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Perhaps until just a few years ago, when the word scam came up, people’s minds leaned towards traditional methods or, at most, Ponzi schemes. However, with the passage of time and the introduction of new concepts in the financial world, such as cryptocurrency or NFT, scamming methods have also evolved. One of the events that occurs in the realm of cryptocurrencies is pump and dump schemes, which needs to be recognized, and investors should be vigilant about their capital.
The world of crypto has provided unparalleled opportunities for investment and financial innovation. Nevertheless, along with that, there is a looming threat of scams that take advantage of the decentralized and often unregulated nature of these markets. One such scheme that has gained notoriety is the “pump-and-dump” scam, a manipulative tactic that preys on unaware investors and disrupts market dynamics.
In this article by Brokerland, we delve into the mechanics of this scam, how it operates, its consequences, and actions investors can take to protect themselves.
What is Pump and Dump Scam in Crypto?
Pump-and-dump scam is a calculated strategy used by reckless players to artificially increase the price of a cryptocurrency like meme coins and then quickly sell off their assets, causing a sharp price drop. This scheme relies on the persuasive power and inherent fear of missing out (FOMO) in investors, leading many to make hasty decisions. By creating a illusion of value and potential, scammers exploit market sentiments and target inexperienced traders.
Pump Phase: Creating Hype
The first phase of pump and dump involves creating advertisements for a specific cryptocurrency. Scammers typically choose coins with low prices or less recognition that are susceptible to manipulation due to lower trading volumes.
Through various tools such as social media, online forums, and messaging platforms, they disseminate exaggerated claims about revolutionary technology, partnerships, and the potential for significant crypto achievements. This grabs the attention of investors, who are lured in by promises of quick profits.
Price Manipulation
With the increased hype, pump-and-dump scammers engage in coordinated buying to artificially increase the price of the targeted cryptocurrency. This illusion creates strong market demand and interest.
In some cases, scammers may collaborate with a network of traders to generate significant trading volumes, adding to the apparent market excitement. This coordinated effort drives up the price and encourages more investors to take advantage of the inflated price.
Dump Phase: Profiting at Others’ Expense
When the price has risen sufficiently, the scammers initiate the final phase of their pump and dump scheme – the dump. This phase involves rapidly selling off their accumulated assets at high prices.
The sudden increase in selling puts buying support under pressure, leading to a rapid and substantial price drop. Unaware investors who bought into the advertisements now hold diminished or worthless assets, while pump and dump scammers walk away with substantial profits.
Consequences of Pump and Dump Fraud
Pump and dump fraud has wide-ranging consequences that extend beyond individual financial losses. These include:
- Loss of Trust: The prevalence of such scams erodes trust in the cryptocurrency market, discourages investors, and hinders overall industry growth.
- Market Volatility: Pump-and-dump schemes exacerbate market volatility, making informed decision-making and achieving stable returns challenging for genuine investors.
- Innovation Hindrance: Diverting resources towards combating fraud hampers focus on real innovation and technological development in the cryptocurrency space.
Protecting Your Capital from Pump-and-Dump
While the allure of quick profits can be tempting, investors should exercise caution and adopt strategies to protect themselves from unprecedented scams like pump and dump:
Conduct Thorough Research: Before investing in any currency or coin, conduct in-depth research to understand its technology, use cases, team, and market trends. Scrutinize the claims made by promoters and cross-reference information from multiple sources.
Examine Trading Volume: Low trading volumes can make a currency susceptible to manipulation and pump and dump schemes. Be vigilant about sudden increases in volume, especially if not accompanied by significant news or developments, and if the rise in value occurs without apparent reason.
Avoid FOMO: Fear of missing out can cloud judgment and lead to impulsive decisions. Stay logical and resist the temptation to invest solely based on aggressive advertisements.
Diversify Your Portfolio: Diversifying your investments across different currencies can mitigate the impact of a potential pump-and-dump fraud on your overall portfolio.
