The Pump-and-Dump Scheme

Although crypto pump-and-dump schemes are new, the logic underlying them has been around since the 1700s. In general, a fraudster persuades people that he has some financial instrument with value. People then give the fraudster money, expecting the financial instrument to skyrocket in price over time. As people are tricked and purchase more of the instrument–this could be a stock or a cryptocurrency–the instrument’s price rises simply due to the increase in demand. With the artificially inflated price (since the instrument does not actually have intrinsic value), the fraudster dumps all of the units of the instrument that he started with and runs away with his monetary profit.

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Consider the South Sea Company, founded in 1711. Swindlers used to exaggerate the success of the company to convince people to buy stocks. The naive recipients would be left ‘holding the bag’ by the time the bubble popped, and the swindlers ran away with the profit of selling those stocks far above their actual worth.

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Altcoins Offer no Real Value

To be sure, not all altcoin founders have this pump-and-dump scheme in mind. That is, they are not necessarily conscious that they are effectively scamming people. Nevertheless, the net effect of their actions is that people are swindled of their money in return for a valueless asset.

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Former Wall Street trader Max Keiser said that “Every single day people are waking up to the fact that [altcoins] are just scams…These DeFi projects routinely blow up.” He also explained that only Bitcoin was scarce and decentralized, and so no altcoin could possibly supplant Bitcoin as the next global reserve asset.

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Pump-and-dump schemes are plaguing the world of cryptocurrency in part because people simply do not understand it. 

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In the world of altcoins, the pump-and-dump scheme often begins with a core team of highly skilled and seemingly professional individuals. Some of these players may even be investors themselves, either genuinely duped into the scheme or in on the chicanery. The investors buy the coins early on so that the price rises, and so that demand for the coin appears genuine to the public. The public, then, will buy the coin in order not to miss out on the opportunity. This is where the lack of widespread understanding of cryptocurrencies causes so much damage. Put simply, the only cryptocurrency that can serve as the next global reserve asset is Bitcoin.

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Do not be persuaded by an altcoin’s publicity campaign, no matter how ‘official’ and ‘substantive’ it may seem. Because investors often provide the coin founders with capital, they can afford to ‘dazzle’ the public with all sorts of marketing gimmicks.

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Risk of Exchanges

As of this writing, the crypto industry is far less regulated than traditional banking is. This is good, since government regulation hampers innovation and growth. However, it also means that crypto exchanges are less likely to receive a bailout in the event that they are running on fractional reserves. This means that they are vulnerable to bank runs, in which case there is no guarantee that you will be able to retrieve your assets that are on the exchange. Fortunately, exchanges are not necessary to own cryptocurrency.

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The Solution

The solution to both avoiding pump-and-dump crypto schemes and the risk of having your crypto assets frozen on an exchange is the same: only buy Bitcoin, and only hold it in your own wallet. 

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Trezor and Ledger both offer excellent, user-friendly hard wallet products. Do not wait to go Bitcoin-only and off of exchanges. If the FTX implosion taught us anything, it is that the world of non-Bitcoin can collapse without a moment’s notice.