Crypto “Pump-and-Dumps”: Buyer Beware

Given recent developments aiding the overall growth and scope of
investment into the cryptocurrency market, all signs appear to be pointing
towards digital assets playing an increasingly pivotal role in the global
financial system in the years to come. Today it is becoming all the more
common for experienced hedge fund investors and novice “Robinhood”
traders alike to own a slice of Bitcoin and other altcoins, with the practice
becoming nearly as commonplace as owning various individual stocks. Yet
what the latter may fail to identify is the fact that unlike the stock market,
protections and regulations surrounding the crypto-realm remain few and
far between – this despite the exponential growth of the market over the
past decade. This presents challenges and potential risks to those delving
into the market for the first time with hopes of simply riding the wave of
gains that have become widely publicized over the past year or so. Much
like other crimes of the white-collar variety, it appears that the crypto
market is too susceptible to efforts by fraudsters seeking to profit at the
expense of unsuspecting citizens.
Whenever novel opportunities such as those presented by new or
emerging markets come about, you can rest assured that financial criminals
will be working their way towards taking advantage of potential loopholes
or the general lack of clarity that often accompany these outlets. With
respect to cryptocurrencies, the lack of legislation governing potentially
illicit activity across the market is virtually non-existent which has enabled
criminals to act with little to no fear of potential repercussion. A growing
form of unethical activity that has hit both the crypto and U.S. stock market
(the latter due in large part to the IPO craze seen since the onset of the
COVID pandemic) are known as “pump and dump” schemes. These ploys
involve the mass promotion and subsequent hype generation of a certain
commodity or cryptocurrency by influencers (which can include celebrities,
widely recognized investors/businessmen, or even ho-hum traders who have
used platforms such as Twitter to build a strong following) which ultimately
causes the coin/stock’s perceived valuation as a worthwhile investment to
increase. More often than not however, this sharp increase in price point
lacks a fundamental backing. This promotion then generally leads to major
investment from the audiences targeted by those “pumping” these assets.
Once the value of the stock/coin increases to a point deemed suitable by the
promoter/scammer (i.e. reaching new all-time highs), they will then proceed
to sell off all of their shares/coins and make substantial profits. Naturally this causes stock or crypto prices to drop quickly, leaving common investors
following the hype train hung out to dry. The practice has already made
millionaires of many while bankrupting far more.
Arguably the two top cryptocurrency options on the market today,
Bitcoin and Ethereum, have larger markets that are more difficult for even
the most powerful to manipulate. However, billionaire entrepreneur Elon
Musk had come under fire in recent months for doing just that. Earlier this
year, word of the reported $1.5 billion investment made by Musk’s
brainchild Tesla into Bitcoin spread like wildfire across social media (as well
as his personal investment in what was at the time nothing more than a
“joke-coin” in Dogecoin). Naturally, the prices of each of these coins surged
“to the moon” as they say. However, much of the fun stopped in April as
Musk abruptly had a change of heart about Bitcoin given “environmental”
concerns with respect to the increasing use of fossil fuels for mining of the
coin, proceeding to cash out to boost Tesla’s quarterly revenue – this at the
expense of those rushing into Bitcoin investment off of Musk’s initial
endorsement alone. Given that the number of alternative coins grows on a
daily basis (and are essentially the equivalent of penny stocks), scammers
have realized that you don’t need to be Elon Musk to make a profit via
similar means in this space. If the retail v. hedge fund (Gamestop) saga of
spring 2021 taught us nothing more, it is that investors seeking to make
quick profits can be easily manipulated with tactics as simple as a Reddit or
Twitter post. And when someone has thousands of dollars invested in a coin
worth <$0.50, it takes only a modest number of new investors to drive up
the price, making the potential profits more than worthwhile for scammers.
Making matters all the more pressing is the fact that these ploys are
growing in prevalence at a very fast pace. CNet writes that “A 2020 study
from the University of Technology Sydney and the Stockholm School of
Economics in Riga found 355 instances of crypto pump-and-dump scams
over the course of seven months” with the organizers of these scams
walking away with millions of dollars.1 Many people casually invested in
cryptocurrencies have no idea that the U.S. Securities and Exchange
Commission (SEC) nor the Commodity Futures Trading Commission (CFTC)
regulates cryptocurrency markets like they do stocks. If this type of activity
were to occur in the stock market, it would be subjected to a full-fledged
investigation and likely legal/criminal action. However, with no regulatory
bodies in place to harbor the crypto market, this already volatile market has
been viewed as the “Wild West” of the investment world. However, politicians are finally coming around to address this and
other threats posed to the growing crypto-investor pool. Senator Elizabeth
Warren (D-MA) has been advocating that a new coordinated strategy to
better combat systemic risks posed to the U.S. financial system come from
the U.S. Treasury Department. With a total of over 2,000 digital currencies
at an estimated total market value approaching $2 trillion, there is a
significant amount of unregulated currency floating around. “FSOC should
review this matter and determine whether it is appropriate to utilize its
statutory authority to contain the systemic risks posed by the growing
cryptocurrency market,” she said. “The longer that the United States waits
to adapt the proper regulatory regime for these assets, the more likely they
will become so intertwined in our financial system that there could be
potentially serious consequences if this market comes under stress.”2 It
remains to be seen whether new Treasury Secretary Janet Yellen is up to
the task and can react urgently to address this issue, though it is evident
that regulation of some sort should be on the table in the coming months to
maintain the integrity of U.S. financial sector.

Citations
1. Gonzalez, Oscar. “Cryptocurrency Pump-and-Dump Schemes: Everything You
Should Know.” CNET, CNET, 27 July 2021. 
2. Mejdrich, Kellie. “Warren Urges Yellen to Crack down on