New York residents who have seen Hollywood films like “The Wolf of Wall Street” and “Boiler Room” will be familiar with pump-and-dump schemes. The dishonest traders that operate them make misleading or exaggerated statements to convince investors that a stock they own is about to increase significantly in value. Investors then purchase the stock based on these fake recommendations. When these purchases cause the price of the stock to rise, the traders liquidate their positions and pocket the profits.
Small-cap stocks and cryptocurrencies
The people who run pump-and-dump schemes have traditionally focused on small-cap stocks because they are easier to manipulate, but the emergence of alternative investments like cryptocurrencies and NFTs have provided them with new opportunities. These alternatives to traditional securities are highly volatile and traded on exchanges that are not strictly regulated, which makes them ideal for pump-and-dump schemes. In 2018, researchers studying the cryptocurrency market identified 3,400 pump-and-dump schemes.
Social media influencers
The dishonest traders depicted in “The Wolf of Wall Street” and “Boiler Room” made cold calls to hype the stocks they were trying to sell, but most modern pump-and-dump schemes are operated online. Emails and social media posts can reach thousands of potential victims in the time it would take to make a single phone call, and they can be very effective if they are endorsed by influencers with a loyal followings. The profits that this approach can generate are sometimes measured in the tens of millions. In December 2022, the U.S. Securities and Exchange Commission charged eight social media influencers in connection with a $100 million pump-and-dump scheme.
Avoiding pump-and-dump schemes
The victims of pump-and-dump schemes usually lose most, if not all, of their money. If you want to avoid being defrauded by dishonest traders running pump-and-dump schemes, you should be very wary of unsolicited offers and extravagant claims. You should be especially cautious if you are offered information about a cryptocurrency or NFT that seems poised to rise in value.