Many schemes are going around in the cryptocurrency world and one of the oldest and well-known schemes is the pump-and-dump scheme. A pump and dump is the old scheme where the value of a worthless asset becomes hot overnight and then it is sold off at a profit realized from a spike in price. Some say pump and dump are illegal under the security of the law, but at the same time, they are incredibly famous in the world of cryptocurrency, blockchain technology, and digital assets. through this article, we will explore more about pump and dump schemes in cryptocurrencies and more.
What are pump and dump schemes?
Pump and dump schemes are coordinated fraud attacks where pumpers use deceitful or fake information to inflate an asset’s price. In the beginning, the pumpers hold the highest position in the targeted asset. They obtain their assets at a very low price and create hyperinflated hype around the asset, thereby driving up demand. Fraudsters indulge in positive rumors and aggressive marketing campaigns; their operations heavily bank on social media to attract investors. They continue this up until they have “pumped” the price of the asset sufficiently for them to cash out with huge returns. Then, they sell off, or “dump,” all their holdings, causing the price to plummet. Because of the abrupt sell-off, deceived investors are left with assets that are worthless or devalued.
How do pumps and dumps in cryptocurrency work?
A pump and dump in cryptocurrency functions similarly to in the traditional market but exploits the distinct nature of the cryptocurrency market. Here is how they function generally:
1. Choosing a cryptocurrency
The pump-and-dumps scammer chooses a low trade volume or low market cap cryptocurrency. These are more often manipulated due to their reduced market volume.
2. Creating hype
The creators of the Ponzi scheme spread misinformation or false information regarding the chosen cryptocurrency on social media channels, online forums, and chat groups, among others. They create exaggerated claims of technology, partnerships, or upcoming developments of cryptocurrency and thereby build hope among investors.
3. Coordination
The criminals coordinate to execute the pump. They could form groups or communities that focus on spreading the word of the targeted cryptocurrency by coordinating their buy orders at the same time.
4. Pump phase
In this phase, the buyers start purchasing large qualities of the targeted cryptocurrency, thus driving up its price. Nervous investors will then be attracted to buying into this cryptocurrency as the prices shoot up unknowingly.
5. Dump phase
Once the cryptocurrency price is inflated artificially to a desired level, the perpetrators sell their holdings massively at a huge profit. This quick dump sends the price falling overnight, leaving those who bought into this hype in the red.
6. Exit
After the dumping, the perpetrators move on to some other cryptocurrency to repeat the process and leave the unsuspecting investors behind, who suffered losses. The relatively low liquidity and no regulation of these markets compared to the traditional financial markets are some ways of facilitating pumps and dumps in the cryptocurrency market. However, regulatory authorities have been increasingly cracking down on such schemes, and investors are cautioned to remain extra careful and heavily research a cryptocurrency before making investments in it.
Are pump and dump schemes illegal?
Pump and dump schemes are illegal. They fall under the category of securities fraud and are thus prohibited in the majority of jurisdictions using their securities laws. They bring about tremendous economic losses to the investors. They also threaten the integrity of the financial markets. Regulatory bodies closely observe and investigate suspicious trading activities and detect those committing pump-and-dump frauds.
Are crypto pump and dump schemes illegal?
While traditional pumps and dumps based on the market are illegal and fall under a category of securities fraud, the legality for this type of scheme isn’t as explicit regarding crypto because crypto markets have much less regulation. Crypto pump and dump scammers cause difficulty in prosecution due to decentralized and often anonymous crypto transactions. Added to that is the lack of regulation drafted to specifically address crypto fraud claims. Regulatory bodies around the world have increasingly shone their focus on combating crypto frauds like pumps and dumps. Currently, while a crypto pump and dump are highly unethical, they usually don’t put culprits behind bars.
How to identify a pump and dump crypto scam?
Know the red flags to look out for the signal a pump and dump scheme, including:
Sudden price spikes for fundamental reasons, such as major announcements, developments, or partnerships. Unsubstantiated hype involving grandiose claims, promises of guaranteed returns, or overly optimistic projections. Cryptocurrencies with low trading volume suddenly take off in investment. Groups or communities dedicated to promoting specific cryptocurrencies and coordinating Bing activities. People who purport to have inside or other privileged information on having inside or other privileged information on the price action of a particular cryptocurrency.
The people who push high-pressure fear of missing out (FOMO) or quick profit opportunities in transparency lack; there is no defined identity of the promoters, no proven fundamentals of the cryptocurrency, and no explanation of motives for the hype pattern of projects linked with patterns such as sudden price spikes followed by rapid declines. Be wary, do ample reserve, and don’t invest in crypto with gullible optimism.
How to steer clear of pump-and-dump crypto scams?
1. Do your own research
Invest in any cryptocurrency after doing thorough research. The whitepaper, team members, technology, roadmap, and community support should be well-studied. Legit investment opportunities are underpinned by solid fundamentals, not hype.
2. Be skeptical of the hype
Never fall for a cryptocurrency hyped up with promises of guaranteed returns or exaggerated claims. If it’s too good to be true, it probably is.
3. Verify information
Information from various credible sources should be verified before such investment decisions are made. Social media posts, online forums, or even chat groups should not solely be your source of information because they can be scammed easily.
4. Understand market dynamics
Stay updated on market dynamics to identify pump and dump schemes, which typically manifest in sudden spikes, low trade volume, and concerted buying activities.
5. Don’t get pressured
Don’t become a victim of high-pressure promotion from the perpetrators of pump-and-dump schemes using their scare tactics of fear of missing out (FOMO) or even guaranteed short-term gain. Think this one through with a cool and level head before investing.
6. Use trusted sources
Always trade on well-reputed and regulated exchanges, with suitable security measures in place. Avoid any unregulated or obscure exchanges that may service pump and dump activities.
7. Diversification
To control risk, diversify your investment portfolio. Engage in various cryptocurrencies that provide strong fundamentals to create diversified risk and minimize exposure to any potential scams.
8. Keep yourself informed
Keep yourself updated on governmental and regulatory developments, market trends, and scams going on in the world of cryptocurrencies. Follow serious news, blogs, and industry experts to stay well updated on the latest going on in the world of cryptocurrencies.
9. Trust your instincts
Trust your gut when checking up on any investment opportunities that come along. If something smells fishy, just forget about investing; it is always safer on the side of caution.
10. Consult professionals
Consider consulting with financial advisors and investment professionals specializing in cryptocurrencies. Such advisory services can save you a lot of time and headaches because experts can analyze the complex, often erratic cryptocurrency market for you.
Conclusion
In conclusion, avoid pump and dumps by monitoring real-time trading data using the AI fraud platforms, which will reveal the pattern of possible pump and dump schemes such as abnormal trading volumes, sudden price strikes followed by sharp decreases, and coordination in buying activities through various different accounts. Keep in mind to keep on analyzing the network.