The not-so-old cryptocurrency industry is growing exponentially, and it has also become a hub for nefarious activities. In addition to using Bitcoin and other cryptocurrencies as a payment method, this space is also more notorious for financial crimes.
Ponzis, kickbacks and hacking are the most common activities in the cryptosphere, often leading to significant financial losses for investors. One of these activities in the crypto market is the pump and dump scheme, which lures investors to buy crypto assets and get quick returns.
Such bad actors in the crypto ecosystem always try to target new investors to drain their pockets. The pump and dump scam is not only limited to crypto but is also widely spread in the traditional market.
What is Pump & Dump Scam in Crypto?
Pump & Dump is a modus operandi of scammers who artificially generate demand for crypto-assets to pump up their price and later sell their existing holdings for massive profits. Fraudsters usually use this method to trap new investors who are not very aware of the crypto market and are looking for lucrative profits.
This scheme involves inflating the market price of a particular cryptocurrency by falsely exaggerating its potential. Most of these crypto projects claim to hold so much potential for the future, and based on that, the project’s token is promoted as cheap compared to its future price.
Additionally, project owners also hire influencers and promoters to create hype around the project and influence users to buy the token. These project owners already have large amounts of the same tokens in their wallets, which they do not need to buy from the market, because they are the owners, and they make systematic allocations to themselves.
After successfully selling enough tokens to the public and pumping up the price, the project owners dump their own holdings into the market to collect large chunks of money. This is usually the end game for them, and the project is nowhere to be found after the dump.
Also read: Spend your crypto safely: 5 tips to choose the best sites
Signs of a Pump and Dump Scheme
There are thousands of crypto-assets in the market right now, and such rogue projects hardly get noticed. Most of these projects happen when the crypto space sees new primitives like liquid staking, layer 2 scaling solutions, NFTs, etc. People often buy new tokens en masse when these new primitives hit the market. However, the pumping and dumping schemes can be noted by analyzing and finding the environment of the projects in general.
Following are the most obvious signs of a crypto Pump and Dump scheme;
Focus on Marketing
These projects are newly launched, and the company spends a significant amount of money on marketing rather than allocating funds for actual development. It aims to reach a wider audience than possible by hiring influencers, KOLs, paid promoters and sometimes even celebrities.
Inflated Trading Volume
The artificially increased trading volume is another important sign that can be easily found while looking at the supply of tokens. If the current market capitalization or fully diluted valuation (FVV) of the project does not match its volume, it is most likely that the trading volume will be unnaturally increased.
Continuous Shilling
Such tokens will constantly be taken down by influencers and sometimes even by bot accounts on social media platforms. This is all under the paid campaigns to increase the visibility of the token among the crypto community.
Lack of utility
These tokens have no primary use other than just trading. Utility is paramount, giving essential value to the sign. If there is no fundamental use of the token, it cannot sustain itself in the landscape of the crypto market.
Too much talk for price
Much of this token material will be centered around its current and future price. All the discussion about the token will come back to its potential price movements and how it will benefit the early investors.
Comparison with other projects
Comparison with other market dominant projects is also a red flag. Recently, the crypto market has been filled with cryptocurrencies, which claimed to be ETH killer, when they didn’t even have such development in the first place.
Suspicious team profile
The most common factor of Pump and dump scams is the lesser known team behind the project. These people often create fake profiles to gain the trust of investors. Some projects even have anonymous team members who are nowhere to be found.
Examples of Crypto Pump & Dump Scam
The decentralized nature of crypto and the lack of a regulatory environment is prime for scammers. While these factors are a plus for the industry, scammers take advantage of employing and carrying out financial fraud. Here are some recent examples of crypto scheme pumping and dumping:
Squid-Game Token
Created after the popular web series in 2021, the Squid Game cryptocurrency token is a prime example of a pump-and-dump crypto scam. The popularity of the Squid Game web series brought attention to the token, and people started buying SQUID coins. However, as the value of the coin skyrocketed, the team behind the project dumped their holdings and paid out all liquidity from the exchanges. Investors reportedly lost more than $3.38 million in this scam.
SafeMoon
SafeMoon is another crypto project that alleged scammers operated in the 2021 bull run. It quickly became popular at the time. The visibility of this token was so good that at one point it reached a market capitalization of more than $17 billion, and later it fell almost 99% to $223 million. After one and a half years, the owners of the project were charged with fraud and money laundering by the SEC and DOJ in November 2023.
There are hundreds of other crypto tokens that have come and gone into obscurity after successfully defrauding investors. Most of the memecoins are pump and dump projects that sometimes become huge success that even developers could not control.
How to avoid falling for pump and dump schemes
This kind of fraud has dangerous effects on investors, especially those who are new to crypto. Before investing in crypto, investors need to know basic things about the crypto space.
Below are some points to consider to avoid falling for pump and dump scam signs;
Research on project
Conducting thorough research on the crypto project and its potential is the first step to finding out whether purchasing a token will be beneficial or not. Investing only because of future price speculation is nothing more than pure gambling.
Don’t invest according to random advice
Not taking financial advice from random people on social media is a must because such actors are paid to promote projects. Investing should not be done only by hype around the token.
Gain knowledge and be updated
Knowing about cryptocurrency will help to understand which projects will succeed and which will fail. Being aware of market trends will also help in making proper investment decisions.
Also Read: Importance of Teaching Financial Literacy in the Age of Cryptocurrencies
Closure:
The lack of regulations has made the crypto industry a hub for illegal financial activity, and these pump-and-dump schemes are top of it. While cryptocurrencies already have a label of illegal money, this kind of activity further ruins the standards of this industry.
When new investors enter the crypto market, they are much more likely to fall for pump-and-dump schemes. These people get the wrong image of crypto and leave immediately after losing money. The solution to this problem is education and warnings about such projects. The crypto community needs to make a collective effort to fight the pump and dump schemes.
Frequently Asked Questions
Q.1 What is Pump & Dump Crypto?
Answer. Pump & dump crypto is a fraud cryptocurrency scheme where a token’s price is increased on false promises just to sell existing token holdings at a higher price.
Q.2 Which cryptocurrency were pump and dump schemes?
Answer. The main examples of pump and dump schemes are Squid Game coins, SafeMoon and U.Cash. Most of the memecoins are pump and dump schemes.
Q.3 Is Bitcoin a pump and dump coin?
Answer. Bitcoin is a decentralized cryptocurrency with a market cap of almost a trillion dollars, so pumping and dumping requires billions which is not possible.
Q.4 Is XRP Pump & Dump CCrypto?
Answer. Many people believe that XRP is a pump and dump scheme, but there is no hard evidence and it has not been proven.
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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