How to Spot Crypto Pump-and-Dump Schemes

Crypto’s favorite scam isn’t just prevalent – it’s taking on new forms.
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Christopher Robbins is a nationally recognized journalist who has been featured as a speaker and panelist on topics including investing, personal finance and wealth management. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.

Digital assets are a frontier, and so it’s no surprise that they draw their share of outlaws.

When this story is shared on social media, inevitably a series of automated accounts, run by bots, will respond, share and retweet it to their followers, and in doing so, advertise a number of projects. While some of those projects will certainly be above-board with varying prospects for success, others will be fraud or scams.

In the bewildering world of cryptocurrencies, where it seems like a new product or strategy launches every minute, it can be very difficult to tell the difference.

But according to Adam Carlton, CEO of Pink Panda, a utility token for an intricately designed digital wallet, there’s one common scam that becomes very easy to recognize once we learn the signs: the pump-and-dump scheme.

The schemes

Pump-and-dump schemes exist throughout the investing universe, Carlton said, but because of the newness and popularity of digital assets, they are especially prevalent. In the scheme, holders of a low-value asset promote and “talk it up” to encourage others to buy and increase its price. When the price reaches a certain point, the orchestrators of the scheme sell, take their profits and fade away before the price drops, with later investors left holding the bag.

“There are two types that are the most prevalent right now. One is where insiders of the token are promoting it and stirring up all the hype while on the backside, they’re selling it slowly,” Carlton said. “The others target tokens and rally a group of that token community’s members to buy, which trigger algorithms, which trigger bots, who buy too, and whoever buys last and doesn’t sell is left holding the bag.”

The first type of scheme can happen in any sort of token, but the second typically targets smaller, less well-known tokens, whose prices are easier to pump up.

One telltale sign of a pump-and-dump scheme is copy-and-pasted messages by groups of social-media and discussion-group posters with similar screen names, who will often disappear at the culmination of their scheme with their anonymity intact.

“What I’m starting to see more of, especially in people overseas, is that they will doxx themselves (reveal their identity), say, ‘Here’s my credentials, and here’s what I’m doing,’” Carlton said.

“Then they do a big raise and never put that liquidity into their token,” he said. “So they’ll raise $1 million, but hold onto $800,000 or $900,000 of it and just kick the can down the road. They’re relying on the incredible attention deficit of people in this space who are looking for one-day buy-back returns – the expectations are incredibly short.”

One telltale sign of this kind of scheme is that the perpetrators will interact in channels populated by digital assets enthusiasts, like channels on the Discord messaging app, looking for their marks.

Carlton said there are still plenty of marks as people try to educate themselves about the digital assets market, and they make themselves clear by asking rudimentary questions.

The process

Every crypto pump-and-dump scheme follows the same basic template, Carlton said.

“The way they work is they create a token, and they want to take it as high as they can, so they go onto social media and talk about the things they are doing, they share memes and get people onto their channel,” Carlton said. “They first list some place like CoinGecko, then CoinMarketCap, and each listing expands them to a broader audience.”

When there are a lot of holders, the scam may start to advertise on buses and billboards, Carlton said, or use influencers to promote their token.

The next step is to appear on one or more of the big exchanges like Coinbase or Binance, opening up the token to an extremely broad audience.

Unlike the case in many forms of financial fraud, the idea isn’t to target a specific group of people, but to rope in as many as possible.

Key indicators

As we’ve already discussed, anonymous founders are usually a red flag for some form of illicit activity or fraud, though some perpetrators are now abandoning anonymity.

“It’s still an indicator, because if someone won’t tell you who they are, they’re doing it for a reason,” Carlton said. “Ninety-nine times out of 100, it is not because they have a strong belief in anonymity, it’s because they want to hide themselves from liability.”

If someone has revealed his identity, Carlton suggests that advisors and investors research that person. That includes looking up personal information as well as understanding the token that the person is issuing.

“As with anything financial, if it sounds too good to be true, it often is,” Carlton said. “I like to look for something specific – what exactly is the utility of this project, are they meeting their objectives, and are they using their community to share valid and useful information versus just pumping?

“Honestly, a lot can be gleaned from a token’s first few trading hours, oftentimes a scam will grow like it's the hottest thing on the exchange, and then everyone gets out very quickly.” Carlton said.

Keep an open mind

But a pump-and-dump scheme doesn’t happen just because a mass movement is inflating the price of a cryptocurrency. During the pandemic, the price of dogecoin – an altcoin that was invented as a parody of digital assets but that was rapidly adopted as a speculative investment – experienced a sudden and dramatic rise when Tesla founder Elon Musk, supported by social-media communities, voiced support for the token.

“If I was out there saying, ‘Buy my token, take it to the moon,’ I would be in trouble, and I’ve been advised by attorneys not to say these things,” Carlton said. “Regulations are gray-ish enough around crypto that nothing happened to Musk, and a lot of those who bought doge at a penny made money. But there were plenty of those who bought at 60 cents or 70 cents, and some of those people were our aunts and uncles and brothers and sisters, and they ended up losing a lot of money.”

Carlton believes that celebrity promotion of crypto should generally be considered a warning sign.

Crypto investing isn’t a zero-sum game, said Carlton. Just like in other asset classes, there can’t be winners achieving above-average returns without losers, and most investment schemers reap their profit by making people losers.

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This article was originally published on Apr 21, 2022 at 12:50 p.m. UTC

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Christopher Robbins is a nationally recognized journalist who has been featured as a speaker and panelist on topics including investing, personal finance and wealth management. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.

CoinDesk - Unknown

Christopher Robbins is a nationally recognized journalist who has been featured as a speaker and panelist on topics including investing, personal finance and wealth management. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.

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