The cryptocurrency market offers countless opportunities for profit, but it also presents several risks, especially for those starting to invest.
One of the most common scams in this scenario is Pump and Dump. Although this practice is illegal in traditional markets, such as stocks, it still occurs frequently in the world of cryptocurrencies.
In this article, we will explain what Pump and Dump is, how to identify it, and, most importantly, how to protect your investments so you don't fall into this type of scam.
First of all, what is a Pump and Dump scheme?
Pump and Dump is a type of financial fraud that involves manipulating the price of an asset. As we have mentioned, it is prohibited in regulated markets, but it often happens without consequences in the cryptocurrency market. Basically, Pump and Dump means "inflate the price and then get rid of the asset."
And, as you will see now, it works in two phases.
The process begins with a group of people (usually the scheme's organizers) buying large amounts of a low-value cryptocurrency, and then this group talks intensely about the coin through social media, private groups, or cryptocurrency forums.
With this aggressive and false marketing, a sense of urgency is created that makes other investors, often inexperienced, buy the coin quickly, believing that its value is really increasing and that it would be a mistake to miss this opportunity.
This first phase, which is PUMP, is fueled by the fear of missing out on a big opportunity (known as FOMO — Fear of Missing Out). With this hype in the scene, the price artificially increases.
When the price reaches a peak, the scheme's organizers sell their holdings en masse, causing the value of the coin to drop. This is the moment of the DUMP, the second stage of the pump-and-dump strategy: it is at this moment when the price falls rapidly, leaving investors who bought the coin at the top with enormous losses, while the scheme's organizers leave the scene pocketing the profits.
How would it be possible to identify a Pump and Dump scheme?
Detecting a Pump and Dump scheme may not be so easy, especially for those new to the cryptocurrency market. Still, there are some warning signs that can help you avoid becoming a victim of this fraudulent practice:
Sudden and unexplained price increase: If an unknown or low-value cryptocurrency suddenly skyrockets in a short period of time, with no clear reason or relevant news behind this increase, you may be witnessing a Pump and Dump. It is common for these coins to have low liquidity before the scam begins;
Excessive advertising on social media: Many Pump and Dump schemes are promoted on platforms like X (formerly Twitter), Telegram, Reddit, and Discord. If you see influencers or groups persistently promoting a coin with promises of quick profits, pay attention, because all this excitement could just be an attempt at manipulation;
Little or no utility of the project: Many of the tokens used in Pump and Dump schemes have no real intrinsic value, nor do they even address a problem they seek to solve. When this happens, there may not be an active community or a solid project behind it and, at worst, it could even be some meme coin;
Organized “pump” groups: Some schemes occur so shamelessly and explicitly that they leave coordinated records. There are groups that openly organize Pump and Dump, choosing a coin to promote and make the plan a reality. These groups may even charge others investors to gain early access to the “signal” of which coin will be inflated, which would be an additional layer of fraud. Participating in these groups, besides being risky, may be illegal depending on your involvement.
How to protect cryptocurrency investments from this scam?
Keeping your investments safe in the cryptocurrency market involves caution, education, and vigilance, a very important triad.
Next, we will tell you about some practices that can help you avoid falling into Pump and Dump schemes:
Research before investing: Never buy a cryptocurrency you don’t know just because you saw someone talking about it online. Do your own research to understand the project, who is behind it (if available), what technology supports it, and its growth potential. And, of course, make sure to check that the coin has a real use;
Be wary of promises of quick profits: Have you heard that saying, "if something seems too good to be true, it probably is"? Here, things fit perfectly. Remember: investing in cryptocurrencies is a process that requires patience, and real profits come over time, not overnight;
Diversify your investments: Putting all your capital into a single cryptocurrency recalls another classic wisdom: "don't put all your eggs in one basket." Diversify your portfolio by investing in cryptocurrencies with solid, recognized projects in the market, as this will reduce the impact of possible losses from fraudulent schemes;
Use reliable exchanges: Avoid buying cryptocurrencies on unknown or unregulated platforms. Choose large, reputable exchanges — count on Binance for this! — that follow compliance and security standards. These exchanges tend to list coins from more serious projects, which reduces the chances of getting involved in something like Pump and Dump;
Monitor market behavior: Keep an eye on the trading volume and price patterns of the cryptocurrencies you own or are considering buying. It is important to do this because it will allow you to notice extremely volatile price movements and sudden increases in trading volume without apparent reason, and all of these are warning signs of possible manipulation.
What should you do if you end up being a victim of a Pump and Dump scheme?
If you realize that you have been a victim of a Pump and Dump scam, it is best to avoid panic selling if possible, as this can only make the situation worse. When the value of the coin plummets, selling hastily can turn a scare into reality: that loss on the screen has become a real loss.
Instead, try to mitigate the damage as follows: conduct an analysis of the project to see if there is a possibility of long-term recovery.
Also, if the case is confirmed, report the fraud on cryptocurrency platforms so that others can pay attention. These groups often repeat the strategy, so this way you can prevent others from participating in a future Pump and Dump scheme. The more information that is shared about these schemes, the harder it will be for scammers to continue with these practices.
Be careful and don't fall for a Pump and Dump!
If you have never heard of Pump and Dump, nor do you know anyone who has done it, consider yourself lucky, because your knowledge on the topic occurred directly in this specialized forum you are reading now.
Do you want to help more people avoid falling into this trap? Don't forget to share this article!
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Image by Jubayer69, available on Freepik
