CFTC Issues Warning on Pump-and-Dump Cryptocurrency and ICO Schemes

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At the heels of the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee meeting this past Wednesday, the CFTC has issued a warning against pump-and-dump schemes, specifically related to digital currencies.

The Customer Advisory on virtual currency pump-and-dumps warns people against “thinly traded or new ‘alternative’ virtual currencies and digital coins or tokens.” This would presumably include various cryptocurrencies, as well as ICOs. The warning suggests that customers should not make purchases and investment decisions based on social media tips or sudden price spikes. They also recommend that users thoroughly research the coins, and the companies behind them, to separate hype from facts.

This is sound advice. While regulations are a form of prohibition, and prohibition has never worked, we are all for transparency and sound investment advice. Social media tips, in our opinion, do have value, but they should not drive your decision-making process. Rather, they should be seen as the hype that they are, and followed-up on with real research to verify any claims, and to assess the real-world value of a particular project.

Pump-and-dump schemes are nothing new. They’re the stuff that serves as the foundation for the plots of movies like The Wolf of Wallstreet and Boiler Room. These plots are compelling because they’re based on real-world scenarios. There are nefarious characters in this world who would take you for everything you’ve got, if they could get away with it, and educating yourself is the best defense. In the past, “boiler rooms” full of people would call up unsuspecting people with “hot tips” about stocks. They’d buy into cheap penny stocks at low prices, then they’d get people excited during the “pump” phase, in order for them to buy into these stocks and to drive up the price. At a pre-determined threshold, these companies would then “dump” the stock for huge profits. This would cause the price to crash, and most people would be left with worthless “investments.”

The CFTC reminds people that this is an old scam, based on new technology. It’s possible for the same cast of characters to commit fraud, by telling lies to people to pump up prices before dumping their own coins when prices reach a peak. The organization cites pump-and-dump groups and chat rooms that contain thousands of members. The leaders of these groups will notify members of when the next pump-and-dump will occur with a buy signal like, “15 mins left before the pump! Get ready to buy.”

We remain bullish on cryptocurrencies and legitimate ICOs, but we would agree with the CFTC in their recommendation to avoid such pump-and-dump groups. Karma will catch up to you, and the results will not be pretty. A better way to make your decisions would be to follow respectable cryptocurrency news websites like Cash Tech News as a starting point for your research. But then to do your own research in making your own decisions. And, if you’re using “real money”, to seek guidance from a professional financial advisor. The rule that we personally follow is, “don’t invest what you’re not ready to lose.” In other words, don’t mortgage your house to wager a bet on the next Bitcoin.

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