The Commodities Futures Trading Commission (CFTC) has warned that crypto-currencies are vulnerable to so-called pump and dump schemes.
“As with many online frauds, this type of scam is not new – it simply deploys an emerging technology to capitalize on public interest in digital assets,” said CFTC Director of Public Affairs Erica Elliott Richardson. “Pump-and-dump schemes long pre-date the invention of virtual currencies, and typically conjure the image of penny stock boiler rooms, but 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 CFTC encourages all customers to thoroughly research potential investments, stay informed about tactics commonly used in investment fraud, and avoid investment opportunities they don’t fully understand.”
The CFTC further noted: “Pump-and-dump schemes are mostly anonymous and are organized in public chat rooms or via mobile messaging apps. They are coordinated efforts to create phony demand (the pump) and then sell quickly (the dump) to profit by taking advantage of traders who are unaware of the scheme. This type of market manipulation occurs in the largely unregulated cash market for virtual currencies and digital tokens, and typically on platforms that offer a wide array of coin pairings for traders to buy and sell.
“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 currency’s 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.”
What is a pump and dump scheme
As the CFTC noted, so-called pump and dump schemes were originally popularized in boiler room penny stock operations.
The movie Boiler Room is about one such boiler room operation which engaged in a series of pump and dump schemes.
In pump and dump schemes, worthless securities are peddled by boiler room operations with high pressure sales tactics until unsuspecting investors buy this worthless security from the originators of the scheme who make huge profits.
Once the securities are dumped on the public, the market – which is non-existent and was entirely manufactured until now – collapses and with it the price of the security.
Pump and Dump and Virtual Currency
There are now well over one thousand virtual currencies, and at a recent hearing, CFTC Chair Christopher Giancarlo stated his belief that most were scams.
The CFTC fraud alert warned potential investors
To avoid pump-and-dump schemes that can occur in thinly traded or new ‘alternative’ virtual currencies and digital coins or tokens. Customers should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes. Thoroughly research virtual currencies, digital coins, tokens, and the companies or entities behind them in order to separate hype from facts.
