Be Wary of Crypto Pump-and-Dump SchemesRyan Tucker
Cryptocurrencies are so new and exciting, and have appreciated so greatly in value just over the past year, that there are more and more investors seeking to purchase them all the time. But like any new market, there are unsavory characters out there looking to take advantage of those investors. Many of these new investors are young, and investing in cryptocurrencies may be their first time investing. And like many first-time investors, they may succumb to investing euphoria and become easy victims of cryptocurrency pump-and-dump schemes.
Pump-and-dump schemes are commonplace among some areas of the stock market, particularly penny stocks. Stocks of small companies are hawked by company owners or other insiders, often with press releases announcing an exciting new product the company is offering, or an acquisition the company has made that allows it to move into a new line of business. Since the companies are small, investors are limited in the amount of due diligence they can do, normally relying only on the press releases for their information.
What happens then is well-known. Investors flock to buy the stock, thinking it has tremendous growth potential, although in reality many of these companies are merely shell corporations that aren’t actually engaged in business. The stock price rises, the company insiders sell their shares and pocket millions of dollars in gains, then move on to form another company and do the same thing all over again.
Cryptocurrencies aren’t immune from that type of activity either, which is why federal financial regulators have warned consumers about falling victim to pump-and-dump schemes. Much of the focus has been on initial coin offerings (ICOs), in which companies will attempt to raise money by creating new cryptocurrencies or tokens, with the hope or expectation that those tokens will rise in value once the company is able to bring its new cryptocurrency product or service to fruition.
The danger is that chatter about the company will lead to the token being overhyped, driving up its price, the insiders within the company then will sell their tokens for a huge profit, and then abandon the project, leaving investors with worthless tokens. Just how many investors have lost money to fraudulent ICOs is unclear, but they do exist.
That’s all the more reason for investors to do their due diligence when making cryptocurrency investments. Investing in established cryptocurrencies with strong track records, such as Bitcoin, Litecoin, Ethereum, etc. is one way to avoid being taken to the cleaners. Products such as Bitcoin IRAs or other similar products that are offered by established companies can also help prevent you from losing money to fraudsters. Just like with any investment, if it sounds too good to be true, it probably is. Do your homework, work with a cryptocurrency firm you can trust, and avoid succumbing to the lure of pump-and-dump schemes.