The unregulated world of cryptocurrency has seen its fair share of scams and schemes, one of the most notorious being the pump and dump scheme. In recent times, this fraudulent activity has become more and more prevalent, leading to the demise of the market for digital assets worth millions and billions.
Let us examine how cryptocurrency market manipulation occurs with pump and dump schemes.
What does "Pump-and-Dump" mean in cryptocurrency?
The term โpump and dumpโ is not unique to the cryptocurrency market, as it has been used for financial scams for centuries. However, it has gained notoriety in the realm of digital assets. It is important to note that pump and dump scams should not be confused with carpet pulling scams, as they are not similar in the way that they work. While they may look similar, understanding the difference between a carpet throw and a pump and dump scheme can help protect against potential losses.
This scheme involves artificially inflating and maintaining the price of a cryptocurrency, followed by selling it at a profit before the price crashes. This fraudulent activity has removed millions of dollars worth of digital assets from the market and caused significant losses to investors who bought the coin based on false information.
A notable example of pump and dump is depicted in the movie "The Wolf of Wall Street." It portrays a stock brokerage agency where marketers offer penny stocks to investors with false promises of high returns. On the contrary, the brokerage house itself sold its stake at a higher price.
The brokerage continued to push sales until buying pressure dissipated, causing share prices to plunge and investors to lose heavily. This is precisely how the pump and dump mechanism works in the cryptocurrency market.
Pump and Dump Schemes in the Crypto Market โ What You Need to Know
The cryptocurrency market, being unregulated, has become a hub for scammers who use different tactics to deceive investors. The notorious pump and dump scheme is one such tactic that has made its way into the crypto world as well.
Unlike traditional markets, scammers in the crypto market have more flexibility to manipulate the price of digital assets at will, making it easier to deceive buyers through fake news or even launch their own assets. To promote their schemes, scammers use platforms like Discord and Telegram to imply fake news and create hype around cryptocurrency. They also run social media campaigns to generate interest in their scams.
However, with the implosion of different crypto projects in the market post-2020, most of these pump and dump schemes failed to gain traction, resulting in almost no trading activity on exchanges. According string analysisOf the 1.1 million tokens introduced in 2022, only 40,521 hit the market.
The on-chain analytics report also suggested that around 24% of the 40,521 tokens were showing pump-and-dump trends. The value of these tokens plummeted by 90% within a week of launch, with a negative security score indicating that the pump-and-dump scheme has become increasingly prevalent for crypto market manipulation.
As a cryptocurrency investor or trader, it is essential to understand how these schemes work and what signals you need to watch out for to protect your investments.
How Pump and Dump Schemes Work in Crypto
Now, let's learn about the market manipulation techniques scammers use to pump and dump cryptocurrency.
Both founders and community members can be part of cryptocurrency scams. They typically operate through cryptocurrency bombing groups, from where they spread false positive news for a particular cryptocurrency. This drives up the price of the coin and encourages people to invest in the project. These groups work through platforms like Discord or Telegram, which allows them to connect with more investors.
Also, project developers can promote their coins through social media campaigns. Many projects run paid hashtags on Twitter right before the coin launch or for any development on the project. This helps build excitement for cryptocurrencies and compels people to invest their funds. As a result, investors in the project continue to grow along with an increase in the price of cryptocurrencies.
When the buying pressure begins to subside, the scammers immediately opt out and sell the token for higher profits. However, the sudden plummet in the price of the coin catches investors off guard and they end up losing their funds. This sophisticated method for scammers allows them to conveniently rob people and leave the system.
The pump and dump scheme is a dangerous investment practice that you should be wary of. It's important to be aware of the tactics used by these scammers and avoid getting caught up in the hype.
4 Tips to Avoid Pump and Dump Schemes
โHow to avoid crypto pump and dump schemesโ is a common concern among investors. Here are four tips to avoid falling victim to pump and dump schemes in the crypto market:
1. Don't believe the hype
The first rule of crypto investing is to ignore promotional campaigns. Even if a project is legitimate, its marketing can exaggerate its potential, leading you to invest in something that isn't worth your money. Therefore, it is crucial to do thorough research before investing. Study market trends and find categories of technical indicators in cryptocurrency trading to help you make informed decisions. By ignoring unnecessary hype, you can avoid falling victim to fraudulent schemes and make smarter investments.
2. Analyze price fluctuations
Another key aspect to consider when evaluating a cryptocurrency is its price fluctuations. If the value of a lesser-known coin suddenly rises, it could be a sign that the price is rising. Similarly, if the value of a coin jumps instantly upon its toss, it can also indicate a scam. It's important to analyze cryptocurrency price changes as part of your research, but also check to see if there are any credible news or events that justify these fluctuations. This will help you avoid investing in projects prone to pump and discharge schemes.
3. Avoid projects with little liquidity
Staying away from projects with low liquidity is crucial to avoid pump and dump schemes. Scammers can use low liquidity to keep the token price high, leading to volatility and imbalance in the market. This can also prevent investors from freely withdrawing their money.
4. Avoid projects with huge buying walls
Huge buy walls in a cryptocurrency can be a red flag for a pump and dump scam. Typically, founding members and community members create buy orders to prop up the price of the coin while holding sell orders to break even. However, this is a tactic used to artificially sustain the network. The organizers can manipulate it at any time to make a profit and leave the project and its investors.
DYOR and follows risk management strategies
Avoiding crypto pump and dump schemes is crucial to safeguarding your investments. You can make informed investment decisions by doing your own (DYOR) research and following risk management strategies. It is essential to be skeptical of investment opportunities that sound too good to be true and not blindly follow the crowd.
Always carefully evaluate cryptocurrencies and the market before investing. Cryptocurrency is a high-risk, high-reward venture, so proceed with caution. By taking these precautions, you can stay ahead of the game and avoid being taken in by pump-and-dump scams.
