On November 10, 2021, Peter Komolafe received a direct message from an unknown sender on Instagram, inviting him to join a crypto pump group on Telegram. The message explained that by pumping a coin to a high value and then selling it, members of the group could make 400–900% profit.

“We agree with the community to buy one of the coins, as soon as everyone buys – the coin starts to grow and arouses interest from the entire crypto community,” the message explained. With inflation near 40-year highs and the average annual return of the S&P 500 around 12%, a 400% return within days would be a steal—literally.

As a financial advisor and YouTuber who educates people about money and investment, Komolafe was intrigued and decided to join the Telegram group to, as he told Morning Brew, “see what’s going on there.”

What Komolafe found was a “pump and dump” (P&D) scheme. A P&D scheme in the cryptoworld usually involves social media influencers, or promoters working on their behalf, promoting preselected cryptocurrencies and then convincing investors to buy into them to pump up the value.

The invitation Komolafe received pointed to the event organizer, a personal Instagram page belonging to a guy claiming to be named David. A quick glance at his Instagram page as shared by Komolafe in redacted screenshots shows that “David” is a young dude living a lavish lifestyle. He’s got a Lamborghini, takes helicopter rides, and spends huge amounts on vacations across the globe. Or so his Instagram claims. In the grid, he looks like the epitome of success, a scammer who might be attractive to a desperate potential investor with little savvy.

Komolafe said that when he joined the Telegram group, the member count was around 15,000 people. By the time of the next pump, there were more than 18,000 people in the group. Clearly, David’s lifestyle was attractive to more than a few random Telegram users.

David’s job is to catch the attention and lure people into the group, but he isn’t running it: The moderators tell investors when and how to prepare for the next pump, which by Komolafe’s estimate happens several times per week. On the pump day, the moderators started to play up the tension in the room by offering a stream of countdowns. “5 MINUTES LEFT BEFORE THE PUMP,” the moderators wrote in the channel. Tellingly, Komolafe said, they never revealed which coin would be pumped until “the very last minute.”

“They were very, very secretive about what coin it was,” he said. That let the leaders of this scam keep the price low before the pump, making sure no one jumped the gun. The coins that are targeted for pump and dump schemes have no special utility, so their base price is only a fraction of a penny. Even with only $10 to spare, one could potentially own thousands of coins.

The logic of a pump and dump scheme is that after the moderators publish the name of the coin, all the members should buy as much as they can as fast as possible while the price is still low. This time the coin being pumped was called akro refinance (ARM). “The faster you buy a coin, the more you can earn,” Crypto Team, the moderator of the channel, explained, according to a screen recording Komolafe shared. Then the price of the coin would be artificially inflated within a few minutes as buyers snap it up. “After that, other traders will start buying it, while we will sell it at the peak of growth.” The goal is to create a buying frenzy.

“It’s all very carefully orchestrated,” Komolafe said, after watching the P&D unfold.

For a coin that doesn’t have intrinsic value and demand, the inflation is purely artificial. If it sounds like a pyramid scheme, you’re right: People who join the scheme early and pull their money out before the collapse will make bank, but the rest end up with nothing. It’s not particularly unusual. In 2021, crypto investors lost more than $2.8 billion to such schemes. It’s hardly limited to crypto. The movie The Wolf of Wall Street portrayed the notorious pump and dump of stocks by financial advisor Jordan Belfort, which cost his investors as much as $200 million. While such schemes are illegal in the stock market, they fall into a legal gray area in the crypto sphere, which is still unregulated.

A common psychological trick these fraudsters use is assuring everyone in the pump group that they are an insider. But the truth is, “There is an insider within an insider club in all of these pump and dumps,” Coffeezilla, a crypto detective, said in a video exposing several pump and dump groups. The moderators, who know beforehand which coin will be pumped, build up their portfolios way ahead of other buyers.

Donghwa Shin, finance professor at UNC’s Kenan-Flagler Business School, said some pump group organizers also offer premium memberships to allow some investors to receive pump signals ahead of others. Then these premium members can buy coins sooner, before dumping them on the newcomers.

