Pump-and-dump schemes are common in the cryptocurrency market. Since many rules are unclear and hard for regulators to enforce, some cryptocurrencies are easy targets for scammers and other bad actors. According to Chainalysis, in 2022, 445 people or groups launched 24 percent of the 9,902 allegedly pump-and-dump tokens. They estimated that by selling off their shares before the tokens’ value plummeted, the token’s creators made a total profit of $30 million.
A solid grasp of crypto investment requires keeping a lookout for fraudulent projects that threaten to drain money overnight, which are called pump-and-dump schemes. Knowing how a pump-and-dump scam works, why the crypto market is especially vulnerable to it, and how to spot a pump-and-dump will help you avoid getting affected by these schemes.
Understanding Crypto Pump-And-Dump Schemes
The concept is to invest in a lightly traded asset, such as a penny stock, at a low price. The next thing that follows is circulating positive news regarding the asset. More often than not, this news is completely contrived. Then the asset’s price rises as more investors pour money into it. Furthermore, these schemes frequently leverage cash rewards and the project’s proprietary tokens to lure celebrities.
Then, by using typically exaggerated claims of huge investment returns, celebrities market the fake tokens to fans who are willing to invest. When the price has been fully “pumped,” the creators sell their interest to the buyers who are still coming in. The price then plummets since they own a sizable portion of the outstanding shares.
Pump-and-dump techniques are a typical type of fraud. By persuading uninformed investors to purchase a product, the scheme’s creators want to take money from trusting investors. When those investors join the investment, the pumper is selling, which inadvertently drives the price down. The scammer makes substantial earnings, while everyone they duped suffers losses.
How to Spot a Crypto Pump and Dump Scheme and Avoid It
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Hyped Up New Cryptocurrencies
Always remember to be cautious when a new coin gains sudden attention. Check the cryptocurrency’s creation date and read the whitepaper to understand its purpose and potential solutions. People want to invest in new cryptocurrencies early to maximize their profits. This can also be a disadvantage. Invest in a new cryptocurrency only after conducting adequate research and assessing its potential.
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Influencers Or Celebrities Relentlessly Promoting A Coin
Think about the motivations of influencers when they are promoting cryptocurrencies. There are some influencers and celebrities who may promote cryptocurrencies without even understanding them as long as they receive payment to do so. These people often get paid for their posts or the hype they generate in either fiat money or cryptocurrency. There are few parts of the world with strong regulations to deal with scams, making it easy for influencers and celebrities to get away with them.
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An Unexpected Hike In The Value Of A New Coin
This often appears after the pump phase of the pump and dump technique has started. The price of a currency can suddenly increase on charts after many people have fallen for the fraud. A sudden price increase in cryptocurrency occurs when multiple people buy it simultaneously.
Conclusion
It is critical to remain cautious and informed when navigating the world of cryptocurrencies, to avoid falling victim to pump-and-dump schemes. Remember to be cautious, conduct thorough research, and seek credible sources of information in order to make informed judgments and protect your investments in the ever-changing cryptocurrency trading scene.