Use Reputable Exchanges: Only trade on well-established crypto exchanges that have implemented stringent security measures and proper protocols. Some reputable exchanges such as BingX exchange, ByBit are listed on the Brokerland broker review site.
Educate Yourself: Stay informed about common scams and prevalent manipulation tactics in the market. Knowledge is a powerful tool to prevent falling victim to fraudulent activities.
How to Detect Pump-and-Dump Schemes?
Identifying a pump and dump scheme in the requires a combination of vigilance, research, and a critical look at market behavior. While detecting these frauds is not always straightforward, there are several key indicators and red flags that can help you identify suspicious activities. Here’s how to recognize a potential pump and dump:
Sudden Price Spikes and Drops: Look for cryptocurrencies experiencing sudden and drastic price spikes. Unpredictable price movements can be a sign of artificial manipulation.
Exaggerated Advertisements: Be wary of overly positive claims and advertisements regarding the potential of a currency for significant profits. Pump-and-dump scammers often use exaggerated language to grab attention and create a sense of urgency.
Low Market Cap and Trading Volume: Currencies with low market cap and trading volumes are more susceptible to manipulation. Scammers can easily create artificial price movements in such markets.
Unusual Trading Patterns: Examine transaction patterns for unusual behaviors, such as a sudden increase in trading volume accompanied by a significant price hike. These patterns may indicate coordinated buying activity.
Lack of Fundamental News: Assess whether price movements are accompanied by significant and credible news related to the crypto. If there is no valid reason for the price increase, be cautious as a pump and dump may be occurring.
Social Media Activity: Watch out for excessive advertising on social media platforms, especially if the sources are unknown or lack credibility. Scammers often use social media to spread misinformation.
Pump Groups: Be cautious of online groups or chat rooms claiming to provide “investment tips” and encouraging you to buy a specific coin. These could be pump groups aiming to manipulate the market.
Fake or Anonymous Teams: Examine the project team and their credibility. If team members are fake or lack verifiable information, it’s a red flag for a potential pump-and-dump.
Unrealistic Returns: Be skeptical of investment returns that seem too good to be true over a short period. Scammers often play on the desire for quick profits.
While these indicators can help in identifying potential pump and dump activities, it’s crucial to approach investments with caution, conduct thorough research, and remain vigilant in the dynamic crypto market.
Without a clear purpose or use case: researching technology and the use of a coin is essential. If there is no clear objective, it might serve as a target for manipulation and pump-and-dump schemes.
Unusual Market Timing: Observe the timing of price movements. If significant price changes occur during low trading hours or when the overall market is calm, it could be an attempt to avoid thorough scrutiny.
Lack of Transparency: Legitimate projects are transparent about their goals, progress, and financial information. If a project lacks transparency or refrains from providing accurate information, be cautious about the potential for pump and dump schemes.
Pressure for Immediate Buying: Pump-and-dump scammers often create a sense of urgency by pressuring investors to buy immediately before a hypothetical opportunity is lost. Take time for informed decision-making.
In summary, vigilance, critical thinking, and thorough research are key to identifying potential pump and dump schemes. Always be skeptical of investments promising quick and unrealistic profits, and rely on credible sources for information. If something seems too good to be true, it’s essential to proceed with caution or avoid it altogether.
Summary
In pump-and-dump schemes, exaggerated advertisements always create a sense of urgency to buy a coin quickly to avoid missing out on a hypothetical opportunity. When many individuals purchase the coin, causing the price to rise significantly due to these high-volume purchases, the pump phase occurs, and scammers sell the currency.
After the pump and dump scheme concludes, investors are left with heavily devalued coins, and the pumpers and dumpers profit significantly from selling those same coins. While the promise of quick profits can be tempting, it is essential for investors to approach their investments with doubt, skepticism, and thorough research.
Investors, by understanding mechanisms like pump-and-dump schemes, recognizing warning signs, and taking preventive actions, can navigate the landscape of coins with more confidence and flexibility. Additionally, always choose a safe and reputable exchange for trading, such as PancakeSwap, CoinEx and Binance.
