A pump and dump in crypto is a type of market manipulation where the price of a cryptocurrency is artificially inflated ("pumped") through misleading or exaggerated information, typically to attract unsuspecting investors. Once the price rises significantly, the manipulators sell off their holdings at the peak, causing the price to plummet ("dump"). This leaves new investors with substantial losses.
How It Works:
Pump:
A group of manipulators coordinates to buy a large amount of a low-market-cap cryptocurrency.
They spread hype, false news, or exaggerate the potential of the cryptocurrency through social media, forums, or private channels.
This attracts new investors, driving up the price.
Dump:
Once the price peaks and new investors start buying, the manipulators sell their holdings.
The sudden sell-off causes the price to crash, leaving late investors holding worthless or devalued assets.
Characteristics:
Low Liquidity: Pump-and-dump schemes often target cryptocurrencies with low trading volumes, as they're easier to manipulate.
Short Duration: These schemes are usually executed quickly to maximize profits before detection.
Coordinated Efforts: Often organized in groups via private channels like Telegram or Discord.
Risks:
Loss of Funds: Investors who buy during the "pump" phase are left with losses after the "dump."
Legal Consequences: Participating in or orchestrating pump-and-dump schemes is illegal in most regulated markets and can result in fines or imprisonment.
How to Avoid It:
Be skeptical of sudden hype around obscure cryptocurrencies.
Conduct your own research and avoid investments based solely on social media tips.
Look for projects with transparent teams, strong fundamentals, and genuine use cases.