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For those in a pump group without insider knowledge, all the buying and selling actions happen within ten minutes, so timing is key. According to a paper Shin coauthored, only investors who buy in the first 20 or 30 seconds after the pump starts can make a profit. The moderators and the VIP members, who get the coin’s information beforehand, can achieve an average return of 18% per pump. It’s a decent gain, but still a far cry from the 400% profit the promoter promised to Komolafe. “That’s what they claim, that’s what they target…it’s hard to achieve,” Shin explained. Akro Refinance’s price spiked from $0.0029 to $0.0098 within seconds.

The number of P&D scams is on the rise: While they only made up 1% of total illicit revenue from crypto scams in 2020, they accounted for 37% in 2021, Chainalysis data shows. A group of victims to David’s P&D schemes eventually made a subreddit to alert new investors to the scam and tried to track him down. But the scrutiny hasn’t slowed him down. David and his team pump a few new coins every week. The ability to operate anonymously allows bad guys to easily create new identities and wallets and start a new round of scams.

Shin, who has studied P&D schemes for years, said that as more amateur investors have shown interest in crypto, the scams have evolved. Fraudsters not only pump existent coins, they also start to create cryptocurrencies on their own for a new type of scheme based on the pump and dump. “Then they advertise this on social media and say that this is the next huge coin or next shiba inu, you know if you missed the previous opportunities, you can actually still make a lot of money buying this,” he said.

But these coins are coded so that they can be bought but not sold—something buyers don’t know. This allows the creators of the token to take all the money they get from people buying their coins. They usually do this days after creating the coins, rather than in minutes. This move, Shin explained, is called an exit scam, better known as a “rug pull.” In 2021, these creators made about $200 billion pulling the rug while the cost of creating these coins was almost zero, according to Shin’s research.

That’s exactly what happened with the Squid Game coin last year. Some anonymous developers launched the crypto project modeled after the hit Netflix show, where buyers could use the token to play virtual games like Red Light, Green Light and earn cash prizes. Before the pump, the coin was worth around two cents. The marketing ploy helped push SQUID prices from $0.01 on October 26 to over $38 on Sunday. Next came the plot twist: No one but the developers could sell them. The developers made off with $12 million.

Influencers and celebrities play an important role in promoting and driving the hype of niche altcoins. Dogecoin, which was created as a joke, rose to fame thanks to a wave of endorsements (and an ocean of fresh memes) from names like Elon Musk. After a few months, its market cap soared to $85 billion, making it worth more than Ford Motor Company. Last June, Kim Kardashian touted EthereumMax to her more than 200 million followers on Instagram. “Are you guys into crypto????” Kardashian wrote. “This is not financial advice but sharing what my friends just told me about the ethereum max token!” A survey by Morning Consult showed that 19% of respondents invested in the coin after seeing Kardashian’s post. (Kardashian was paid to post this message and she was later sued for aiding and abetting “unjust enrichment.” The lawsuit is ongoing, and Kardashian’s lawyers have filed to have it dismissed.)

But there’s a big difference between celebrity promotion and actively recruiting people like Komolafe to boost the value of a coin for profit. Most penny coins don’t require the name recognition of a promoter like Kardashian or Musk to attract new buyers, which leaves average-joe investors vulnerable to being scammed.

The Securities and Exchange Commission (SEC) does not currently regulate cryptocurrency. P&D scams are illegal in the stock market, but not yet in the crypto space. In April, SEC Chair Gary Gensler announced that the agency plans to expand protections to crypto investors. Shin said it’s challenging to implement any regulations in this space. Regulations require global collaboration, otherwise a scammer can easily create a new account in another country. Plus, the decentralized nature of the crypto market makes it almost impossible to identify the fraudsters. Research and reason are an investor’s best protection. Coins called ElonBirthday or ELON 100M FOLLOWERS are likely to be scams.

Komolafe thinks P&D scams are a psychological trap targeting people who have been battered by the stagnant economy and want to take a shot to win big. “I just encourage people to step back and think logically and ask yourself, ‘Is it too good to be true?’ If it is, it probably is a scam.”