What Are Crypto Pump-And-Dump Groups? Are They Legal?

by Aug 8, 2023DEX/CEX0 comments

Crypto pump-and-dump groups are online communities that coordinate to manipulate the prices of cryptocurrencies for their own benefit. They use social media platforms like Discord and Telegram to communicate and execute their schemes. But how do they work, and are they legal? In this article, we will explore crypto pump-and-dump groups’ nature, methods, and consequences.

What Is a Crypto Pump-and-Dump Scheme?

A crypto pump-and-dump scheme is a type of market manipulation involving artificially inflating a cryptocurrency’s price (pumping) and then selling it at a higher price to unsuspecting buyers (dumping). The perpetrators of the scheme usually target low-liquidity and obscure coins that are easier to manipulate. They use various tactics to create hype and demand for the coin, such as spreading false or misleading information, creating fake news or events, or using bots or influencers to promote the coin. The goal is to attract as many buyers as possible and drive up the price.

Once the price reaches a certain level, the perpetrators start selling their holdings (dumping), causing a sharp drop in the price. The buyers who bought at the peak are left with worthless coins and huge losses. The perpetrators then move on to another coin and repeat the process.

Crypto Pump-and-Dump Scheme

How Do Crypto Pump-and-Dump Groups Operate?

Crypto pump-and-dump groups are self-organized teams of individuals carrying out online operations. They usually operate on Discord or Telegram, creating channels or groups anyone can join without prior consent. The groups have a hierarchy of members and leaders (or admins) who manage the group. The leaders decide which coin to target, when to start and end the pump, and how to distribute the information.

The members of the group are divided into different ranks or tiers, depending on their level of involvement or contribution. Higher-ranked members receive the notification that initiates the pump by disclosing the target coin a little earlier than lower-ranked users. This gives them an advantage to buy at a lower price and profit more from the pump-and-dump scheme.

Most groups use an affiliation system, where members can move up the hierarchy by recruiting new members. The rank increases in proportion to the number of new members added to the group. Some groups also charge a fee to join or access higher ranks, usually in Bitcoin (BTC).

The groups use various channels or platforms to communicate and execute their schemes, such as:

  • Discord or Telegram: These are the main platforms where the groups organize and coordinate their activities. They use voice or text chat services to share information, instructions, signals, countdowns, charts, etc.
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Discord or Telegram
  • Twitter or Reddit: These are the platforms where the groups create hype and demand for the target coin. They use hashtags, posts, comments, upvotes, retweets, etc., to spread positive or misleading information about the coin. They may also use bots or influencers to amplify their messages.
Twitter or Reddit
  • YouTube or TikTok: These are the platforms where the groups create fake news or events related to the target coin. They may use video editing tools or actors to create convincing videos that show celebrities endorsing the coin, major partnerships being announced, breakthroughs being achieved, etc.
YouTube or TikTok
  • Crypto exchanges are the platforms where groups buy and sell the target coin. They usually choose exchanges with low liquidity and security standards, such as decentralized exchanges (DEXs) or unregulated ones. They may also use multiple accounts or proxies to avoid detection or suspension.

What Are the Consequences of Crypto Pump-and-Dump Schemes?

Crypto pump-and-dump schemes have negative consequences for both the perpetrators and the victims of the scheme. Some of these consequences are:

  • Financial losses: The victims of the scheme suffer financial losses when they buy high and sell low. They may lose their entire investment or a significant portion of it. The perpetrators may also face financial losses if they fail to sell their holdings before the price drops or if they get caught by law enforcement or regulators.
  • Legal risks: The scheme’s perpetrators may face legal risks if they violate any laws or regulations related to market manipulation, fraud, money laundering, etc. Depending on the jurisdiction and severity of the case, they may face fines, lawsuits, criminal charges, imprisonment, etc.
  • Reputation damage: The victims of the scheme may face reputation damage if they are associated with dubious or scammy projects. They may lose credibility or trust among their peers or customers. The perpetrators may also face reputation damage if they are exposed or denounced by other crypto community members.
  • Market distortion: The scheme may distort the market by creating artificial volatility and liquidity for certain coins. This may affect the price discovery and efficiency of the market. It may also harm legitimate projects with similar names or features to the target coin.

How to spot and avoid crypto pump-and-dump groups?

