Pump and dump and rug pull are the tools that scammers and influencers use to run cryptocurrency scams. It’s all designed to take money out of your pocket, and put it in theirs.

So let’s take a little tour of these terms, what they mean, and how you can spot a scammer trying to pull one of them on you.

I need to preface this by saying, I am not a financial or legal expert, and this is just information based on my own journey to understanding the stock market. I am certainly not advising you to invest or not invest in anything.

The term “pump and dump” has its roots in the stock market. To understand it, let’s start at the beginning, when a company first offers stock.

A company starts up, and they attract some private investors. They have a plan to grow and expand. But to really implement this plan, the company needs more money. So at some point, they decide they’re going to sell shares in the company to the general public, with each share equating to some tiny percentage of the company, like 0.001%.

Because the money the company gets, they can use to do their big future plan, which will make them more profitable. These first shares offered by a private company are called the Initial Public Offering, or IPO.

Why would anyone buy these shares? Why invest? Ideally, the shares in the company grow in value, over time, and the value is tied to the price it can be sold for later on. Like, let’s say you buy 10 shares at $50 apiece, so you’ve spent 50×10, or $500. At that time, the value, and price, of each share is $50. Then at some later time, you discover, to your delight, that the shares are now valued at $200 each, meaning you can sell your 10 shares for $2000. You put in $500, and got $2000 back.

On the other hand, the value of each share could go down from $50 to $8, and your $500 investment can only be sold for $80.

Who decides how much these shares are worth at any given time? To understand that, let’s talk about the stock exchange.

The general term for these shares is “stocks”, and the actual individual values are controlled by “stock exchanges,” these highly regulated organizations that use algorithms to match up buyers and sellers, and determine the current value of any particular shares at any given time. There’s all kinds of factors that influence the stock price, like if a company announces a cool new product, or that they’re opening a new factory, or anything that shows they’re growing and expanding the business.

But there’s one kind of general rule that’s a lot easier to wrap your head around:

If more shares are being bought than sold, the value goes up, because demand is higher than supply. This also means that if more shares are being sold than bought, the value goes down. And yeah, there are other factors that can push and pull at the value of shares, but that’s the big one.

Classic pump-and-dump: The Wolf of Wall Street

The movie “The Wolf of Wall Street” illustrates a classic example of a pump-and-dump scheme.

In the movie, which is based on a true story, stockbroker Jordan Belfort starts his own little brokerage called Stratton Oakmont. He hires salespeople and teaches them how to do hard-sell techniques to sell stocks over the phone. Hard-sell is a “Never take No for an answer” type of approach.

These salespeople are pitching penny stocks, which is any stock worth less than $5 a share. The threshold for being in this category used to be $1 per share, thus the term, “penny stock.” There are tons of these around, and some of them really are worth just a few pennies, so an investor can get a whole bunch of shares for just a few dollars.

Jordan Belfort’s trick was to buy up a bunch of these penny stocks first, which would make the value go up. Then he’d get his salespeople to sell more shares in the same company to people over the phone, like to senior citizens who didn’t understand much about stocks, but had a nice life savings to invest. And if they could get enough people to buy, the stock would keep going up. Remember, when more shares are bought than sold, the stock goes up.

That’s the “pump” part of the scheme. By getting lots and lots of people to buy, the price pumps up. Now, maybe it would just go from 2 cents to $2 per share, but that’s 100 times more, so if the customer invested ten thousand bucks they’d be looking at a million in no time at all.

After enough people bought in, when the stock was worth many times what he originally bought it for, Belfort would sell all his shares, sending the share price into a tailspin. In other words, Belfort would “dump” all his shares.

And he’d make thousands or even millions off each one of these pump and dumps, while the value of everyone else’s shares would be worth even less than they were when they bought in, so they couldn’t even get their original investment back.

And there you have it, folks, the “pump and dump” scheme. One person gets rich, and everybody else loses their money. Stratton Oakmont also did a bunch of other shady stuff, but pump and dump was at the core of their business.

Jordan Belfort eventually got caught, and went to jail. because in the stock market, “pump and dump” is illegal.

Next, let’s talk about pump-and-dump as it relates to cryptocurrency.

Cryptocurrency is digital money, and the way it’s bought and sold is a lot like trading stocks. People buy cryptocurrency with conventional currency, like the US dollar. Like, anyone can buy a certain number of Bitcoin for a certain amount of US dollars.

And the value of cryptocurrency works on the same principle: the more people buy it, the more its value rises.

Bitcoin is a great example. It started out with a value of less than a penny per Bitcoin, and now a single Bitcoin is worth over $60,000. That’s a pretty huge change! But the value has fluctuated wildly, even over the past couple of years.

