What has happened?
The US Commodity Futures Trading Commission (CFTC) has warned investors to stay clear of cryptocurrency pump-and-dump schemes, describing them as "old scams, new technology".
What does this mean?
In a release, the CFTC said customers should beware of thinly traded markets, such as new “alternative” virtual currencies, digital coins or tokens as they are often linked to fraudulent behaviour.
"As with many online frauds, this type of scam is not new - it simply deploys an emerging technology to capitalize on public interest in digital assets," said CFTC Director of Public Affairs Erica Elliott Richardson.
This warning focuses particularly on social media, as pump-and-dump schemes are often organised through online chat forums or via mobile messaging apps.
The CFTC described some of the methods used by fraudsters to manipulate prices by driving them up, but only for their benefit.
The scheme organisers start spreading rumours online to encourage immediate buying and create a phony demand (the pump).
Victims react to the price of the virtual currency rising, but without taking the time to check whether the scheme is bona fide.
The organisers then sell quickly (the dump); the price falls and victims are left with currency or tokens worth less than expected.
The entire scam is over in a matter of minutes.
The CFTC therefore said customers should avoid trading based on information obtained from social media or sudden price spikes.
"Customers can best protect themselves by purchasing only alternative virtual currencies, digital coins, or tokens that have been thoroughly researched – to separate hype from facts. The bottom line: Customers should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes," the release states.
This is the second consumer warning from the Commission this month and one is an ever-growing list of warnings issued by regulators worldwide.
At the beginning of the month, the CFTC had cautioned against investing in cryptocurrency retirements account.
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