What Is Pump & Dump Schemes In Crypto – How To Spot And Avoid It

The not-so-old cryptocurrency industry is growing exponentially, and it has also become a hub for unpleasant activities. Besides the use of Bitcoin and other cryptocurrencies as a payment method, this space is more infamous for financial crimes as well. 

Ponzis, rug pulls, and hacking are the most common activities in the crypto sphere, which often result in substantial financial losses for investors. One of these activities in the crypto market is the pump & dump scheme, which lures investors to buy crypto assets and gain quick returns.

Such bad actors in the crypto ecosystem always look to target new investors to drain their pockets. The pump & dump scam is not only limited to crypto but is also widely spread in the traditional market.

What is Pump & Dump Scam in Crypto?

Pump & Dump is a modus operandi of scammers who artificially generate demand for crypto assets to pump its price and later sell their existing holdings for massive profits. Fraudsters most commonly use this method to trap new investors who are not very aware of the crypto market and seek lucrative profits. 

This scheme involves inflating the market price of a particular cryptocurrency by falsely exaggerating its potential. Most of these crypto projects claim that they hold so much potential for the future, and based on that, the project’s token is promoted as cheap compared to its future price. Additionally, project owners also hire influencers and promoters to create hype around the project and influence users to purchase the token. These project owners already have vast amounts of the same tokens in their wallets, which they do not have to buy from the market because they are the owners, and they make systematic allocations to themselves. 

After successfully selling ample tokens to the public and pumping the price, the project owners dump their own holdings in the market to accumulate big chunks of money. This is usually the endgame for them, and the project is nowhere to be found once after the dump. 

Signs of a Pump & Dump Scheme

There are currently thousands of crypto assets in the market, and such scammy projects hardly come to attention. Most of these projects occur when the crypto space sees new primitives like liquid staking, layer 2 scaling solutions, NFTs, etc. People often buy new tokens in mass when these new primitives hit the market. However, the Pump and Dump schemes can be noted by generally analyzing and finding the surroundings of the projects.  

Followings are the most obvious signs of a crypto Pump-and-dump scheme;

Focus on Marketing

These projects are newly launched, and the company spends a notable amount of money on marketing rather than allocating funds for actual development. It aims to reach a broader audience as possible by hiring influencers, KOLs, paid promoters, and sometimes even celebrities. 

Inflated Trading Volume

The artificially boosted trading volume is another significant sign that can be easily found while looking at the supply of tokens. If the current market capitalization or fully diluted valuation (FDV) of the project does not align with its volume, it’s most likely that the trading volume will be unnaturally boosted. 

Continuous Shilling 

Such tokens will be continually shilled by influencers and sometimes even by bot accounts on social media platforms. It’s all under the paid campaigns to increase the visibility of the token among the crypto community.

Lack of Utility

These tokens do not have any primary utility other than just trading. Utility is most important, which gives essential value to the token. If there is no fundamental use of the token, it can not sustain itself in the landscape of the crypto market. 

Too Much Talk For Price

Much of these token materials will be centered around its current and future price. All the discussion about the token will bring back to its potential price movements and how it will benefit the early investors.

Comparison With Other Projects

Comparison to other market-dominant projects is also a red flag. The crypto market was recently filled with cryptocurrencies, which were claiming to be ETH-killer while not even having such development in the first place. 

Suspicious Team Profile

The most common factor of Pump and dump scams is the lesser-known team behind the project. These people often create fake profiles to win the trust of investors. Some projects even have anonymous team members who are nowhere to be found. 

Examples of Crypto Pump & Dump Scam

The decentralized nature of crypto and the lack of a regulatory environment is most beneficial for scammers. While these factors are a plus point for the industry, scammers take advantage of them to employ and execute financial frauds. Following are some recent examples of pumping and dumping crypto schemes:

Squid-Game Token

Created after the popular web series in 2021, the Squid Game cryptocurrency token is a prime example of a pump-and-dump crypto scam. The popularity of the Squid Game web series brought attention to the token, and people started buying SQUID coins. However, as the value of the coin soared, the team behind the project dumped their holding and cashed out all liquidity from the exchanges. Investors reportedly lost over $3.38 million in this scam. 

SafeMoon

SafeMoon is another crypto project that alleged scammers operated in the bull run of 2021. It quickly gained popularity at that time. The visibility of this token was so good that it reached a market cap of over $17 billion at one point, and later, it fell nearly 99% to $223 million. After one and a half years, the owners of the project were charged with fraud and money laundering by the SEC and DOJ in November 2023. 

There are hundreds of other crypto tokens which came and went into oblivion after successfully scamming investors. Most of the memecoins are pump-and-dump projects which sometimes become massively successful that even developers could not control. 

How To Avoid Falling For Pump & Dump Schemes

These kinds of frauds have hazardous effects on investors, especially those who are new to the crypto. Before investing in crypto, investors must have to know basic things about the crypto space. 

Below are some points to consider to avoid falling for pump-and-dump fraud tokens;

Research About Project

Conducting thorough research on the crypto project and its potential is the initial step to find out if buying a token will be beneficial or not. Investing just because of future price speculations is nothing more than pure gambling. 

Don’t Invest Following Random Advice

Not following financial advice from random people on social media is a must because such actors are paid to promote projects. Investing should not be done solely just by hype around the token. 

Gain Knowledge and Be Updated

Knowing about cryptocurrency will help in understanding which projects will be successful and which will be failed. Being up-to-date with market trends will also help in making proper investment decisions. 

Conclusion: 

The lack of regulations has made the crypto industry a hub for illegal financial activities, and these pump-and-dump schemes are tops in it. While cryptocurrencies already have a label of illicit money, this kind of activity further ruins the standards of this industry. 

When new investors enter the crypto market, they are much more likely to fall for pump-and-dump schemes. These people get the wrong image of crypto and leave immediately after losing money. The solution to this problem is education and warnings about such projects. The crypto community needs to put some collective effort into fighting the pump-and-dump schemes.

FAQs

Q.1 What is Pump & Dump Crypto?

Answer. Pump & dump crypto is a fraud cryptocurrency scheme where a token’s price is increased on false promises just to sell existing token holdings at a higher price. 

Q.2 Which cryptocurrency were pump & dump schemes?

Answer. The prime examples of pump & dump schemes are Squid Game coin, SafeMoon, and U.Cash. Most of the memecoins are pump & dump schemes. 

Q.3 Is Bitcoin a pump & dump coin?

Answer. Bitcoin is a decentralized cryptocurrency with a market cap of nearly a trillion dollars so pumping and dumping require billions which is not possible. 

Q.4 Is XRP Pump & Dump CCrypto?

Answer. Many people believe that XRP is a pump & dump scheme but there is no solid evidence and it’s not proven. 

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2024-02-08 20:52