How to Spot a Pump and Dump Scheme in the Crypto Space

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How to Spot a Pump and Dump Scheme in the Crypto Space
How to Spot a Pump and Dump Scheme in the Crypto Space

The most popular scheme in the crypto space isn’t only common; it’s also increasing.

Since their values have soared in recent years, cryptocurrencies have captured the attention of the entire world. This has caused a massive influx of investors who are oblivious to how to spot a pump and dump scheme.

In the world of cryptocurrencies, a practice known as “pump-and-dump” involves deceiving investors into buying inflated tokens, which are generally promoted and pushed by paid celebrities and social media influencers.

As a result, many people who invested in shady enterprises lost money. This manual will show you how to spot a pump and dump plan and how to avoid falling for it.

Investors must pursue education on the cryptocurrency ecosystem while waiting for a bull market to emerge.

Having said that, a solid grasp of cryptocurrency investment necessitates being aware of fraudulent initiatives, often known as pump-and-dump schemes, that threaten to siphon off funds overnight.

Pump and Dump Scheme Explained

When someone tries to artificially increase the price of a security, they are committing a fraud known as a pump and dump. This is accomplished by persuading others to purchase it and then having them afterwards sell their securities holdings at a premium price.

In order to create a buying frenzy and subsequently sell high, the method involves disseminating false or misleading information.

Because they trade on unregulated exchanges and have unstable pricing, cryptocurrencies are also the subject of pump-and-dump strategies.

In the world of cryptocurrencies, a practice known as “pump-and-dump” involves deceiving investors into buying inflated tokens, which are generally promoted and pushed by paid celebrities and social media influencers.

One of the most well-known instances of an alleged pump-and-dump operation involving A-list stars, including Nick Carter, Soulja Boy, Lil Yachty, and YouTubers Jake Paul and Ben Phillips, is the SafeMoon token.

After the investors have bought the tokens at inflated prices, the holders of the largest number of tokens sell out, causing a sharp decline in the value of the tokens.

Despite the fact that scammers mask pump-and-dump schemes with the premise of producing the next generation of cryptocurrency billionaires, informed investors have the advantage of spotting and avoiding their involvement.

A cryptocurrency’s use cases have a significant impact on its long-term success. People that promote pump-and-dump schemes consequently frequently limit their involvement to highlighting the use cases the token is intended to address.

Furthermore, these schemes frequently pay celebrities upfront in cash and the project’s proprietary tokens in order to attract their attention. Celebrities then sell the fake tokens to gullible followers, often promising them large investment returns.

The Process of a Crypto Pump and Dump

According to Adam Carlton, CEO of Pink Panda, every cryptocurrency pump-and-dump scheme has the same fundamental structure.

They establish a token and want to increase its value as much as possible, so they post about their activities on social media, distribute memes, and attract viewers to their channel.

They initially list on a site like CoinGecko, then on CoinMarketCap, and with each listing, their reach increases. When there are enough holders, the scam may begin to promote their token through influencers and advertising on buses and billboards.

The next stage is to list the token on one or more of the major exchanges, such as Coinbase or Binance, making it accessible to a very large audience.

Contrary to many other types of financial fraud, the goal here is to involve as many people as possible rather than to specifically target any particular group.

How to Identify a Pump and Dump Scheme

Knowing how the system functions is the first step in spotting a pump and dump plan. The aim of a typical pump and dump is to raise the price of a token or currency by making misleading claims about partnerships, features, or adoption.

They’ll make a profit when prices are high enough to sell their tokens. This might result in a bubble that finally bursts, costing investors money. There are various methods you can use to protect yourself from pump-and-dump tactics.

First of all, be extremely cautious of any press releases or announcements that seem too wonderful to be true. Second, before making an investment, conduct your own research on the project and its staff. Lastly, never risk more than you can afford to lose when investing.

Key Indicators

As we’ve already mentioned, anonymous founders are typically a sign of fraud or illegal conduct, albeit some of those responsible are now giving up their identity.

When someone refuses to identify themselves, Carlton added, “it’s still an indicator because they’re doing it for a reason.” Ninety-nine times out of a hundred, it’s because they want to protect themselves from liability, not because they have a great conviction in anonymity.

Carlton advises advisors and investors to conduct background checks on anyone who has revealed their name. That entails researching personal information and comprehending the token the issuer issuing.

If something sounds too good to be true in the world of finance, it probably is, according to Carlton. “I prefer to look for something particular. What exactly is the project’s utility, are their goals being reached, and do they leverage their community to contribute reliable information rather than just spew it out?

In order to protect yourself from pump and dump schemes: 

  • Before making an investment, research is crucial. Make sure you comprehend the cryptocurrency’s underlying technology and the development team.
  • Additionally, be on the lookout for any warning signs, such as a sharp price increase devoid of justification. It would probably be advisable to steer clear of investing if you see something that doesn’t look genuine.

Wrapping Up

Pump and dump scams are nothing new in the crypto space. We might anticipate more of these schemes as crypto values and popularity rise.

By convincing others to invest in cryptocurrency, some people attempt to make money by selling it afterward. Those that invest may suffer because they may receive nothing in return. But if there are more restrictions, it might be possible to prevent this from occurring in the future.

Pump and dump crypto schemes pose a serious risk to investors. However, you can safeguard yourself from these ruses by exercising caution and conducting your own investigation.