The unregulated world of cryptocurrency has witnessed 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 increasingly prevalent, causing millions and billions worth of digital assets to disappear from the market.
Let’s examine how cryptocurrency market manipulation occurs with pump-and-dump schemes.
What Does “Pump-and-Dump” Mean in Cryptocurrency?
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The term “pump and dump” is not exclusive to the cryptocurrency market, having been used for financial scams for centuries. However, it has gained notoriety in the digital asset realm. It’s important to note that pump and dump scams should not be confused with rug pull scams, as they are not similar in how they operate. While they may seem similar, understanding the difference between a rug pull and a pump-and-dump scheme can help protect against potential losses.
This scheme involves artificially inflating and maintaining the price of a crypto, followed by selling it off at a profit before the price collapses. This fraudulent activity has wiped out millions of dollars worth of digital assets from the market and caused significant losses for 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 where marketers pitch penny stocks to investors with fake promises of high returns. In contrast, the brokerage itself sold its share at a higher price.
The brokerage continued to drive sales until the buying pressure dissipated, leading to a drop in stock prices and large losses for investors. This is precisely how the pumping and dumping mechanism operates in the cryptocurrency market.
Pump-and-Dump Schemes in Crypto Market: 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 also made its way into the crypto world.
Unlike traditional markets, scammers in the crypto market have more flexibility to manipulate the price of digital assets at their will, making it easier to deceive buyers through false news or even launch their own assets. To hype up their schemes, scammers use platforms like Discord and Telegram to purport false news and create hype around cryptocurrencies. They also run social media campaigns to drive interest in their scams.
However, with the implosion of different crypto projects in the post-2020 market, most of these pump-and-dump schemes have failed to gain traction, resulting in almost no trading activity on exchanges. According to Chain analysis, out of the 1.1 million tokens introduced in 2022, only 40,521 impacted the market.
The Chain analysis report also suggested that around 24% of the 40,521 tokens showed pump-and-dump tendencies. The value of these tokens plummeted by 90% within a week of their launch, with a negative safety score indicating that the pump-and-dump scheme has become increasingly prevalent for crypto market manipulation.
As an investor or a crypto trader, it’s essential to understand how these schemes operate and what signs to look out for to protect your investments.
How Pump-and-Dump Schemes Work in Crypto
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Now, let’s learn about the market manipulation techniques scammers use for cryptocurrency pumping and dumping.
Both the founders and community members can be part of cryptocurrency scams. They usually operate through crypto pump groups, from where they disseminate false positive news for a particular cryptocurrency. This pushes the coin’s price upward and prompts people to invest in the project. These groups work through platforms like Discord or Telegram, allowing them to connect with more investors.
Furthermore, project developers may promote their coins through social media campaigns. Many projects run paid hashtags on Twitter just before the coin’s launch or for any development in the project. This helps to create hype for the crypto and compels people to invest their funds. As a result, the project investors continue to grow along with a rise in the crypto’s price.
When the buying pressure starts to decrease, the scammers immediately opt out and sell the token to make higher gains. However, the sudden plummet in the coin’s price 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 must be cautious of. It is 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
“How to avoid crypto pump and dump schemes” 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 investment is to ignore promotional campaigns. Even if a project is legitimate, its marketing may exaggerate its potential, leading you to invest in something that isn’t worth your money. So, it’s crucial to conduct thorough research before investing. Study the market trends and look for technical indicator categories in crypto trading to help you make informed decisions. By ignoring the unnecessary hype, you can avoid falling prey 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 spikes, it could be a sign of price pumping. Similarly, if a coin’s value jumps instantly upon its launch, it may also indicate a scam. It’s important to analyze crypto price changes as part of your research, but also check for any credible news or events that justify these fluctuations. This will help you avoid investing in projects prone to pump-and-dump schemes.
3. Avoid Projects With Low Liquidity
Staying away from projects with low liquidity is crucial to avoid pump-and-dump schemes. Scammers may use low liquidity to keep the token price high, causing volatility and market imbalance. This may also prevent investors from withdrawing their money freely.
4. Avoid Projects With Huge Buy Walls
Huge buy walls in a cryptocurrency can be a red flag for a pump-and-dump scam. Typically, the founding members and community members create buying orders to prop up the price of the coin while maintaining sell orders to bring balance. However, this is a tactic used to artificially sustain the network. The organizers can manipulate it anytime to reap profits and abandon the project and its investors.
DYOR and Follow Risk Management Strategies
Avoiding crypto pump-and-dump schemes is crucial to safeguard your investments. You can make informed investment decisions by doing your own research (DYOR) and following risk management strategies. It’s essential to be skeptical of investment opportunities that sound too good to be true and not blindly follow the crowd.
Always assess cryptocurrencies and the market carefully 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 duped by pump-and-dump scams.
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