The unregulated cryptocurrency world has witnessed its fair share of scams and schemes, one of the most notorious being the pump and dump scheme. This scam has become more prevalent these days, causing millions and even billions worth of digital assets to disappear from the market.
Let’s find out how cryptocurrency market manipulation works in a pump-and-dump fashion.
What does “pump and dump” mean in cryptocurrency?
Image credit: freepic
The term “pump and dump” is not limited to the cryptocurrency market, it has been used in financial fraud for centuries. However, it is gaining notoriety in the field of digital assets. It is important not to confuse pump-and-dump scams with lag-pull scams, as they are dissimilar in how they work. Although they may seem similar, understanding the difference between lag pull and pump-and-dump schemes can help prevent potential losses.
The scheme involves artificially inflating and maintaining the price of a cryptocurrency, then selling it at a profit before the price crashes. The fraud wiped millions of dollars worth of digital assets from the market, resulting in huge losses for investors who bought the coins based on false information.
A striking example of pumps and dumps is depicted in the movie The Wolf of Wall Street. The film follows a brokerage firm where marketers sell penny stocks to investors with false promises of high returns. In contrast, brokerages themselves sold their shares at high prices.
The intermediary continued to promote sales until the buying pressure subsided, causing stock prices to plummet and investors to lose heavily. This is exactly how pumping and dumping mechanisms in the cryptocurrency market work.
Pump and Dump Schemes in Crypto Markets: What You Need to Know
The cryptocurrency market is unregulated, making it a hub for scammers who use various tactics to defraud investors. The infamous pump-and-dump scheme is one of the tactics he has permeated the cryptocurrency world.
Unlike traditional markets, fraudsters in the cryptocurrency market have the flexibility to manipulate the price of digital assets at will, making it easier to trick buyers with fake news or launch their own assets. Become. To hype up their plans, scammers use platforms like her Discord and Telegram to spread false news and create hype about cryptocurrencies. We also run social media campaigns to raise awareness about the scam.
However, with the collapse of various crypto projects in the market since 2020, most of these pump-and-dump schemes have failed to gain momentum, resulting in little trading activity on exchanges.according to chain analysisOf the 1.1 million tokens introduced in 2022, only 40,521 had an impact on the market.
The Chain Analysis report also suggested that around 24% of the 40,521 tokens exhibited a pump-and-dump trend. The value of these tokens plummeted by 90% within a week of their launch, giving them negative safety scores, demonstrating the increasingly prevalent pump-and-dump method of cryptocurrency market operations.
As an investor or cryptocurrency trader, it is essential to understand how these schemes work and what signs to look out for to protect your investment.
How pump-and-dump schemes work in cryptocurrencies
Image credit: fabrikasimf/freepic
Learn about market manipulation techniques scammers use to pump and dump cryptocurrencies here.
Both founders and community members can be complicit in cryptocurrency scams. They typically operate through crypto pump groups, from which they spread false positive news about specific cryptocurrencies. This increases the price of the coin and encourages people to invest in the project. These groups operate through platforms such as Discord and Telegram to connect with more investors.
Additionally, project developers may promote their coins through social media campaigns. Many projects run paid hashtags on Twitter just before coin launch or for project development. This creates hype for cryptocurrencies and helps force people to invest their money. As a result, the number of project investors continues to grow as the cryptocurrency price rises.
When buying pressure starts to diminish, scammers quickly opt out and sell their tokens for greater profits. However, a sudden plunge in the coin’s price caught investors off guard and they lost their money. This sophisticated method for scammers allows people to conveniently steal money and stay out of the system.
Pump and dump schemes are a risky investment technique and should be used with caution. It is important to be aware of the tactics used by such scammers and avoid getting caught up in the hype.
4 tips to avoid the pump-and-dump method
“How to avoid cryptocurrency pump and dump schemes” is a common concern among investors. Here are four tips to avoid falling victim to pump-and-dump schemes in the cryptocurrency market.
1. Don’t believe the hype
The first rule of cryptocurrency investing is to ignore promotional campaigns. Even if a project is legitimate, marketing can exaggerate its potential, leading to investments that are not worth the money. Therefore, it is important to do thorough research before investing. You can research market trends and explore categories of technical indicators in cryptocurrency trading to make informed decisions. By ignoring the unnecessary hype, you can avoid falling prey to fraud and make smarter investments.
2. Analysis of price fluctuations
Another important aspect to consider when evaluating a cryptocurrency is its price volatility. When the value of a little-known coin suddenly soars, it could be a sign of a price spike. Similarly, if a coin’s value spikes shortly after its launch, it could also indicate fraud. While it is important to analyze cryptocurrency price changes as part of your research, it is also important to check for credible news and events that justify these fluctuations. This helps avoid investing in projects prone to pump-and-dump schemes.
3. Avoid illiquid projects
To avoid pump-and-dump schemes, it’s important to stay away from projects with low liquidity. Scammers can take advantage of low liquidity to keep token prices high, causing volatility and market imbalances. This may also prevent investors from withdrawing their funds freely.
4. Avoid projects with big purchase barriers
A huge cryptocurrency buy-wall could be a red flag for pump-and-dump scams. Typically, founding members and community members create buy orders to support the price of the coin while maintaining sell orders for balance. However, this is a tactic used to keep the network artificially maintained. The organizers can always manipulate it to profit and abandon the project and its investors.
Follow DYOR and risk management strategies
To protect your investment, it is important to avoid cryptocurrency pump and dump schemes. By conducting your own research (DYOR) and following a risk management strategy, you can make informed investment decisions. It’s important to be skeptical of too good an investment opportunity and not blindly follow the crowd.
Always evaluate cryptocurrencies and markets carefully before investing. Cryptocurrencies are a high-risk, high-return venture, so proceed with caution. By taking these precautions, you can stay ahead of the game and avoid falling for pump-and-dump scams.