Crypto pump-and-dump groups are not easy to spot, as they conceal their identity and intentions using various techniques. However, there are some signs and indicators that can help you identify and avoid them, such as:

  • Unrealistic promises: The groups may promise huge returns or profits in a short period of time, such as 100x or 1000x. They may also claim that the target coin is the next Bitcoin or Ethereum or that it has a revolutionary technology or a groundbreaking partnership. These are usually red flags that indicate a scam or a manipulation.
  • Lack of transparency: The groups may not disclose their identity, credentials, or affiliation. They may also not provide any verifiable information or evidence to support their claims or statements. They may use fake names, profiles, or accounts to hide their true identity or agenda.
  • High pressure: The groups may use high-pressure tactics to persuade you to join their group or buy their coin. They may influence your decision by using urgency, scarcity, fear, or greed. They may also use social proof, testimonials, or endorsements to create a false sense of legitimacy or popularity.
  • Low quality: The groups may use low-quality platforms or services to communicate or execute their schemes. They may use poorly designed websites, apps, or channels that have spelling errors, grammatical mistakes, broken links, etc. They may also use low-liquidity or unregulated exchanges that have security issues, withdrawal limits, etc.
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What Are Crypto Pump-And-Dump Groups

To avoid falling victim to crypto pump-and-dump groups, you should also follow some best practices, such as:

  • Do your own research: Before investing in any cryptocurrency project, you should always do your own research. You should verify the source, credibility, and validity of the information you receive. You should also check the project’s website, whitepaper, roadmap, team, partners, etc., to understand its vision, goals, and progress.
  • Be skeptical: You should always be skeptical of any offer or opportunity that sounds too good to be true. You should not trust anyone who promises guaranteed returns or profits without any risk or effort. You should also not follow anyone who tells you what to buy or sell without explaining why or how.
  • Be cautious: You should always be cautious of any platform or service that asks for your personal or financial information. You should not share your private keys, passwords, PINs, etc., with anyone. You should also not send any money or crypto to anyone without verifying their identity and reputation.
  • Be diversified: You should always diversify your portfolio and invest in different projects and coins that have different characteristics and risks. You should not put all your eggs in one basket or chase after the latest trend or hype. You should also set realistic expectations and goals for your investments.

Are crypto pump-and-dump groups legal?

Crypto pump-and-dump groups are illegal in the stock market, but since most cryptocurrencies are not considered securities, cryptocurrency markets often operate in legal limbo. Therefore, even though the scheme is unethical and immoral, it may not be explicitly illegal in some jurisdictions.

However, this does not mean that crypto pump-and-dump groups are immune from legal action or regulation. Depending on the nature and extent of the scheme, it may violate various laws or regulations related to market manipulation, fraud, money laundering, consumer protection, etc.

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For example 2018, the U.S. Commodity Futures Trading Commission (CFTC) issued a customer advisory warning against crypto pump-and-dump schemes. The CFTC stated that such schemes are illegal under the Commodity Exchange Act and that it has the authority to prosecute them.

Similarly, in 2019, the U.S. Securities and Exchange Commission (SEC) charged a group of individuals for conducting a fraudulent ICO and a series of pump-and-dump schemes. The SEC alleged that the group violated the antifraud and registration provisions of the federal securities laws.

Therefore, crypto pump-and-dump groups are harmful to the investors and the market and risky for the perpetrators. They may face legal consequences if they are caught by law enforcement or regulators.

Conclusion

In conclusion, crypto pump-and-dump groups are online communities that engage in market manipulation to artificially inflate the prices of cryptocurrencies for their own gain. While the legality of these schemes may vary depending on jurisdiction and the specific circumstances, they are generally considered unethical and can result in significant consequences for both the perpetrators and the victims.

For individuals seeking to protect themselves from falling victim to these schemes, it is important to be vigilant and exercise caution. Conducting thorough research, being skeptical of unrealistic promises, maintaining personal security, and diversifying investments are all key practices to follow.

To stay informed about the latest news and updates pertaining to cryptocurrencies, NFTs, and the metaverse, I encourage you to subscribe to our website newsletter.

FAQ

Are crypto pump-and-dump groups legal?

They often operate in legal grey areas, but depending on the jurisdiction and extent of the scheme, they could violate laws related to market manipulation, fraud, and more.

What tactics do pump-and-dump groups use?

They create hype by spreading false information and fake news and using influencers to promote coins.

How do members of pump-and-dump groups benefit differently?

Higher-ranked members get early notifications to buy low before the pump, maximizing their profits.

Why do pump-and-dump groups target low-liquidity coins?

Low-liquidity coins are easier to manipulate due to their limited trading activity and volume.

What platforms do pump-and-dump groups use for communication?

They coordinate their schemes through Discord, Telegram, Twitter, Reddit, YouTube, TikTok, and crypto exchanges.

How can pump-and-dump schemes affect legitimate projects?

These schemes may harm legitimate projects with similar names or features as the target coin.

What legal actions have been taken against pump-and-dump groups?

The U.S. CFTC and SEC have issued warnings and taken action against pump-and-dump groups, charging them with illegal activities.

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