From pump and dump to rug-pull: spotting crypto market manipulation

Whilst many were initially sceptical of cryptocurrency, and the impact it could have, it is now undeniable that there has been a surge in popularity for various cryptocurrencies over the years. As a result, there are now more platforms, and methods for buying cryptocurrencies, available than ever before. The Financial Times and BBC even have dedicated pages on their websites in respect of crypto news.

We have previously written about how the growth in the cryptocurrency market has sparked a rise in the number of individuals falling victim to crypto fraud, but there has also been a growing amount of litigation in respect of “pump and dump” schemes, also known as “rug-pulls”.

What is a “pump and dump” scheme?

A “pump and dump” scheme is a form of market manipulation, whereby stock prices are artificially ‘pumped’ through misleading statements, before being sold, or ‘dumped’, at an inflated price. The result of such schemes is that stock prices then plummet, leaving those that have invested significantly out of pocket as they are left with stocks with little to no value.

Such schemes are not exclusive to cryptocurrency, and they have also been used in relation to ‘traditional’ stocks in smaller companies. An example of a “pump and dump” scheme was highlighted in the film The Wolf of Wall Street, which told the true story of Stratton Oakmont, a brokerage firm, inflating the price for so called ‘penny shares’ through misleading and false statements, in order to sell the shares for a price greatly exceeding what they were actually worth. Once the stock price had increased as a result of Stratton Oakmont’s scheme, the shares would be sold causing a crash, and investors were then left with near worthless stock.

Due to the inherent nature of cryptocurrency, and its numerous different types, these “pump and dump” market manipulation schemes are becoming increasingly common. This is largely due to the prices for buying and selling cryptocurrency being particularly sensitive to outside factors. Cryptocurrency is also currently unregulated, although the FCA has published a ‘Cryptoasset Road Map’ and plans for a Cryptoasset regime.

The use of social media

The use of social media is being seen as a tool for promoting crypto to an increasing extent, particularly in respect of new cryptocurrencies. There have been a number of instances where cryptocurrencies have received celebrity endorsement, particularly prior to their launch as a means of raising awareness and popularity, before the value later nosedives.

Some caution should be given to statements made on social media, seemingly promoting certain cryptocurrencies. There have been instances where assertions made on social media, even those with celebrity endorsements, have been alleged to have been in furtherance of “pump and dump” schemes, to try and inflate the initial price of a new cryptocurrency, by bringing popular attention to it.

The BBC has reported on several such instances, including articles concerning Hailey Welch’s newly launched digital coin, ‘Hawk’, which dropped in value by more than 95% within hours of its launch, and accusations that Logan Paul profited after misleading fans over his cryptocurrency dealings.

What to look for to help avoid falling victim to a “pump and dump” scheme

Given the vast amount of information available online regarding cryptocurrencies, it can be difficult to establish whether an investment may be at risk of falling victim to a market manipulation scheme. As with anything, investments which sound too good to be true should be treated with caution, along with any cryptocurrencies that promise high returns.

Some red flags which could be a sign of a “pump and dump” scheme include, but are not limited to, the following:

1. A sudden increase in social media activity and advertisements regarding a particular coin;
2. Sudden spikes in prices;
3. Promises of high returns in a short period of time; and
4. Pressure to buy a particular coin quickly.

That being said, “pump and dump” schemes are becoming increasingly sophisticated, and due to the fact that cryptocurrency is currently unregulated, it can be a minefield for potential investors trying to satisfy themselves that a particular cryptocurrency is not subject to a market manipulation scheme.

How Ellis Jones can help with cryptocurrency disputes

We have acted for a number of clients in respect of cryptocurrency disputes, and have previously successfully obtained freezing injunctions in respect of the same. We can assist with obtaining such injunctions against both individuals and cryptocurrency exchanges, depending on the particular circumstances of the matter and type of dispute.

Our cryptocurrency team also have experience of dealing with a wide range of matters such as where there has been a breach of contract, misrepresentation or mis-selling of cryptocurrency. We have also successfully obtained the return of funds from exchanges, which have withheld funds from customers.

If you find yourself victim to a “pump and dump” scheme, and have incurred significant losses due to a particular cryptocurrency’s value dropping as a result, please contact us to discuss your options. Call us today on 01202 525333 or email banking@ellisjones.co.uk, for a no-obligation discussion on your situation.