What Are Crypto Pump and Dump Schemes and How Can You Avoid Them?

The unregulated world of cryptocurrency has seen its fair share of scams and schemes, one of the most infamous being the pump and dump scheme. In recent times, this fraudulent activity has become increasingly common, causing millions and billions of digital assets to disappear from the market.

Let’s examine how cryptocurrency market manipulation occurs with pump and dump schemes.

What does “pump and dump” mean in cryptocurrency?

The term “pump and dump” is not exclusive to the cryptocurrency market, as it has been used for financial scams for centuries. However, it has gained notoriety in the field of digital assets. It is important to note that pump and dump scams should not be confused with withdrawal scams as they are not similar in how they work. Although they may look similar, understanding the difference between a carpet pull and a pump-and-dump scheme can help protect against potential losses.

This scheme involves artificially inflating and maintaining the price of a crypto, followed by selling it at a profit before the price collapses. This fraudulent activity wiped out millions of dollars worth of digital assets from the market and caused significant losses to investors who bought the coin based on false information.

A notable example of pump and dump is depicted in the film “The Wolf of Wall Street.” It depicts a stock brokerage where marketers offer penny stocks to investors with false promises of high returns. In contrast, the broker himself sold his share at a higher price.

The brokers continued to drive sales until the buying pressure dissipated, leading to a drop in stock prices and huge losses for investors. This is exactly how the pump and dump mechanism works in the cryptocurrency market.

Pump and dump schemes in crypto market: what you need to know

The cryptocurrency market, which is unregulated, has become a hub for scammers who use different tactics to trick investors. The infamous pump and dump scheme is one such tactic that has entered the crypto world as well.

Unlike traditional markets, scammers in the crypto market have more flexibility to manipulate the price of digital assets to their will, making it easier to trick buyers through fake news or even launch their own assets. To pull off their schemes, scammers use platforms like Discord and Telegram to fake news and create hype around cryptocurrencies. They also run social media campaigns to drum up interest in their scams.

However, with the collapse of various crypto projects in the post-2020 market, most of these pump-and-dump schemes failed to gain traction, resulting in almost no trading activity on exchanges. According to Chain analysis, only 40,521 out of the 1.1 million tokens launched in 2022 have impacted the market.

The chain analysis report also suggested that around 24% of the 40,521 tokens are showing pump and dump trends. The value of these tokens dropped by 90% within a week of their launch, with a negative security rating indicating that the pump-and-dump scheme has become increasingly common for crypto market manipulation.

As an investor or a crypto trader, it is essential to understand how these schemes operate and what signs to look out for in order to protect your investments.

How Pump and Dump Schemes Work in Crypto

Now let’s learn about the market manipulation techniques scammers use for pumping and dumping cryptocurrency.

Both the founders and community members can be part of cryptocurrency scams. They usually operate through crypto pump groups, from where they spread false positive news for a specific cryptocurrency. This pushes the coin’s price upwards and encourages people to invest in the project. These groups operate through platforms such as Discord or Telegram, which allow them to connect with more investors.

Furthermore, project developers can promote their coins through social media campaigns. Many projects have paid hashtags on Twitter just before the coin’s launch or for any development in the project. This helps create hype for the crypto and forces people to invest their funds. As a result, the project investors continue to grow along with an increase in the crypto’s price.

When the buying pressure starts to subside, the scammers immediately opt out and sell the token to make bigger profits. However, the sudden drop in the coin’s price catches investors off guard, and they end up losing their funds. This sophisticated method for scammers allows them to conveniently rob people and leave the system.

The pump and dump scheme is a dangerous investment practice that you should be careful about. It is important to be aware of the tactics used by these scammers and avoid getting caught up in the hype.

4 tips to avoid pump and dump schemes

“How to avoid crypto pumping and dumping schemes” is a common concern among investors. Here are four tips to avoid falling victim to pump-and-dump schemes in the crypto market:

1. Don’t believe the hype

The first rule of crypto investing is to ignore promotional campaigns. Even if a project is legitimate, marketing it can exaggerate its potential, leading you to invest in something that isn’t worth your money. It is therefore crucial to do thorough research before investing. Study the market trends and look for technical indicator categories in crypto trading to help you make informed decisions. By ignoring the unnecessary hype, you can avoid falling prey to fraudulent schemes and make smarter investments.

2. Analyze price fluctuations

Another important aspect to consider when evaluating a cryptocurrency is its price fluctuations. If the value of a lesser-known coin suddenly rises, it can be a sign of price pumping. Likewise, if a coin’s value jumps immediately upon its launch, this may also indicate a scam. It is important to analyze crypto price changes as part of your research, but also look for any credible news or events that justify these fluctuations. This will help you avoid investing in projects prone to pump and dump schemes.

3. Avoid projects with low liquidity

Staying away from projects with low liquidity is essential to avoid pump and dump schemes. Scammers can use low liquidity to keep the token price high, causing volatility and market imbalance. It can also prevent investors from freely withdrawing their money.

4. Avoid projects with large purchase walls

Large buying walls in a cryptocurrency can be a red flag for a pump-and-dump scam. Typically, the founder members and community members create buy orders to increase the price of the coin, while maintaining sell orders to bring balance. However, this is a tactic used to artificially maintain the network. The organizers can manipulate it at any time to make a profit and abandon the project and its investors.

DYOR and follow risk management strategies

Avoiding crypto pump-and-dump schemes is essential to protecting your investments. You can make informed investment decisions by doing your own research (DYOR) and following risk management strategies. It is essential to be skeptical of investment opportunities that sound too good to be true and not blindly follow the crowd.

Always carefully evaluate cryptocurrencies and the market before investing. Cryptocurrency is a high-risk, high-reward business, so proceed with caution. By taking these precautions, you can stay ahead of the game and avoid being duped by pump-and-dump scams.