The Pump-And-Dump.
Welcome to Part 3 of the “Age-Old Cons Live Again on The Cryptocurrency Frontier.” If you’re new to the series you can read Part 1 and Part 2 before diving in.
A main theme in this series is that the tech underlying crypto / NFT / DeFi services is well understood and robust. But technology is a tool; human frailties persist and scammers are eager to learn how to use new tech to take advantage of those frailties.
Many old scams thrive in today’s cryptocurrency and NFT markets. The “pump-and-dump,” for example, was a 1920s Wall Street staple and is once again in vogue in today’s crypto markets.
What is a Pump-and-dump?
Here is the pump-and-dump in three easy steps:
- Quietly buy up an asset until you hold a big position.
- The Pump: drive the price up by convincing other people to buy in, too. These buyers are the scam’s suckers, the “saps,” the “Marks.” Jordan Belfort, the real-life Wolf of Wall Street, used an army of high-pressure salespeople to snare suckers to buy penny stocks. Crypto pump-and-dumpers use social media to generate viral buzz about their tokens. They create phony trading volume with another technique with its own awesome name, “wash trading.” That’s when insiders trade huge volumes back and forth with each other to trick outsiders, the Marks, into believing that there is big interest in their coin.
- The Dump: once the price has risen to a target level, sell your shares and count the profits!
Wall Street traders were pump-and-dump experts back when the strategy was legal on U.S. securities exchanges. Regular investors, like those who bought into Radio Corporation of America (RCA) stock in 1928, got burned.
Meehan & The Great Radio Pool Scandal
In the 1920s radio technology was new and related businesses were exploding. The Radio Corporation of America, formed in 1919, was the 1920’s Google. RCA sold much more than radios: they drove an entirely new communication and entertainment experience. Spurred by the vision of a young David Sarnoff, on his way to becoming a tech industry legend, the company expanded into services by launching America’s first broadcast network, the National Broadcasting Company (NBC).
This RCA advertisement from the late 1920s projected a lifestyle with unlimited access to performance arts, news, and sports.
RCA’s strategy offering an integrated platform of devices, networks, and content, would be familiar today inside Apple and Meta. Investors loved it: their euphoria for the new technology and business model drove share prices skyward. “RCA to the moon!”
A group of Wall Street pros, “The Radio Pool,” colluded to make a pump-and-dump killing on RCA. Ringleader Michael J. Meehan was a modestly educated English immigrant with a gift for securities trading. In early 1928 the Radio Pool quietly began buying RCA shares; in March they started the pump.
Back then, special telegraph receivers called stock tickers printed out share prices on narrow reels of paper tape. Traders stared at “ticker tape” like today’s crypto investors gaze at CoinMarketCap charts. The Radio pool “painted the tape” for RCA, the Wall Street term for creating lots of trading volume at increasing prices. They used the wash-trading technique. Average investors with no clue about the pump-and-dump scheme saw a hot tech stock’s price climbing with good volume. They loaded up on RCA just like investors load up on tech stocks today.
The Radio Pool planted exciting RCA stock stories in influential media to generate viral buzz. Share prices rose from $95 on March 3, to $195 on March 30, to $505 in the summer of 1929. That would be a $7,500 share price today. By comparison, in early 2022 Amazon traded at just $2,447 (before a 19-to-1 split).
The dump started at the end of the summer of 1929 and Radio Pool members pocketed $10M in profit ($150M today). After the Black Monday market crash of October 28, 1929, RCA traded at $26, a 95% drop. The Radio Pool scheme was absolutely legal in 1929, the scammers walked away wealthy and free.
The Securities Exchange Act of 1934 made pump-and-dumps illegal on U.S. exchanges. Regulation is a grifter’s bane, but Meehan couldn’t help himself. He was back at it in 1935 pumping and dumping shares in another hot tech company, Bellanca Aircraft.
The Securities and Exchange Commission (SEC), created by the 1934 Act, told Meehan, “We totally see what you’re doing. It’s illegal now.” Meehan was the SEC’s first-ever prosecution win. He was barred from both the New York Stock Exchange and the Chicago Board of Trade.
