How to Detect Crypto Pump and Dump Schemes

The crypto space has become one of the leading investment markets that continues to attract retail and institutional investors. The influx of investors into the crypto space has caused scammers to develop fraudulent crypto projects to defraud unsuspecting investors.

Pump and dump schemes: The deep look

Pump-and-dump schemes are well-orchestrated crypto scams that involve duping investors into artificially inflated tokens with the hope of doubling their investments. Pump and shower scammers usually work with social influencers and celebrities to market and hype the tokens to gain a higher market value and attract investors.

Pump and dump schemes have been around for quite some time in the crypto space, but have since evolved to take on new forms. In the bewildering world of cryptocurrencies, where promising projects are launched daily, it can be quite difficult to distinguish between legitimate projects and dumping schemes.

Any diligent investor should be keen to distinguish the difference between legitimate projects and fraud schemes. It is possible to easily recognize crypto pump and dump schemes by learning the signs and tricks used by such fraudulent projects. Read on to learn how to spot crypto pump-and-dump schemes.

What are Crypto Pump and Dump Schemes?

Crypto pumping and dumping schemes are financial scams in the crypto space that involve manipulating the price of a token/coin to create a false sense of profitability, causing investors to buy the tokens with the hope of multiplying their investments .

Crypto pump and dump scammers deliberately use false information and artificial hype to trick investors into thinking that a particular low-value crypto project has great potential. Investors are encouraged to buy the asset causing the resulting rise in price due to high demand.

The scammers then wait for the digital asset’s price to skyrocket and reach a specific point before selling their holdings, causing a market influx that erodes the coin’s value, causing an almost immediate collapse in the value of the tokens . The unregulated nature of the crypto space has made crypto pumping and dumping schemes common in recent years.

Several celebrities, notably Soulja Boy, Lil Yachty, Nick Carter, and YouTubers Ben Philips and Jake Paul, have all been involved in pump-and-dump schemes in the past. Launched in 2021, the $SQUID Game coin, named after Netflix’s hit series – Squid Game, has been involved in a pump and dump scam with live investors counting millions in losses.

The coin rose to $2800 in a short period of time from slightly more than a penny before crashing to a few cents within minutes. This is a classic example of a crypto pump and dump scheme.

Crypto pump and dump schemes against carpet pulling

Withdrawal and crypto pump and dump schemes are typically the same thing. However, in a backlash, crypto developers entice investors to invest in the project by buying tokens at earlier stages with the hope of selling them later at higher prices to make significant profits.

The development team suddenly abandons the project and removes its liquidity leaving investors with worthless coins. Essentially, investors are tricked into feeling that they are getting a good investment, but soon the entire project becomes worthless, causing their investments to crumble.

Analyze Crypto pump and dump schemes

Cryptopump and dumping schemes often offer false promises regarding three broad categories: guaranteed exorbitant returns, ability to solve real-world cases, and high popularity among top investors, influencers, and celebrities.

These scams often start on social media platforms, mostly Instagram, TikTok, Twitter and Discord. The success of pump and dump schemes often relies on creating hype around the new coin/token. A great way to create hype is to encourage celebrities and influencers to create compelling social media content and target it to their fans via social media platforms.

Contracted influencers and celebrities will generally promise enormous return on investment (ROIs) growth within a short time and even lie about the coin’s use case or who/what is associated with the coin. For example, the $SQUID Game coin lied that the project was affiliated with the runaway Netflix series Squid Game which was untrue.

As the project and its perceived investment returns are shared on social media by influencers and celebrities, the scammers use automated accounts run by bots to respond, share and retweet the posts to make the project viral on social media platforms. This creates enormous hype rather than real interest in the project.

The hype is big enough to cause a serious FOMO (fear of missing out) among emerging and established crypto investors. Most investors will buy the coins/tokens, causing the price of the tokens to rise within a short time and start the scam.

How to Recognize and Avoid Crypto Pump and Dump Scheme

Crypto pump and dump schemes can be easily recognized by their peculiar and almost consistent features. In virtually all of these scams, victims are manipulated into taking action for FOMO, which ultimately leads to them being scammed. Here’s how you can recognize cryptopumps and scams and avoid falling into the trap.

A new cryptocurrency is suddenly lifted

Crypto pump and dump schemes are characterized by a new coin/token that suddenly gets a lot of attention and a lot of hype out of nowhere. Suppose you see a new cryptocurrency project getting a lot of hype. In that case, you’ll want to do thorough background research by looking at the project’s white paper, founders, development team, and use cases to determine if the hype is worth it. If you decide to invest in the coin, make sure it matches your investment goals, not just because someone told you it would be great.

Celebrities and influencers are hyping up a new project like crazy

It’s okay to be skeptical about a crypto project once you see celebrities and influencers promoting it on their social media platforms. This is because their motive may be to get paid and not really show their genuine investment interest in the project.

Most celebrities and influencers do not have sufficient crypto knowledge to give advice on crypto investments. They are probably hyping the coin because they are either paid in fiat or the tokens/coins for the new project. It is also highly unlikely that the influencers and celebrities themselves support the project.

Never take investment advice from influencers and celebrities, especially when new crypto projects are advertised. Getting celebrities and influencers involved in these scams is difficult as most of them are unknowingly selling out the scams.

Similar messages across social media platforms

Another common sign of crypto pump and dump schemes is the appearance of identical messages regarding a new crypto project posted all over social media platforms, on Discord groups, in channels, on pages, crypto subreddits, and more.

These messages aim to make the project viral and attract unsuspecting investors. In most cases, the post is usually paid as advertising, with the discussions around the project conducted by bots. Discussions about legitimate crypto projects are often done more naturally with differing opinions among users.

The difference between legitimate crypto projects and pump-and-dump schemes is that these crypto projects gained traction because of their underlying technology and use cases rather than social media hype using bots, influencers, and celebrities.

Aggressive advertising campaign

While it is normal for any upcoming crypto project to run advertising campaigns, pump-and-dump scammers often run aggressive campaigns even before the project fully establishes itself in the space.

A startup trying to establish itself in any sector should at least invest aggressively in product development rather than advertising campaigns. Aggressive advertising campaigns for a newly launched crypto project without precise use cases and hardly any market cap is a big red flag.

Therefore, you will want to be skeptical of a particular launched crypto project if you see it aggressively campaigning across social media and other platforms.

An unprecedented price increase

This is one of the most common signs of pump and dump schemes that indicate the scheme is already underway and waiting to pounce on gullible investors. The price increase in the project’s token/coin is due to an increase in market demand and a sign that many people have already fallen for the scam.

A sudden price jump in a relatively unknown coin is a red flag. If you have already invested in the project and find yourself in such a situation, you will want to sell the tokens almost immediately before a price crash in the dumping phase.

Closing words

Crypto pumping and dumping schemes have become common in recent years due to cryptocurrencies’ decentralized and unregulated nature. As an avid crypto investor, distinguishing between the legitimate and crypto pump and dump schemes is a mandatory skill.

For the most part, you can protect yourself from such fraudulent schemes by establishing a workable trading strategy, sticking to it, and investing small amounts of money that you can afford to lose in new crypto projects.

If you are a pump and dump victim, try to liquidate your holdings as soon as possible or accept your losses, learn your lesson and move on. You can also report the pump-and-dump scheme to the relevant authorities, such as The Federal Trade Commission (FTC) and The Internet Crime Compliant Center.