fraud in the UK. Our unique blend of financial expertise and knowledge regarding blockchain technology allows us to deliver tailored solutions for our clients.
Whether you’re an individual investor or a business, if you’ve been impacted by cryptocurrency fraud, our services are designed to help you to uncover the truth, recover your losses, and secure justice.
Take the First Step Today
The rise of pumps and dump crypto schemes highlights the overwhelming need for vigilance in the field of digital currencies. While these scams can have a devastating financial consequence, you don’t need to face the fallout on your own.
Do you suspect that you’ve been targeted by a crypto coin pump and dump scheme? Contact Inquesta Forensic today. Our team of experts is on hand to guide you through the process of uncovering the fraud and recovering your loss.