The other thing about cryptocurrency is that because of the way it works, anyone can invent their own cryptocurrency. Anybody! I talk more about how cryptocurrency works in my episode “Blockchain and Bitcoin,” so I won’t get into it here. But the technology to make your own cryptocurrency is out there, and not that hard to use.

But even if a person creates their own cryptocurrency, it doesn’t have much value unless people start buying it. That’s where influencers come in.

There are dozens of stories of influencers pushing their new cryptocurrency and getting their followers to buy in. One of the most famous ones was promoted by a group of YouTubers called the Faze Clan, who announced a new cryptocurrency in 2021 called Save the Kids. A portion of the profits, they said, would go toward charity.

On the day that Save the Kids launched, the price went through the roof. Amazing! Then, the very next day, the price tanked, all the way to zero. It was almost like, someone who owned 99% of it, sold the whole thing and walked away with all the money. Huh!

All in one day! That’s a really fast pump-and-dump. So fast, in fact, that there’s a different name for this kind of dump: a rug pull. Someone dumps it all so fast, that it’s like they just yanked the rug right from under everyone else.

There are so many rug pulls in cryptocurrency, a lot of them by influencers and YouTubers with huge followings. They get their fans to pump up the value, then pull the rug, and line their own pockets. Sometimes the influencer is paid to promote the crypto, and sometimes it’s their own coin. A lot of the influencers that have promoted crypto claim that they had no idea it was scammy, that they just got paid to do an ad. But there are definitely some that are the originator of the scam.

One example is YouTuber Ice Poseidon, aka Paul Denino, who decided in 2021 to invent his own cryptocurrency, called CXCoin. He said he threw it together in just two weeks, which tells you just how easy it is to create your own currency. Yep, two weeks, just chillin’ and lookin’ for something to do. Alright, I think I’ll make my own money.

Denino then got his fans to buy into CXCoin, and the value went up; and up and up. And then, you guessed it, he pulled the rug and sold all his own CXCoin, even a huge chunk of it that was supposed to be “untouchable” and used only to help stabilize the price, and he walked away with over half a million dollars in cash. This guy has even admitted in interviews that he did a rug pull, that he took money from his fans, and that he doesn’t care, he’s not sorry. In fact, he said, “If somebody wants to gamble their life savings away like an idiot, then they’re gonna learn the hard way. They have to take some responsibility eventually.”

What a swell guy.

Something that should protect investors in cryptocurrency is called an “anti-whale” policy. In finance, a “whale” is a person or companies that own a huge share of the investment. Like, if you own more than 20% of the entire available pool of a particular cryptocurrency, you’re a whale.

When a cryptocurrency gets introduced, they will sometimes boast that they have an anti-whale policy, which means the whales can’t sell for a specified amount of time. In fact, it’s built into the code that runs the cryptocurrency. This is supposed to make pump-and-dump harder to do, and make people trust it more so they’ll invest. And knowing that there’s an anti-whale policy can make a cryptocurrency seem a whole lot more legit, right?

For stocks, the SEC does a similar kind of thing through what they call a lockup period. When a new stock is introduced through an IPO, the major shareholders aren’t allowed to sell their shares for a certain amount of time, something like three to six months. This prevents them from dumping a whole bunch of stock when the price goes high, which would make the price just plummet. If you fool around with this rule and find some way around it and sell during a lock up period when you’re not supposed to, you’ve got a lawsuit comin’ atcha, baby. The SEC, they do not play.

But in crypto, there’s no such regulations, just a promise that they have an anti-whale policy. And in the case of the Save the Kids crypto, there was supposed to be anti-whale code in place that made it impossible for the whales to sell early. But it turns out, that somebody got in the code and changed the code. Which meant that the whales could cash out anytime. Which they did, at the end of Day One. Nothing puts the “dump” in pump-and-dump like a whale on the loose.

So, why doesn’t law enforcement go after these scammy crypto influencers, the way the SEC goes after people who violate the lockup period? Why doesn’t anyone sue them? Well, the SEC regulates the stock market, and they can bring legal action against someone who breaks the rules. But the world of cryptocurrency isn’t regulated by… anyone at all. It’s a Coin Fest, Wild West, anything-goes kind of place where any scammer with a couple of weeks on their hands can mint their own coins, inflate their value by getting their fans to invest, and then pull the rug and walk away without a scratch.

The government is trying to do something about this. In 2021, the Department of Justice created the National Cryptocurrency Enforcement Team, which sounds like a step in the right direction. But with all these rug pullers still creating content and collecting fans and money and pulling the rug like nothing happened, it looks like we still have a ways to go.