Is Pumping And Dumping Cryptocurrency Illegal? How Does It Happen?

Pumping and dumping cryptocurrency on regulated crypto exchanges are illegal. But on the unregulated crypto exchanges, scammers use this scheme because they know that it will be difficult for the authority to catch them. So, if you want to apply the Pump and Dump scheme on the unregulated crypto exchanges then it is not illegal.

Key Takeaways

• There are lots of cryptocurrency scams available, among them pump and dump is one of the most used scams
• By using the pump-and-dump method, scammers boost the price of a cryptocurrency through fake recommendations
• Usually, scammers pick low price crypto and then inflate the price through well-planned marketing
• In 2015, CTFC released their first Pump-and-Dump Virtual Currency Customer Protection Advisory statement
• You should not invest in cryptocurrencies that comes through social media

What Are Pump And Dump?

Pump-and-dump is a manipulative scheme and scammers use this scheme to boost the price of a stock or security through fake recommendations. Nowadays, Pump-and-dump is very common in cryptocurrency and it represents a situation where an individual or group of people try to make a profit from pumping the cryptocurrency. Pumping and dumping work is based on false, misleading, or greatly exaggerated statements. The word “pump” refers to the purchasing of large quantities of crypto coins to increase the demand for a coin so that the price of that coin will increase. 

Then the buyers release the coins at a high price to take in a high return on investment. Here the scammers take advantage of the market dynamics of supply and demand and make general investors think that the price hike of the coin is a normal trend. Usually, the scammers target the new and unpopular coins to manipulate because they don’t need lots of money. For example, the scammers won’t pump and dump Bitcoin because the price of Bitcoin is very high and it will require a lot of money. Moreover, many scammers choose the initial coin offerings (ICOs) because lots of investors are psychologically prepared to make a purchase.

How Do Pump And Dump Work?

Usually, the pump and dump scheme is operated by a team of organized and tech-abled members who operate from different points to make the public look genuine. They target worthless or low price crypto and then inflate the price through well-planned marketing. Scammers use various types of methods to increase the price of the currency and their methods include false statements, misleading statements, a large number of social media posts, co-signs, etc. Sometimes the scammer team includes investors who provide funding to buy the coins and raise the demand. If the coin has low volume, then it allows the scammers to control the whole asset.

The scammers work in two teams. One team focuses on creating artificial supply and the other team works hard to establish the good side of the coin. In the past, scammers used word of mouth to spread the news but now scammers use various online platforms and social media to encourage people to buy dump and pump coins. Moreover, scammers also use influencer marketers to spread the ‘good’ word about cryptocurrency. The buyers and investors rush to buy the coins at a high price in fear of missing out on the opportunity to make a large profit. When the scammers manage to sell all their cryptocurrency, the hype and demand disappear as well as the price crashes. Below are the five steps to pump and dump crypto – 

1. First, create a pump and dump scheme group

2. Then collect some investors and get the funds ready to make rapid purchases

3. Run an aggressive publicity campaign to create hype among the traders

4. Increase the price of the coin and monitor the price; sell the coins once the price hits the peak

5. Once you sell all the coins make sure you move your funds to your wallet immediately

How To Take Advantage Of Pump And Dump Cryptocurrency Schemes

If you can identify the pump and dump scheme of a coin then you will be able to take advantage of that scheme. You have to closely monitor the crypto market trend and buy the coins when the price started to rise and then sell the coins when the price reaches the peak. Follow the below steps to take advantage of the pump and dump scheme – 

1. Follow the coin closely that has been publicized so much. It could be a new coin or an existing coin

2. Closely follow the price movement of that coin to notice when it starts to rise steadily

3. You have to identify the pumping point of the coin so that you can buy the coins at as low price as possible

4. Monitor the price and wait for the coin price to reach the peak and then sell all the coins and bag the profits!

CTFC Virtual Currency Customer Protection Advisory Statement

In 2015, CTFC released their first Pump-and-Dump Virtual Currency Customer Protection Advisory statement. The statement says – 

“Customers should know that these frauds have evolved and are prevalent online. Even experienced investors can become targets of professional fraudsters who are experts at deploying seemingly credible information in an attempt to deceive.”

The CTFC detects the pump and dumps schemes from various online groups with more than thousands of members. They even quoted messages from an online chat group – 

“15 mins left before the pump! Get ready to buy.” “Five minutes till pump, next message will be the coin! Tweet about us and send everyone the link to telegram (sic) for outsiders to see what we are pumping so they can get in on the action too!! Let’s (sic) take it to the MOON!!!!!”

Therefore, the CTFC warns the crypto traders and says – 

“Customers should avoid purchasing virtual currency or tokens based on tips shared over social media. The organizers of the scheme will commonly spread rumors and urge immediate buying. Victims will commonly react to the currencies or token’s rising prices, and not verify the rumors. Then the dump begins. The price falls and victims are left with currency or tokens that are worth much less than what they expected. From beginning to end, these scams can be over in just a few minutes.”

This is what Joe Ciccolo (founder of BitAML and anti-money laundering (AML) specialist) says about the legal status development of pump and dumps in the cryptocurrency market – 

“The CFTC, like other financial regulators, will continue leveraging existing enforcement resources. Whistleblower programs, a common regulatory tool, have generally worked remarkably well at putting crucial and credible information into the hands of investigators. The CFTC has rightfully prioritized consumer education and protection by focusing on detecting and deterring fraudulent activities, such as pump and dump schemes, while not stifling early innovation in the crypto space.”

How To Protect Yourself From Pump And Dump Scheme

The best way to keep yourself safe from pump and dump schemes is to only purchase alternative virtual currencies, digital coins, or tokens that have been thoroughly researched. Here are some important tips – 

1. Avoid purchasing crypto coins or tokens that comes through social media

2. Don’t trust ads or websites that offer quick profits by investing in a certain cryptocurrency

3. Do not participate in pump-and-dump trades because pumping and dumping is illegal and against the law

4. If there is any offer that says there is no risk of losing money then don’t accept the offer and invest money

FAQs About Is Pumping And Dumping Cryptocurrency Illegal? How Does It Happen?

References:

1. https://www.cnet.com/personal-finance/crypto/cryptocurrency-pump-and-dump-schemes-what-you-should-know-about-these-scams/
2. https://kenaninstitute.unc.edu/kenan-insight/should-cryptocurrency-pump-and-dump-schemes-be-regulated/

Last Updated on October 24, 2022 by Magalie D.