A pump and dump is a type of cryptocurrency scam that involves artificially inflating the value of a cryptocurrency to attract new investors. Scammers buy a large amount of the coin, then promote it heavily on social media or other platforms, causing the price of the coin to rise as a result of the high demand. After the price reaches a certain level, these scammers sell their holdings of the coin, causing its price to suddenly collapse. In the end, investors who later entered the deal find themselves stuck with a coin that is almost worthless.
How does a pump and dump scheme work?
There are four main stages that a pump and dump scheme goes through in the cryptocurrency market:
Pre-launch phase: Scammers purchase large amounts of an unknown or low-value cryptocurrency.
Launch phase: Intense promotion of the coin begins through social media platforms such as Twitter, Telegram, and Discord. Huge exaggerations are used to attract investor interest.
Pamp phase: Once more investors start buying the currency due to fear of missing out, the price of the currency rises very quickly.
Crash (Dump) Phase: After the price reaches its peak, scammers start selling their coins, causing the price to drop significantly, leaving new investors with huge losses.
How to detect a "pump and dump" scheme?
In order to avoid falling into the trap of a pump and dump scheme, investors should pay attention to some warning signs:
Sudden price spike for no apparent reason: If an unknown coin experiences a rapid price spike without any significant news or developments to justify it, this could be evidence of a scam.
Excessive promotion on social media: Coins that are overly promoted by individuals or groups without focusing on the actual value or technology used in the coin should be viewed with suspicion. Scammers may rely on copy and paste in promoting messages to quickly attract attention.
Unexplained increase in trading volume: A sudden increase in trading volume, especially in currencies with a small market cap, may indicate coordination between scammers to push up the price.
Lack of clear information about the coin: If information about the coin’s development team or the goal of the project is unclear or unavailable, this is a red flag. Legitimate cryptocurrencies usually have detailed whitepapers, a known development team, and clear plans.
Urgent calls to invest: If you see urgent calls to buy the currency due to unmissable opportunities or promises of quick profits, this is a classic tactic to make investors feel afraid of missing out.
Examples of pump and dump schemes in real life
One of the most famous scams in the cryptocurrency market is BitConnect.
BitConnect was a platform that presented itself as a cryptocurrency investment tool and promised fantastic returns of up to 1% per day through a “lending program.” The coin was heavily promoted, attracting many investors who were hoping to make quick profits. The value of the coin rose dramatically in a very short time, further attracting more investors.
In early 2018, the project completely collapsed after accusations of fraud. The value of the coin dropped rapidly after the platform announced the closure of its operations, resulting in huge losses for investors. The coin went from being one of the most valuable coins on the market to becoming almost worthless. The platform was shut down after lawsuits by US regulators, and investigations later revealed that the project was a massive Ponzi scheme.
This case is a classic example of a “pump and dump” scheme, where the huge demand for cryptocurrencies was exploited to lure investors in, only to collapse after developers pulled their profits out of the market, leaving investors with huge losses.
How to protect yourself from "pump and dump" schemes?
To protect yourself from falling into this type of fraud, you can follow some of the following tips:
Do thorough research: Always make sure to study the project and cryptocurrency you are considering investing in. Research the development team, the goal of the project, potential partnerships, and the technology used.
Avoid hype-based investments: If a currency is based mainly on media hype without explaining the real value or actual benefits, it is better to stay away from it.
Watch for suspicious market behavior: Unexplained spikes in price or trading volume for low-cap coins should raise your attention. These could be signs of a “pump and dump” scheme.
Stay away from emotional decisions: Fear of missing out (FOMO) can lead you to make bad investment decisions. Stay calm and base your decisions on facts.
Diversify your investments: Avoid putting all your money in one currency or project. Spreading out your investments reduces your risk if one project turns out to be part of a scam.
Choosing a reliable trading platform: It is important to use reliable and licensed trading platforms. For example, #بينانس is one of the largest trading platforms in the world and takes strict measures before listing new coins. These platforms have strict criteria when adding digital currencies, which reduces the possibility of users being exposed to fraudulent projects. Reliable platforms like Binance conduct a comprehensive review of projects before listing them to ensure user safety and reduce the chances of price manipulation.
By following these steps, you can protect your investments and reduce the risks you may face in the volatile cryptocurrency market.