Pumping and Dumping Crypto
Like 1920’s Wall Street, cryptocurrencies are largely unregulated and pump-and-dumps are legal. Combine thousands of thinly traded tokens, millions of suckers hoping to score instant crypto fortunes, 24/7 media coverage, and countless chat groups on Discord and Telegram and you get a pump-and-dump frenzy.
Various reports estimate there are hundreds to thousands of crypto pump-and-dumps every year. Pump-and-dump groups litter the online landscape. Google “discord pump groups” and you’ll get pages of this:
There are groups named “Crypto Pumps” and “Extreme Pump” and “Big Pumps Binance” and “Crypto Signal” and “Mega Pumps Group” and hundreds more.
All have the same pitch, “We’ll tell members which coins to pump and when. Together we will inflate the coin’s price then make money on the dump. But you have to click fast to make money!”
Even in 2022’s crashing crypto market the allure of making fast money with fast clicks, buying at the start of the pump and selling at the start of the dump, is irresistible. Crypto pump-and-dumps are well-known scams, they’re about as well-trusted as psychics. Marks, the preponderance of the groups’ members, desperately want their dream of fast, easy wealth to come true. They join the schemes despite knowing that the goal is to get over on other people and take their money: these suckers are not innocent victims.
I’d draw a cartoon to show a pump-and-dump in action but the real-life examples are too entertaining to pass up. The following one happened on Telegram in April 2022.
Here’s the kick-off. Notice that there are 35,000 members following the messages.
After a few more pep-talk posts the big moment draws near. In the next message the scammers give the Marks clear instructions to broadcast their coin purchases on their social networks after they buy-in. The Marks, the suckers, think they are the insiders, and their job is to con their social network contacts.
Wait for it, wait for it…
Now! The coin they’re pumping is VIB. The Marks are about to lose their money. I don’t feel sorry for them.
Finally, the con artist’s denouement. “What, everyone lost money? We’re shocked but don’t worry, we’ll give you more chances later this year!” My favorite line in the final post is, “…We will make up for your losses during the season.” I didn’t know that there is a crypto pump-and-dump season.
To see what happened in detail here’s an expanded view of VIB’s trading action around this pump-and-dump. The grey bars at the bottom of the chart show hourly trading volume.
Look at the coin’s value rising slowly four days before the pump. Someone was buying VIB as if they knew the pump was coming. Because they did know, just like the Radio Pool knew in 1928. VIB’s price and volume erupted for the pump’s first 15 minutes, just after 5am on the 25th. The grifters dumped as soon as they knew that the group’s members, the suckers, were enthusiastically buying. The real insiders, the scammers, got out at the high point. VIB plummeted and the Marks were left asking what they did wrong.
Same Old Fraud 150 Times Faster
In 1928 Michael J. Meehan’s Radio Pool pump-and-dump took about 600 days start to finish. In 2022 anonymous organizers needed just four days to run an almost identical scheme with the VIB token. Seven years after the RCA pump-and-dump sensible regulation protected investors and put Meehan out of the investment business. Crypto, where grifters can operate in multiple countries under a galaxy of pseudonyms, will be harder to tame.
The blockchain technology underlying crypto and DeFi works as expected. Entrepreneurs use it to solve legitimate problems in ownership, identity, and transactions. But the same powerful tools are used by fraudsters. You could say that they are disrupting the fraud industry.
Next Time: It’s Embezzlement. Unless It’s Legal.
If an investment company told you that their bylaws allow the firm’s majority owners to take all the customers’ deposits for themselves, would you open an account with them?
The smart contract behind a high-profile DeFi project, Beanstalk, allowed just that as investors learned the hard way in April 2022. We’ll explore good old fashioned embezzlement in Part 4, the final installment of “Con Artists Use Age-Old Scams On The Crypto Frontier.”
Cover Image:
Original FutureResolve art added to image retrieved from Coinmarketcap.com 22 August 2022