How to Spot Crypto Pump-and-Dump Schemes?

Ever joined a long queue only to realize after a while that you were in the wrong one? Hate that, don’t you? Well, it’s way worse than that when it happens in the crypto space. Crypto pump-and-dump groups usually lead the wrong queue in crypto. And the result could be a scam. But not all such groups are scams.

In this article, we will outline a few signs that will help you recognize the signs if you fall prey to a scam of this kind. We also offer tips on how to avoid them.

Understanding Cryptocurrency Pump and Dump Schemes

A crypto pump-and-dump group is a collective of crypto users who operate online. They get their name from the crypto pump-and-dump groups behind them, which “pump” up the price to sell off soon after (that is, dump it) at a higher price.

While all these groups are involved in some form of market manipulation, they are not all malicious, as seen in the section below. Irrespective of their intention, the legality of all such groups is dubious at best in the crypto space.

How do crypto pump-and-dump groups work?

Crypto pump-and-dump groups operate on social platforms such as Discord or Telegram.

While the platforms they use usually allow anyone to join in, there still is a hierarchy within the groups. The group admins are often at the top of the pyramid. Then some high-ranked members have the privilege of receiving alerts about potential pump-and-dump moves before all the others. This allows them to purchase the asset concerned when its price is low and sell it off at a high—well before the price begins to plummet.

Types of pump-and-dump groups

Some pump-and-dump groups are often the mastermind behind pump-and-dump scams. But not all of them are the same. There are:

1. Transparent groups, and
2. Obscure groups.

The former tries to be open about their agenda. So the words “pump” and “dump” are often used in proximity and, sometimes, even the channel description. On the other hand, obscure groups essentially try to obscure the agenda. Malicious actors in the group avoid referring to the idea of pumping and dumping on the group. And innocent participants are oblivious to or uncertain about the legality of what’s happening. The latter are associated with scams.

Pump-and-dump crypto scams

Crypto pump-and-dump scams get their name from the crypto pump-and-dump groups behind them “pump” up the price to sell it off (that is, dump it) at a higher price. The buyers are usually unaware and put their money into a project set up for failure. Ultimately, the asset’s price declines due to the dumping, leaving buyers high and dry.

Such scams are naturally harmful to the victims and the integrity of the crypto ecosystem.

Pump-and-dump scams are one of the oldest tricks in the scam book. But they are still pretty common—a fact that highlights how few are aware of them. Crypto being unregulated does not help either.

There are many dangers associated with this kind of scam. First, unsuspecting investors end up losing money. Many may even lose faith in crypto as a whole as they may believe that the investment rapidly rose and fell without any real reason. Finally, pump-and-dump schemes can lead to market manipulation, affecting many other cryptos as well.

One of the most well-known pump-and-dump scams unfolded last year. In November 2021, the native token of a project inspired by the TV series Squid Game suddenly surged by a phenomenal 2,400% in a 24-hour window. But it was in for a massive fall soon after because the developers disappeared with member funds. They had pumped and dumped.

These scams fall are called rug pulls. You can read all about them here.

How to spot and dodge a pump-and-dump crypto scam

Pump-and-dump scams are frequent, and since the crypto industry is unregulated, they can be hard to come back from. So, it is better to learn to avoid rotten eggs altogether. But to do that, you should be able to differentiate between a pump-and-dump scam and an authentic project.

While we at CoinSwitch help you learn how to do it, you must also find your ways. But to help you begin the process, let’s understand the basics here.

• Maintain a modicum of wariness: Remember there are no clear-cut red flags, but it does help to stay wary of projects with excessive hype. Investors must thoroughly and continually evaluate crypto projects before making any investment decisions.
  Look for sudden price fluctuations: A drastic or sudden price hike is also a warning sign, especially if it follows much hype. This is especially relevant if the given crypto asset was previously disregarded, unrecognized, or forgotten.
• Be careful about whom you follow: Popular players promoting a token they never mentioned before is another sign of market manipulation. Consider the potential motivation whenever you see a celebrity or crypto influencer discuss or promote an asset. Many influencers and celebrities have little knowledge about the assets they promote.
  Run a fact-check when you spot recurring messages: If you see many same or similar messages about a new crypto project in social media or private messaging service groups, that could be a warning sign. Remember how these groups operate and try to keep that in mind while filtering information.
• Don’t stray from your investment strategy: If you have created an investment strategy based on your risk appetite, investing only so much that you think you can afford to lose and sticking to your original plan can take you a long way to safety. A good strategy often involves picking the type of coins right for you, usually in small amounts. So trusting the work you have done to create a diversified portfolio is half the battle won. The DYOR strategy seldom gets old.
• Stray from your plan only when you are 100% sure: The only time you should consider adding new coins to your portfolio is when you have done enough research to ensure that all is well. Only allow yourself to add stuff by doing more research. Study the team, the ideas behind it, the problem it is trying to solve, how it envisions the solution, whether the evidence shows the plan is feasible, and so on. Familiarize yourself with numbers and price charts.

Conclusion

Pump-and-dump scams are a big problem in the crypto industry. Unfortunately, scammers have gotten away with stealing millions of dollars from innocent investors. So your best bet is to plan. Please read the project’s whitepaper, check out its team, and look closely at how token sales play out before investing in any new project.

Remember, FOMO can lead you astray if you aren’t careful. But it doesn’t have to. We hope this article has helped you spot those pump-and-dump tactics. Stay safe!

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