LONDON — Cryptocurrency exchanges are rife with “pump and dump” scams that would be illegal in most markets and leave unsuspecting investors at risk of large losses, a Business Insider investigation has found.
Crypto traders are using the secure messaging app Telegram to orchestrate the scams. Their strategy is to suddenly inflate the price of a cryptocurrency by coordinating a few buyers to act at specific times.
Then, after the price rises, they attract other, unwitting investors to buy into the price momentum. The “pumpers” quickly sell the coin to make a profit. The coins often crash just minutes after the initial surge, leaving the second wave of investors with losses.
The same scam was most famously carried out in the stock market by the “Wolf of Wall Street” Jordan Belfort, the convicted securities fraudster whose exploits were turned into a film starring Leonardo DiCaprio.
Business Insider observed “pump and dumps” for the cryptocurrencies UBQ, VCash, Chill Coin, Magi Coin, and Indorse over the last two weeks alone. All the scams took place on either Las Vegas-based exchange Bittrex or Russian exchange Yobit.
Ben Yates, a senior associate at law firm RPC who has looked closely at the space, told Business Insider: “It’s clear from even casual monitoring of the exchanges that this sort of activity is rife, particularly with altcoins with smaller circulation.”
Cryptocurrency exchanges and markets are unregulated in most parts of the world and so these activities are not illegal. However, they highlight the risks associated with this new corner of finance, which has attracted huge amounts of capital in 2017 but is regarded as the “wild west” by critics.
“Pump and dump” schemes are illegal in government-regulated public stock markets, like the London and New York stock exchanges. Several securities lawyers BI spoke to argued that cryptocurrency exchanges should be regulated in the same way. The US Securities and Exchange Commission has said digital currencies are likely to fall under existing securities laws, but it has so far taken little enforcement action.
A $200 billion market
Cryptocurrencies have exploded in popularity in 2017 thanks to the success of “initial coin offerings” (ICOs), where startups issue new digital coins in exchange for real money used to fund their ideas. These coins can be traded on online exchanges, offering greater liquidity to investors in private companies.
Over $3 billion has been raised through ICOs since the start of the year and there are now more than 1,200 cryptocurrencies in circulation, according to CoinMarketCap.com.Celebrities such as Paris Hilton, boxer Floyd Mayweather, rapper The Game, and DJ Khaled have all endorsed ICOs, helping raise the profile of digital currencies.
While retail investors have rushed into the new market, many people have warned about the potential dangers of the emerging space.
Belfort himself, who served 22 months in prison for securities fraud and money laundering in 2000, said recently that ICOs are “a huge gigantic scam that’s going to blow up in so many people’s faces. It’s far worse than anything I was ever doing.”
The European Securities and Markets Watchdog (ESMA) said on Monday that ICOs are “extremely risky and highly speculative investments” and “many of the coins or tokens… have no intrinsic value other than… to use them to access or use a service/product.” Investors risk “the total loss of your investment”, ESMA warned.
Despite similar warnings from other regulators, the total cryptocurrency market has ballooned to almost $200 billion this year. However, well-known coins such as bitcoin, ethereum, and bitcoin cash account for 80% of the market by value, meaning there are a huge number of low-value coins in circulation. Most have thin trading volumes, making them ripe for “pump and dump” manipulation, like penny stocks…