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. The wrong queue here is usually led by a crypto pump-and-dump group. And the end result could be a scam.
In this article, we will outline a few signs that will help you recognize the signs if you fall prey to a crypto pump and dump. We also offer tips on how to avoid them.
What are pump-and-dump crypto scams?
Crypto pump-and-dump scams get their name from the fact that the crypto pump-and-dump groups behind them “pump” up the price in order to sell it off (that is, dump it) at a higher price. The buyers are usually unaware and end up putting their money into a project that’s being set up for failure. In the end, the asset’s price declines as a result of the dumping, leaving buyers high and dry.
Such scams are naturally harmful to not only the victims but also to the integrity of the crypto ecosystem.
Pump-and-dump scams are the oldest trick in the crypto scammer’s 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, therefore affecting many other cryptos as well.
How do crypto pump-and-dump groups work?
With crypto pump-and-dump groups, scammers team up and operate on social platforms, like Discord and 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 there are high-ranked members who 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.
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
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 will also need to find your own 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 hike in prices 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.
- Careful about whom you follow: Another sign of market manipulation is popular players promoting a token that they never mentioned before. Each time you see a celebrity or crypto influencer discuss or promote an asset, consider the potential motivation. 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. A good strategy often involves picking the type of coins that are 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 when you should be considering 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 there is evidence to show that the plan is feasible, and so on. Familiarize yourself with numbers and price charts.
Pump-and-dump scams are a big problem in the crypto industry. Unfortunately, scammers have been able to get away with stealing millions of dollars from innocent investors. So your best bet is to plan ahead. Read the project’s whitepaper, check out its team, and take a closer look 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!