Don’t fall for their tricks.
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It’s not, but there are bad actors out there who want to relieve you of your hard-earned money. Additionally, in the age of social media — and with the rise of cryptocurrency — pump-and-dump scams and kickbacks can happen more frequently and quickly.
Don’t be afraid; be educated, and be skilled. Learn to recognize the warning signs to ensure you are well equipped to avoid them. You don’t want to be the one holding the bag.
What are pump and dump schemes versus carpet pulling?
A pump and dump scheme occurs when the price of an asset is fraudulently “pumped” (often by a group of insiders working as a team), then the asset is “dumped” while the price is still high. A pull of the rug occurs when a crypto project developer suddenly withdraws all the funds from the project, essentially pulling “the rug” out from under investors who are left with worthless tokens.
What pump and shower schemes and carpet pulling have in common
They use manipulative practices. Whether inflating the price of an asset or creating a false sense of security, scammers use sophisticated practices to manipulate investors. They promote speculative assets. The assets associated with pump and dump schemes and carpet pulling are typically highly speculative, with no established track record. Assets are hyped on social media. Not every investment opportunity promoted on social media is a scam, but it is often where investors are recruited for pump-and-dump schemes and kickbacks. They target inexperienced investors. While anyone can potentially fall victim to a pump-and-dump scheme or a scam, these types of scams often target novice investors. This often occurs early in an asset’s history. Pump-and-dump schemes and carpet pulling happen more often with crypto projects or assets like meme coins that are recently created and run on narrative rather than tangible value. They can cause significant financial damage. When entire groups of investors suffer losses, the total monetary damage can be significant.
How pump and shower schemes and carpet pulls differ
Different asset types. Pump-and-dump schemes can occur across asset types, while pullbacks are specific to crypto. Price manipulation. Pump-and-dump schemes involve direct price manipulation; carpet pulls simply drain project liquidity. Offenders. Any individual or group can attempt a pump and dump scheme, while only project developers can perform a carpet pull. Regulatory attention. Pump-and-dump schemes may receive more attention from regulators because they have a longer history of influencing investors in traditional assets. Withdrawals are newer and limited to digital currencies.
6 factors that contribute to pump and dump and carpet pulling
How do pump and dump schemes really happen? Why is carpet pulling possible? Here are six factors that contribute to the prevalence of these types of schemes.
1. Low liquidity. Assets with low liquidity are easier to manipulate because they do not require much volume to drive their prices significantly higher. This makes such assets (penny stocks are a good example) prime targets for fraudulent actors.
2. Volatile market conditions. High market volatility can create ideal conditions for price manipulation or the sudden withdrawal of funds.
3. Social media hype. Pump-and-dump scammers need to generate hype to inflate asset prices; backtracking scammers need to attract liquidity. Much of this hype is generated on social media.
4. Sophisticated marketing. Beyond the hype on social media, pump-and-dump schemes and backhauls can be carried out with the help of sophisticated marketing. Scammers may use professional-looking websites and marketing materials to appear legitimate. They may even pose as analysts representing top investment banks.
5. Low regulatory oversight. Assets like meme coins and penny stocks may not be well regulated, making it easier for scams to run before regulators take notice.
6. FOMO. “This stock is the next NVIDIA!” “Our token is the next generation of blockchain technology and by next year we will replace Ethereum!” The fear of missing out can contribute to the success of pump and shower schemes and carpet pulling. Investors eager to gain exposure to the “next big thing” may fail to do due diligence.
How to avoid becoming a victim
Falling victim to a scam or pump-and-dump scheme is possible – but not inevitable. Some best practices can help:
Do a lot of your own research. Be wary of unsolicited advice. Understand the company or project’s fundamentals. Stay well informed, especially amid volatile market conditions. Expect transparency from project or company leadership. Be wary of projects with low liquidity as they are easier to manipulate. Don’t trade on hype. Be skeptical of rapid price increases.
You know the saying about something that seems too good to be true—it probably is! Beware of unrealistic promises.
Should you invest in speculative projects and assets?
Because speculative assets such as meme stocks, penny stocks, and meme coins are so often the target of pump-and-dumps and pullbacks, you may wonder if any exposure to these assets is advisable.
The answer is – it depends. Should you invest all your funds in the riskiest assets that promise the highest returns? Probably not. But can you use a conservative amount of your portfolio to speculate? Perhaps. It depends on your goals and risk tolerance.
A well-diversified portfolio typically contains a range of investments that span asset types. Stocks, bonds, exchange-traded funds or mutual funds, cryptocurrency and real estate can all be included in a diversified portfolio. Diversification generally increases your risk-adjusted return profile, allowing you to allocate a conservative percentage—perhaps 5% or 10%—in high-risk, high-growth-potential assets. To speculate, or not to speculate: That’s the question only you can answer!
The bottom line
Always make sure to do a lot of research before making any investment decisions. Pump-and-dump schemes and carpet pulling can and do happen, but being informed and staying informed is a powerful way to protect yourself. If you’re driven to speculate, proceed with caution—and don’t invest more than you’re comfortable losing.
Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
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