Interest in crypto has exploded. Crypto scams have also exploded, and regulators are responding. Last year, the Department of Justice (DOJ) formed the National Cryptocurrency Enforcement Team. This year, the FBI launched a virtual asset seizure unit. The Securities and Exchange Commision (SEC) has been regulating crypto for years, charging for violations including raising money in fraudulent and unregistered securities offerings, misusing investor funds, and price manipulation.
Though manipulation can happen in stock markets, one set of researchers found crypto markets are plagued by pump-and-dump (P&D) manipulation, while other researchers concluded that P&Ds are pervasive in crypto markets. An author from a crypto study said manipulation of crypto assets is “unprecedented in modern markets,” and is “exponentially higher” than traditional equity markets. While around a few hundred cases happen in a 10-year period in penny stocks, the author’s team found 300 crypto cases within a few months. While P&Ds are illegal with stocks, crypto pumping may not technically break any laws and tend to be openly broadcast and organized.
Pump & Dump
In a pump and dump, asset issuers hype their offering to lure investors and rapidly boost the price. Then they sell off their stake, typically crashing the value. The pumpers cash out on profits made from those they touted the asset to, who can be left with steep losses. Investors recently accused Kim Kardashian and Floyd Mayweather Jr. of a similar scheme. Separately in 2018, Mayweather along with DJ Khaled, settled charges with the SEC that they promoted a crypto offering without disclosing they were paid to do so. Actor Steven Seagal settled similar SEC charges in 2020.
Exchange Exit Scams...
Researchers in 2019 found that around a quarter of bitcoin users and nearly half of bitcoin transactions are involved in illegal activity. In the largest financial seizure ever by the DOJ, over $3.6 billion in crypto was recovered from a 2016 hack of a crypto exchange. Trust No One: The Hunt for the Crypto King highlights the meltdown of QuadrigaCX. Client crypto also vanished from exchanges Mt. Gox and Bitsane. Crypto Ponzi scams have sprouted globally. In Brazil, crypto pyramid schemes are so common in one part of the country, it has been called “New Egypt.” However, even as crypto markets adopt more oversight, it would still be critical to assess the value of crypto as an asset. In upcoming discussions, we will focus solely on value, and why we view crypto as highly speculative assets.
April 20, 2022
Dhawan, Anirudh and Putnins, Talis J. (November 12, 2021). A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets. Review of Finance.
Foley, S., Karlsen, J. R., Putniņš, T. J. (May 2019). Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies?. The Review of Financial Studies, Volume 32, Issue 5
Gandal, N., Hamrick, J.T., Moore, T.W., & Oberman, T. (2017). Price Manipulation in the Bitcoin Ecosystem. Journal of Monetary Economics 95 (2018)
Li, T., Shin, D., & Wang, B. (2019). Cryptocurrency Pump-and-Dump Schemes. Corporate Governance & Finance eJournal.
Williams-Grut, O. (August 13, 2020). Level of Cryptocurrency Scams 'Unprecedented in Modern Markets'. Yahoo Finance UK
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