The current digital currency market is a promising yet very risky environment, and one of the biggest risks investors face is pump and dump scams. By understanding how this scam operates and recognizing warning signs, investors can protect themselves from unfortunate losses.
What is Pump and Dump?
Pump and dump is a fraudulent strategy in financial investing, originally popular in the stock market, and now has strongly infiltrated the cryptocurrency market. The method of pump and dump is very simple:
Price Pump: A person or group buys a poorly traded asset, such as penny stocks or low liquidity cryptocurrencies, when its value is very low. They then spread positive news or misinformation about this asset to lure in investors. When more people start to show interest and buy in, the asset's value quickly rises.
Dumping: When the asset's value reaches the desired level, these scammers sell off a large portion of the assets they hold, causing the price to suddenly drop sharply. New and inexperienced investors, who bought at high prices, will suffer heavy losses when the price suddenly falls.
Why is the Cryptocurrency Market Vulnerable to Pump and Dump?
The cryptocurrency market is likened to the 'Wild West' of finance due to its novelty and lack of strict regulatory oversight. Below are the main reasons why this market is vulnerable to pump and dump scam tactics:
Loose regulations: Most cryptocurrencies are traded freely without strict regulation. The regulations are not clear enough and limited enforcement allows scammers to exploit the situation.
Diverse and hard to control: Every day, a myriad of new cryptocurrencies emerge and are traded on various platforms. This makes it very difficult to control and monitor transactions in the market.
FOMO (Fear Of Missing Out) Effect: The fear of missing investment opportunities of investors can easily be exploited by exaggerated news.
The involvement of 'KOLs' (Key Opinion Leaders): Influential people, especially on social media, can easily get involved in these tricks, even if they may not realize it themselves. They promote a certain coin with attractive promises, leading to a surge of new investors entering the market.
Signs of Recognizing Pump and Dump Schemes
Detecting a pump and dump scheme in a timely manner before investing will help investors avoid significant losses. Here are some signs to look for:
The unusual emergence of positive news: When you see a cryptocurrency that few people know about suddenly being heavily promoted on forums and social media, be cautious. Typically, this is a signal of an impending pump and dump.
Lack of information and unclear objectives: When checking information about a project, look for a whitepaper or the project's long-term goals. If the coin has been around for a while but lacks significant development or has vague goals, it is likely just a project created to tap into short-term speculative demand.
Sudden involvement of influencers in promotion: When influencers (KOLs) who are not financial experts suddenly post about a new cryptocurrency, carefully consider the reasons and the authenticity of that information. Reputable projects typically do not resort to loud promotional tricks from non-experts.
Lack of official and transparent platforms: A reliable project will have a website, official media, and transparent documentation about the development team. Check information from official sources instead of relying solely on unofficial ones.
Suspicious trading platforms: If the coin is only traded on obscure DeFi exchanges or those that few people know about, investors should take the time to research further. Reputable and large exchanges typically have fewer pump and dump projects due to their stricter vetting processes.
How to Protect Yourself from Pump and Dump Activities?
Here are some ways to avoid:
Conduct detailed research: Never invest in a coin just because everyone is rushing into it. Learn about the whitepaper, development roadmap, and the development team of the project.
Analyze the project's development: Invest in coins with sustainable development and clear foundations. The project must have a roadmap and specific goals to attract community interest reasonably.
Be cautious with social media channels: Don't fully trust advice from influencers. Check whether the information about this coin is reliable.
Check the credibility of the trading platform: Only trade on large and reputable exchanges to minimize risk. Smaller and less regulated exchanges are often easy targets for pump and dump scams.
Conclusion
Pump and dump activities are a real risk for new investors in the cryptocurrency market. By equipping yourself with knowledge about how these scams work, understanding warning signs, and implementing preventive measures, investors can protect themselves from unnecessary risks. However, nothing can guarantee absolute safety; always consider carefully and choose to invest in projects with solid and transparent foundations.
