Social media plays a big role in the crypto community, but that’s not always a good thing.
Twitter, Reddit, and TikTok have become virtual gathering places among crypto investors and enthusiasts alike, which also makes them an attractive target for a particular type of scam known as the pump-and-dump. Also known as “rug pulls,” these scams took in more than $2.8 billion worth of crypto in 2021 and accounted for 37% of the year’s crypto scam revenue, up from 1% in 2020, according to research from crypto data firm Chainalysis.
Crypto pump-and-dumps are when conspirators use misleading information to raise the price of a currency, after which they sell it at a profit. A recent cautionary tale follows the experience of some investors with a themed “Squid Game” cryptocurrency. One moment, the SQUID coin was soaring in value, and the next, it was crashing. The coin’s creators are alleged to have cashed out and disappeared with $3 million from investors.
A class action lawsuit was filed in January accusing Kim Kardashian and boxer Floyd Mayweather of pumping the price of EthereumMax, which is unrelated to Ethereum, before company executives dumped the coin for a profit and left everyone else with basically worthless crypto.
We were unable to reach Kardashian and Mayweather for comment, and multiple other outlets have reported they either did not respond to such requests, or couldn’t be reached.
There are more than 17,000 altcoins, but experts advise you stick with Bitcoin and Ethereum. That’s because they have longer track records of value growth, compared to newer altcoins. With any crypto investments, experts recommend keeping your holdings at 5% or less, and only investing in crypto if you have an emergency fund, have paid down high-interest debt, and are also pursuing a diversified conventional investing strategy.
For investors who do experiment with altcoins, not only are they typically even more volatile and speculative, but they also come with extra risks like these pump-and-dump and other schemes, experts say. Here’s what you need to know about crypto pump-and-dumps, and how to stay away from them.
What Is a Pump-and-Dump Scam?
A pump-and-dump scam is when a group of traders, such as a coin’s founders or collaborators, spreads misleading or false information to inflate the price of an asset before selling off their shares at the higher price. This can cause regular investors to lose a lot of money, and it is more likely to happen when buyers don’t know much about a coin and are swayed by online promotions.
In a largely unregulated investment market, things can get even trickier. While pump-and-dump schemes are illegal in the stock market, regulations for crypto are still developing, so fraudsters are seizing the opportunity to see what they can get away with.
How to Avoid Crypto Pump-and-Dump Scams
Educate Yourself Before You Buy Crypto
It can be tempting to jump on a trend if you see other people making money — or at least claiming to. “It takes a great amount of self control not to want to do what other people are doing, let alone a celebrity that you love,” says Kiana Danial, founder of Invest Diva and author of “Cryptocurrency Investing for Dummies.”
This happened with penny stocks and during the dot-com bubble, because people didn’t understand what was going on but they wanted in, says Danial. “We had a lot of catastrophic results, and cryptocurrency is the same,” she says. “The reason why people are falling for it is because they’re not educated.”
Before buying a particular altcoin, Danial recommends investors learn about a given coin’s purpose, history, and its community. “Go down the rabbit hole and see what this is about. What problem are they solving?” says Danial. Value comes from category kings (when a company’s name is now a verb, such as Google), or projects that help people do something better, cheaper, or faster, she says. “All the hype, all the FOMO is going to fade away, and the winners are going to be the ones that are actually creating value,” she says.
Before you buy a new altcoin, do your research to avoid losing money in a pump-and-dump scam.
It’s important to understand the asset you’re looking at, and not just buy it because you like the idea of blockchain or decentralization, says Danial. “The markets move because of human psychology,” she says.
The fact that crypto is unregulated makes it easier for someone to run a scam, says Doug Boneparth, certified financial planner and president of Bone Fide Wealth in New York. “You’re also having that hype factor, that “this is the new cool thing” factor,” he says. While many people got rich legitimately for being early investors in crypto as a new asset class, these are still the early days of forming a new financial system. “In this newness, inherently comes a lot of noise,” says Boneparth.
To learn for yourself, you can start with the Bitcoin white paper as a way of understanding peer-to-peer transactions, says Boneparth. “It’s a good primer in terms of understanding how blockchain technology works. You need to understand the underpinning technology behind all of this,” he says. “And you can continue to read about blockchains and cryptocurrencies.”
Crypto is the Wild West right now, says Boneparth. “There’s so much amazing creativity and utility and value being created, but the extreme examples, both good and bad, drown out the more practical, long-term stuff that you should be paying attention to.”
The fact that crypto is largely unregulated makes it riskier, so even more reason to do your research.
Play Before You Pay
If you are going to invest in riskier altcoins, start small and get a sense of how things work. “Just figuring out how to connect or link your checking account to an exchange and buy crypto is a big learning experience,” says Boneparth. “You’re now trusting a trustless system. When have you ever done that?”
Instead of throwing everything into a coin you just heard about, start by investing a small amount like $1, $5, or $20, just to learn how things work. “It’s a $20 learning lesson that might pay you massive dividends by understanding where things are going, and maybe it will open your mind to legitimate investment opportunities,” says Boneparth.
And even if you end up losing $20 (or less), that brings us back to another tip experts recommend: Don’t invest more in cryptocurrency than you can handle losing, in case its value falls through the floor or, worse, is wrapped up in a pump-and-dump or other scheme.
Stick With Your Strategy
Identifying and sticking to a strategy can make you less likely to fall for scams. Danial says she isn’t tempted by pump-and-dumps because she focuses on value investing, where a stock seems to be trading lower than its inherent value. “I apply Warren Buffett’s value investing methods, ironically, even though Warren Buffett is against cryptocurrencies, to my investment portfolios and to my crypto investment strategy,” says Danial. Ethereum, for example, can be used to create other dapps (decentralized applications) and mint NFTs, so an investor can see its purpose beyond the coin itself.
Figure out your strategy and risk tolerance, research the pros and the cons, and gauge the market sentiment, says Danial. “When I see a high, I’m like, ‘Oh, that doesn’t even fit in my strategy,” says Danial. “I’m willing to miss out on an ‘opportunity’ because I have a strategy, I’m good. I don’t look for trends on Twitter to say, ‘OK, what do I want to buy?’”
Be Wary of Celebrity and Influencer Promotions
The celebrity or influencer might have their own reasons to promote a particular currency, whether they’re getting paid as a spokesperson, or they own the coin and want to pump its value, or they truly believe in it. But it’s almost certainly not that they’re just trying to help you get rich.
If you see other altcoin investors talking about how they are “so early” to a given new coin, try to find out why there’s reason to think anyone else is coming later to invest more money. “They’re encouraging your investment,” which will usually be the thing they are invested in, says Boneparth. “We’re growing, but that doesn’t mean go throw your money in, that means go learn as much as you can.”
Scammers can also reach out to you personally and pretend they’re a trusted influencer. This is a common problem for credible personal finance experts who have built engaged communities on Instagram, so dig in a bit if someone you follow appears to send you a message.
“I have over 1,000 impersonators combined on Instagram, TikTok, and Facebook,” Danial says. “They take my pictures, they take the pictures of me and my daughter, they kind of imitate my name, and then they follow and DM my followers and scam them.”
If someone reaches out saying they just want to give you this great advice or free coins, Google the person’s handle and check if it matches the verified handle of the person they say they are, says Danial. “Do not respond to anybody unless you’ve done your research online and verified they’re the real deal. If it feels like a scam, it probably is,” she says.