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A new report calls Web3 a ‘potential threat to democracy’ and says that memes are a sinister problem for crypto and NFT investors

March 4, 2022, 5:00 PM UTC

Don’t believe all the chatter on internet message boards like Reddit when it comes to buying cryptocurrencies and NFTs. 

They’re a breeding ground for baseless rumors and cryptocurrency schemes that prey on investors, according to a new report released today by the Network Contagion Research Institute, a nonprofit that studies the spread of misinformation and deception on social media. 

But it’s not just outright scams that are undermining confidence in blockchain-based markets—it’s also so-called meme-trading, or buying and selling crypto and stocks based on internet hype, that is undermining “financial conversation and market information integrity.”

“Often, though not always fraudulent, this activity exceeds the reach and depth of traditional financial regulatory bodies, which permits speculators to invest successfully in increasingly lawless behaviors, further eroding market trust and information integrity,” the report reads. 

The proliferation of new Web3 technology, and the cultures that go along with them, also has broader implications, according to the report, and “comprise a potential threat to democracy and entrenched institutions,” the report reads.

Joel Finkelstein, chief science officer for the Network Contagion Research Institute and the report’s coauthor, says that crypto and NFT investors should be wary of what they see in online message boards. Those places, and the memes that power them, are especially dangerous for new investors because many of them are not versed in the appropriate lingo, he says, having been attracted to crypto after seeing ads about big returns. 

“As investors are coming to the space from Super Bowl ads and seeing memes, they need to understand that the markets that we’re studying overall are highly manipulated,” says Finkelstein. 

Meme trading, at least in terms of stocks, has had a high profile over the past two years. The trend was thrust into the spotlight in 2021 when investors loosely organized on the Reddit forum WallStreetBets sent shares of GameStop soaring. 

In the case of crypto and NFTs, meme trading has sometimes led to wild swings in prices entirely based on hype, rather than the underlying value of the tokens.

Finkelstein pointed to Dogecoin as an example of a crypto asset whose price is susceptible to rumors on Reddit and other social media sites. It is influenced by message boards, and also by tweets from self-proclaimed “Dogefather” Elon Musk, who when not weighing in on crypto, leads Tesla

Meme trading also opens the door to organized pump-and-dump schemes, which can fall under the radar of the Securities and Exchange Commission. A pump-and-dump is a scam in stocks and crypto in which hype and sometimes false information pushes up prices so a group of people who bought the asset for cheap can quickly cash in. 

In September, the cryptocurrency Litecoin was affected by a possible pump-and-dump scheme, according to the Network Contagion Research Institute’s report. 

After a fake press release was published by GlobeNewswire saying that Walmart would be accepting the crypto token, the price of Litecoin jumped 22% while transactions spiked, according to the report. 

Litecoin did not immediately respond to Fortune’s request for comment.

In another example, less than a month later, a fake press release claiming that Kroger would accept another cryptocurrency, Bitcoin Cash, was also published. The fake information led to the price of Bitcoin Cash rising 5% in 15 minutes.

“All the evidence when you put together the social media, the manipulation of the newswire service, and the anomalies in the blockchain, they show just how well planned these kinds of operations are, and they show where we need to be looking to be able to detect these things in the future,” says Finkelstein. 

The report is not a condemnation of crypto and NFTs, said NCRI lead intelligence analyst Alex Goldenberg, but rather a warning to investors attracted by the recent advertising related to both assets.

“Pump-and-dump schemes and other manipulative behavior in the capital markets, the SEC takes extremely seriously, but similar activity in the crypto markets, falls into a legal gray area,” Goldenberg notes.

Before investors buy into the FOMO, or fear of missing out, that is built around crypto and NFTs, they should be aware of the risks of manipulation, Finkelstein says.

“It’s okay that they buy into the hype,” he says. “That’s every investor’s choice. But they absolutely deserve to know, and [should] have the transparency to know, how that value exactly is being calculated.”

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