How to Avoid Crypto Pump and Dumps
Posted December 7, 2018
“All I do is win, win, win, no matter what. Got money on my mind; I can never get enough.”
That’s a line from the hook to “All I Do is Win,” a song by well-known music producer DJ Khaled. It’s a pretty popular song, used everywhere from commercials to sporting events.
It’s a catchy record, with certainly a confidence-boosting message. I’ve had it on my gym playlist since 2010, and I’ve always seemed to lift more iron when the song’s playing.
But I think DJ Khaled may have taken that song’s message excessively to heart, given the trouble he and boxing champion Floyd “Money” Mayweather, Jr. got themselves into...
They’ve both been charged by the Securities and Exchange Commission with illegally promoting cryptocurrencies, including one that ended up pumping and dumping its investors.
This week, I’m going to let you know exactly what Khaled and Mayweather did, their punishment, what a pump and dump is, and what you can do to avoid them.
The Crime and Punishment
Here’s how it all went down: DJ Khaled (whose real name is Khaled bin Abdul Khaled) and Floyd Mayweather were paid by different cryptocurrency companies to promote their ICOs.
One company in particular was Centra Tech. Centra Tech paid Khaled $50,000 and Mayweather $100,000 to promote its upcoming ICO.
The celebrities promoted the tokens through their social media accounts. DJ Khaled called Centra’s ICO a “gamechanger,” while Mayweather touted his involvement with cryptocurrencies on Twitter:
"You can call me Floyd Crypto Mayweather from now on"
What Khaled and Mayweather did wrong was that neither of them revealed that they were actually paid to promote the cryptos.
Stephanie Avakian, the SEC’s enforcement co-director, commented on the case, saying, “With no disclosure about the payments, Mayweather and Khaled's ICO promotions may have appeared to be unbiased, rather than paid endorsements.”
That’s what got them in trouble. This case is especially compelling because it’s the first time the SEC has charged anyone with deceptively promoting a cryptocurrency.
DJ Khaled and Floyd Mayweather were punished and will pay for their crimes. Literally.
Both defendants settled with the SEC, agreeing to pay the agency for the deceptive promotions — combined with additional fees for interest and penalties.
Furthermore, they are prohibited from promoting any kind of security for a period of time. Khaled can’t promote securities for two years, while Mayweather can’t for three.
What’s a Crypto Pump and Dump?
Centra Tech ended up pumping and dumping its ICO and has since been charged by the SEC, with its ICO being purportedly fraudulent.
This is how pumping and dumping a cryptocurrency works: First, a token is deliberately hyped up by an invested group (called the pump-and-dump, or P&D, group), causing many unrelated investors to start buying into it and raising its price. Eventually, the token’s price is high enough to the P&D group’s satisfaction, and they sell all their shares, making a killing.
The token’s price then sharply drops, and the investors unrelated to the P&D group are left saddled with losses.
It’s because of situations like this that many governments around the globe prohibit ICOs, as they can easily be used to scam investors.
Here’s how DJ Khaled and Floyd Mayweather factor in. Since they promoted Centra’s ICO without revealing their monetary connection to the company, their audiences invested right into a scam, thinking their celebrity endorsers had unbiased involvement.
Another co-director of the SEC’s enforcement division, Steven Peikin, said it best when he stated, “Social media influencers are often paid promoters, not investment professionals, and the securities they're touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds.”
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Tip #1: Avoid Emotional Judgment Calls
The first thing you could do to avoid a crypto pump and dump is put your emotions aside when making investing decisions. There are a few times doing this is imperative.
First, don’t invest in a crypto just because you’ve noticed a lot of hype around the token. The hype may be online or even among your coworkers and loved ones. Be careful, as you may be caught up in a P&D group’s schemes.
Also, be wary of tokens that are rising in price at fast paces. It's possible that the token is already in the P&D process, where the scammed token rises in price due to increased hype.
Make sure you’re doing your research on the company and its token. If something doesn’t feel right to you, chances are something’s not right.
Tip #2: Never Buy Dead Cryptos
The second way you can dodge a P&D is by never buying into cryptocurrencies that are dead.
You can check to see if a crypto is dead in a few different ways. First, a red flag is if the token’s price is in the gutter. Second, you can research the company’s website or chat channels. If there is little to no community chatting or developer activity on them, then the crypto is potentially dead.
If a crypto is dead, there’s usually a good reason for it. Just do your research and don’t buy into it.
Tip #3: Forget About FOMO
The third way you can save yourself from a P&D situation is by letting go of the fear of missing out, or FOMO, as some call it.
Imagine investing in Bitcoin back in 2010, when it was basically unknown, then selling your shares for near $20,000 a piece in December 2017.
That’s what people are chasing: the next big thing.
Don’t get caught up in trying to invest in the next $20K Bitcoin. That mindset may cloud your judgment and steer you in the direction of a P&D ICO.
Slow and steady wins the race. Leave the fear of missing the next big thing in the dust, and involve yourself in investments that you have soundly researched and deliberated.
There you have it — that’s what can be done to minimize your chances at playing into a pump-and-dump ICO. Don’t make emotional decisions, leave dead tokens alone, stop the FOMO, and stay informed. Follow those instructions, and against ICOs, you will win, win, win, no matter what.
Stay pump and dump-free,
John Butler, Jr.
Contributing Editor, The Token Authority
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