The world of cryptocurrency is unfortunately rife with different scams, with a very common one that even experienced investors fall for being pump and dump scams. Being aware of all of the different cryptocurrency scams when you’re investing is so important, as they come in many different forms. They’re also always evolving, which is why remaining switched on is key. We’re here to focus on pump and dump scams, including what they are, key signs to look out for and advice if you think you’ve been a victim of a pump and dump scam.
What Are Pump and Dump Scams?
A pump-and-dump scam involves a group of scammers, usually a large group, who artificially inflate the price of a particular cryptocurrency by investing at a similar time. From here, they either spread information on social media about a new hot crypto that everyone should invest in, or they may approach people directly about it.
Once a number of people have then invested in the crypto (the number will depend on the extent of the scheme) and the value is inflated even further, which is the end of the pump phase, the scammers will all “dump” and sell their stock, leaving the remaining investors with a likely worthless investment. They make a lot of money, the innocent investors lose a lot of money, and then they go on to repeat the process.
Unfortunately, this scam is very prevalent in the world of cryptocurrency, usually targeting micro and small-cap stocks that are easier to manipulate quickly. Although, this isn’t always the case, as shown by the high-profile example of the X Token Dump and Pump rumours. This is all about using misinformation to shift natural supply and demand.
Are Pump and Dump Scams Illegal?
Yes, pump and dump scams are illegal in the UK and the US. If people are caught and face criminal charges, they will be imposed with heavy financial penalties and/or imprisonment. Investors can complain to the SEC, which then goes through a tracing process to find the people responsible.
Signs Of A Pump and Dump Scam
There are a few signs that you can look out for to identify when something might be a pump-and-dump scam:
- Usually, these scammers will find victims through social media or anonymized messaging apps like Discord or Telegram
- Hype will be built around the token; it will be framed as “the next big thing,” promising a good return on investment
- The token won’t be very well known, and when you read the white paper, the objectives and person behind it may be questionable
- The investment will likely seem too good to be true
- Abrupt increases in price and trading activity is another big warning sign
- Usually, there will be mentions of “guaranteed returns” or pressure to buy quickly before you miss the opportunity
How To Avoid Pump and Dump Scams
- Do your own research before making any investment, rather than relying on hype you see on social media or investment information that you’re approached with
- Based on your research, if anything about the investment doesn’t seem quite right, then avoid it at all costs
- Don’t listen to influencers on social media, whether they are specifically crypto influencers or fashion influencers who are dipping a toe
- Make sure you regularly read up on common cryptocurrency scams so you know how they are evolving, as they do get increasingly complex and hard to spot over time
What To Do If You Think You’re A Victim Of A Pump and Dump Scam
If you think you’re a victim of a pump-and-dump scam, you must report it to the SEC (Securities and Exchange Commission) if you’re based in the US or the FCA (Financial Conduct Authority) if you’re in the UK. These organisations are designed to protect consumers in terms of financial services and to keep the industry well-regulated and stable. Call either organisation as soon as possible after you think you’ve been scammed, and then they will be able to help you take the right course of action from there. It’s key that you report this to help catch the people responsible and prevent them from taking action again.
In terms of recovering the money you lost through the scam, if you’re working with a regulated broker or advisor and they steer you towards the scam, you may be able to file a claim against them and recover your losses.
You should also contact investment fraud lawyers who can utilise tracing technology and try to help you recover your lost funds. The sooner, the better when you think you’re a victim of a scam, as the tracing process is usually more accurate, although it’s always worth getting in touch, no matter how long it’s been.
