3 Ways to Avoid a Pump-and-Dump Scam | #socialmedia

  • Regulators in the US and the UK have warned investors about crypto pump-and-dump schemes.
  • Scammers ‘pump’ prices by spreading misinformation, then ‘dump’ the coin once it reaches a price target.
  • Crypto and finance experts told Insider how smart investors can protect themselves.

Kim Kardashian seems an unlikely target for investigation by the UK’s financial markets regulator.

But the celebrity and influencer found herself in regulatory hot water last week when she used her instagram account to promote the little-known ethereum max cryptocurrency token – which bears no relation to ether, the native coin of Vitalik Buterin’s Ethereum Foundation.

“I can’t say whether this particular token is a scam,” said Financial Conduct Authority chair Charles Randell, speaking at the Cambridge International Symposium on Economic Crime about Kardashian’s promotion of ethereum max. “But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation.”

“Some influencers promote coins that turn out simply not to exist at all,” he added.

2.3 million Brits have invested in crypto products, according to the FCA, and an estimated 12% incorrectly believe that the regulator offers them financial protection against these scams. Security tokens like bitcoin and ether are currently unregulated in both the UK and the US.

“The concern the FCA has is that many of those 2.3 million Brits don’t understand the risks they’re getting into,” Mark Lewis, a consultant at Macfarlanes LLP specializing in technology regulation, said in a recent interview with Insider.

Kim Kardashian promoted an unknown crypto token to her followers in June.

NurPhoto/Getty Images

Regulators across the Atlantic have raised similar concerns about cryptocurrencies. In an August 3 speech, SEC chair Gary Gensler described the unregulated crypto market as the “Wild West.”

“Right now, we just don’t have enough investor protection in crypto,” he told the Aspen Institute. “If we don’t address these issues, I worry a lot of people will be hurt.”

Insider spoke to crypto analysts and personal finance experts to determine what a crypto pump-and-dump scam looks like and how investors can better protect themselves.

Scams are often ‘too good to be true’

Most observers of cryptocurrency Instagram, TikTok, and Twitter will already have a sense for what a pump-and-dump scam looks like. Active users and bots promote misinformation about the potential returns of a little-known coin to encourage investment. They then ‘dump’ their holdings once they believe the price has topped out, meaning later investors have to absorb losses.

“It can be easier for crypto investors to fall victim to a pump-and-dump scheme,” Simon Peters, a crypto analyst at financial services firm eToro, said. “Big returns are possible for investors, and many are looking for the next big crypto and chasing extraordinary returns.” 

“Those looking for quick wins and who fail to do their research can be susceptible to the spread of misinformation, and encouraged to buy a particular asset they otherwise might not have,” he added.

Other experts agreed that investors should be wary of unknown tokens promising triple-digit returns.

“The chatter on social media platforms and potential for fraud and scams is rising, with so many people desperate to emulate tales of getting rich quick,” said Susannah Streeter, an investment and markets analyst at UK broker Hargreaves Lansdown. “Some of the most financially vulnerable are gambling with money they can’t afford to lose.”

In both the US and the UK, there have been horror stories about retail investors losing their life savings in crypto scams, with one 70-year-old telling the BBC recently he had lost over £250,000 ($350,000). The chief executive of crypto data and software specialists Lukka tells his parents to think carefully about their own risk profile before investing in cryptocurrencies.

“I tell them not to go crazy, buy some safe assets with the majority of their portfolio and just hold them – this is definitely a long strategy,” Robert Materazzi told Insider in a recent interview. “Go dabble with some of the other coins with an amount you’re willing to lose, but count on losing that money if you’re investing in true altcoins.”

Look into the community behind a coin

Crypto experts told Insider investors should take the time to research a coin’s developers before making a decision to get involved.

“If you’re looking for signs I would point to the actual community behind a coin, you can tell what people are there for,” said Mason Nystrom, an analyst at the crypto research firm Messari. “Look at developer metrics, look at actual growth, look at whether people are depositing their capital into a protocol and using it for something specific.”

“Some projects have no clear goals, just want to take consumer capital, and have no interest in returning it,” he added.

eToro’s Peters agreed with Nystrom that investors should investigate the community behind a coin.

“Investors should always look at the credentials of the people behind the project – mainly to understand their experience and if they have been involved in other, similar projects, or are new to the space,” he said. “If the founding members or organization behind the crypto is holding most of the circulating supply, that could also be a reason to be wary.”

Peters pointed to the 2017 initial coin offering craze as a period when many investors poured money into little-known crypto tokens. 78% of ICOs that year ended up being identified as scams, according to the advisory firm Satis Group.

“Many scam projects managed to mislead investors, purely based on a whitepaper and a website,” he said. “There was no real credibility in these projects, yet they managed to convince many to buy.”

Ignore the influencers

Kardashian is just the latest high-profile celebrity to use social media to promote a little-known cryptocurrency. Ethereum Max’s 28,000-follower Twitter account boasts of a collaboration with world champion boxer Tyson Fury, with the British heavyweight reportedly set to be sponsored by the coin in his upcoming title fight against Deontay Wilder.

Ethereum max claim to have collaborated with the heavyweight boxer Tyson Fury.

Photo by MB Media/Getty Images

In April, 17-year-old TikToker Matt Lorion apologized for promoting the Star Wars-themed cryptocurrency Mando to his followers. He said he lost $10,000 in the pump-and-dump scam.

“The developers pretty much scammed everyone, including me,” Lorion said in an apology video. “To make sure that something like this doesn’t happen again, my management team is going to get in contact with every single developer before I promote a cryptocurrency.”

One prominent investing influencer told Insider they receive offers of “thousand of dollars or more” to promote “random cryptocurrencies” on a daily basis.

Experts agreed that one of an investor’s first steps should be to check whether a token is listed on a major exchange such as Coinbase or Binance. Ethereum max, for example, cannot be traded on either platform.

“If the crypto is not listed on a major regulated crypto exchange, that could raise a few question marks, so always proceed with caution,” eToro’s Peters said. “Exchanges and brokers should vet projects before deciding to list them on their respective platforms.”

Right now, the only way that investors can protect themselves in the influencer-driven ‘Wild West’ world of crypto is by asking those questions.

“Speculation is going to continue to be a part of crypto; that’s how you fund ideas that couldn’t otherwise be funded,” Messari’s Nystrom told Insider. “So it’s up to investors to do their due diligence and for the community to self-regulate when it can.”

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