What is pump and dump in cryptocurrencies?
The cryptocurrency market is highly susceptible to pump and dump scams. With regulatory uncertainty and enforcement difficulties, thinly traded cryptocurrencies are prime targets for scammers. Understanding how pump and dumps work, why the cryptocurrency market is vulnerable to them, and how to spot them, will help you avoid falling victim to these schemes.
What is the pump and discharge process?
Pump and dump operations date back to the early days of the stock market. The idea is simple: a person or group of people buy a poorly traded asset, such as a penny stock, when its price is low. They then spread positive news about the asset. Often, this news is completely fabricated.
As investors become more interested and buy more of the asset, the price continues to rise. Once the price reaches a certain level (the “pump” phase), the scammers sell their stake to new buyers. Since they own a large percentage of the asset, their selling causes the price to suddenly collapse, leaving other investors with huge losses.
Why is the cryptocurrency market vulnerable to pump and dump?
The cryptocurrency industry is considered the “Wild West,” with many platforms and it being relatively easy to issue a new cryptocurrency. This creates a fertile environment for weakly traded coins, which attracts scammers to exploit these assets.
Typically, pump and dump operations in the cryptocurrency market are started by an organizer who gathers a group of influencers in a private online group. After coordinating the purchase to avoid a sudden spike, these influencers start sharing information about the coin with their followers via social media. Once the audience is attracted and the price rises, the asset is sold (the “dump” phase), leaving new investors with losses.
How to spot a pump and dump in cryptocurrencies
You can easily spot pump and dump scams after they happen, but that doesn’t help investors after they’ve suffered losses. It’s better for investors to recognize the signs of a scam before they fall victim.
1. Do your research: If you notice an unknown cryptocurrency being promoted by people online, don’t rush to buy. Research the coin, read its “white paper,” and check out the goals and who is behind the project.
2. Analyze the development of the project: If the coin has been around for a while but there has been no significant development on the project, this is an indication that the coin may be a scam. Also, if the project does not have a clear goal, claims unrealistic benefits, or is associated with individuals with a negative history, these are all warning signs.
3. Pay attention to social media influencers: If you suddenly start noticing influencers, especially non-cryptocurrency ones, talking about a particular coin, ask yourself why these people are talking about it and what their interest is. This could be an indicator of a potential pump.
4. Check the sources of information: When discovering a new currency through social media, make sure that there is an official website and official contact sources for the project. It is always better to verify the information from the source rather than relying on third parties.
5. Check trusted platforms: If you don’t see any red flags in the project documentation or how it’s promoted, take a look at how the coin is traded. If it’s listed on a trusted exchange, it may be safer. If it’s traded on an unknown DeFi platform, you’ll need to do more research.
Conclusion
Pump and dump scams remain a real threat in the cryptocurrency market, and investors should be cautious and conduct thorough research before investing. Focusing on well-known coins and reputable platforms may reduce the risk of falling victim to these scams, but it does not guarantee complete safety.