Undoubtedly, pump-and-dump schemes have taken a toll on the cryptocurrency market. On the other hand, the crypto world has seen an increase in interest from individual and institutional investors in recent years.
However, this popularity has unfortunately led to increased scammers looking to take advantage of the enticing opportunities and the relatively limited regulations. Crypto scams seem to lurk everywhere, like hidden obstacles waiting to trip you up. One misstep and your hard-earned money could vanish.
It’s important to note that not all scams are similar. Some are blatant in their deception, while others play a more subtle game of manipulation. One particularly nasty type is the pump and dump scheme, promising unrealistically high returns. These scammers use psychology to ensnare victims, appealing to their emotions with the allure of quick wealth, and many fall into the trap due to FOMO (Fear of Missing Out).
The more you educate yourself about crypto and its potential pitfalls, the better equipped you’ll be to avoid falling victim to these scams. This excerpt sheds light on how pump and dump schemes operate, ways to identify both obvious and not-so-obvious warning signs, and everything in between.
Let’s dive in!
What is a Crypto Pump and Dump?
A crypto pump-and-dump can be equated to a sneaky market trick where scammers get their hands on a bunch of a lesser-known digital coin, hype it up to artificially boost its value (pump), and then make a quick buck by selling it off to unsuspecting folks (dumping).
When these scammers unload their tokens, it messes with the supply-demand balance. Prices drop, and because many of these coins are essentially worthless, they don’t bounce back. So, innocent investors are left holding tokens close to worthless while the fraudsters are off enjoying their ill-gotten gains.
In simple terms, a pump-and-dump is a shady move where the scammers talk up the value of an asset they own using false or misleading info. They then cash out when the newbies start buying in, causing the market to flood and leaving the newcomers with an asset that’s basically worthless.
How Crypto Pumps and Dumps Work
Pre-Launch Phase
It’s all about building excitement – the more hype, the more people invest, and the scammers profit quickly. They usually create this hype on platforms like X, Discord, and Telegram, targeting people who might not know better. These scammers use tactics like allowlists and pre-sales to attract initial buyers.
An allowlist gives certain people early access and special privileges. Unfortunately, scammers use it to make you feel exclusive, pitching it as a unique chance to invest before everyone else. If you’re on the allowlist, you can buy the coin before the public in a pre-sale, sometimes with a discount. But again, that’s where the problems start.
Launch
This involves boosting the apparent value of a token or coin, usually by individuals with a major social media presence or a strong reputation.
These shillers play on the FOMO to create a sense of urgency and excitement. They might say, ‘If you missed out on the early opportunities, here’s your last chance to join from the beginning and make big profits later.’ Unfortunately, victims end up unknowingly promoting the token to the scammers as they get caught up in the fake hype.
Pump
Investors are already set to lose money and have bought in, and that shoots up the asset’s price. If you miss the early sale, it can feel like you’ve missed the boat. But here’s the trap: the more latecomers buy in at these higher prices, the more the scammers profit. And guess what? That’s exactly what they’re aiming for. Inflate crypto price, boost cryptocurrency value, increase in token price, elevate digital asset value
Dump
Once the token hits a price that the scammers think will make them money, they all team up and sell off their stash at once. This big sell-off makes way more tokens available than people want to buy, and the price drops like crazy.
In return, it freaks out other investors, who also start selling, but it will be too late for them. The tokens end up worthless, and the scammers walk away with a fat profit, while the unlucky investors are stuck with worthless digital assets. Sell-off crypto holdings, Unload assets, Offload tokens, Dispose of holdings
How to Avoid Pumps and Dumps
- A thorough research on the cryptocurrency per se and its fundamentals before investing.
- Utilize technical analysis to identify unusual price fluctuations.
- Avoid making decisions driven by hype and FOMO.
- Stay up-to-date on news and market trends.
To sum up, folks diving into the world of crypto trading or investing really need to keep their guard up against pump-and-dump schemes. Even though it’s against the rules in traditional securities markets, the lack of regulations in the crypto world has made these schemes all too familiar.
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
