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How to Spot Crypto Pump-and-Dump Schemes

Learn
How to Spot 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 in the crypto space has caused con artists to develop fraudulent crypto projects to scam 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-dump fraudsters typically partner with social influencers and celebrities to market and hype the tokens to attain a higher market value and attract investors.

Pump-and-dump schemes have typically been around in the crypto space for quite some time but have since evolved to assume new forms. In the bewildering world of cryptocurrencies, where promising projects are launched daily, it can be quite difficult to discern legit projects and dump schemes. 

Any avid investor should be keen to tell the difference between legit projects and fraud schemes. It’s possible to easily recognize crypto pump-and-dump schemes by learning the signs and gimmicks 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 pump and dump 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 mislead investors into thinking that a particular low-value crypto project has huge potential. Investors are encouraged to buy the asset causing its consequent increase in price owing to high demand. 

The scammers then wait for the digital asset’s price to skyrocket and reach a particular point before selling their holdings, causing a market influx that erodes the coin’s value, causing an almost immediate crash in the value of the tokens. The unregulated nature of the crypto space has made crypto pump and dump schemes prevalent 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, was involved in a pump-and-dump scam living investors counting millions in losses. 

The coin surged to $2800 from slightly over a cent within a short period before crushing to a few cents in minutes. This is a classic example of a crypto pump and dump scheme. 

Crypto Pump and Dump Schemes vs. Rug Pull 

Rug pull and crypto pump and dump schemes are typically the same things. However, in a rug pull, crypto developers attract investors to invest in the project by buying tokens at earlier stages with the hope of selling them later at higher prices to make considerable profits. 

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

Analyzing Crypto Pump and Dump Schemes

Crypto pump and dump schemes often offer false promises in regard to three broad categories: guaranteed exorbitant returns, ability to solve real-world cases, and huge 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 of creating hype is roping celebrities and influencers to draft convincing social media content and direct them 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 instance, 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 employ 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 true interest in the project. 

The hype is big enough to trigger a severe FOMO (fear of missing out) among upcoming and established crypto investors. Most investors will resort to buying the coins/tokens, causing the price of the tokens to soar within a short time and setting the scam into motion. 

How to Recognize and Avert Crypto Pump and Dump Scheme

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

A New Cryptocurrency Is Suddenly Being Hyped Up 

Crypto pump and dump schemes are characterized by a new coin/token suddenly getting lots of attention and lots of hype from nowhere. Suppose you see a new cryptocurrency project getting lots of hype. In that case, you’ll want to do thorough background research by looking at the project’s whitepaper, founders, development team, and use cases to establish whether the hype is worth it. If you decide to invest in the coin, ensure that it aligns with your investment goals, not just because someone told you that it will be great. 

Celebrities and Influencers Insanely Hyping a New Project   

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

Most celebrities and influencers don’t have sufficient crypto knowledge to advise on crypto investments. They are probably hyping the coin because they are getting paid either in fiat or the tokens/coins for the new project. It’s also highly unlikely that the influencers and celebrities themselves are backing the project. 

Never take investment advice from influencers and celebrities, especially when advertising new crypto projects. It’s difficult to implicate celebrities and influencers in these scams since most of them unknowingly sell 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 go viral and attract unsuspecting investors. In most cases, the post is usually paid as ads, with the discussions surrounding the project being conducted by bots. Discussions around legit crypto projects are often done more naturally with different opinions among users. 

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

Aggressive Ad Campaign 

While it’s normal for any upcoming crypto project to carry out advertising campaigns, pump-and-dump scammers often carry out 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 ad campaigns. Aggressive ad campaigns for a newly launched crypto project with no exact use cases and hardly any market cap is a huge red flag.

Therefore, you’ll want to be skeptical about a particular launched crypto project when you see it carrying aggressive campaigns across social media and other platforms. 

An Unprecedented Price Hike  

This is one of the most common signs of pump and dump schemes signifying that the scheme is already in motion, waiting to pounce on gullible investors. The price hike 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 had already invested in the project and found yourself in such a situation, you’d want to sell off the tokens almost immediately before a price crash in the dump phase.

Closing Words

Crypto pump and dump schemes have become common in recent years due to cryptocurrencies’ decentralized and unregulated nature. As an avid crypto investor, distinguishing between the legit 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 you can afford to lose in new crypto projects.

If you’re 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 authority such as The Federal Trade Commission (FTC) and The Internet Crime Compliant Center

What is a Crypto Pump and Dump Scheme?

P&D schemes involve buying stocks or digital assets at high prices and then dumping them after making gains. The goal is to drive up the stock price while covering all losses when they occur. To spot a pump-and-dump scheme, look for unusually large transactions taking place around the same time. Also, look out for sudden price increases during trading, especially in small quantities. Finally, check whether there has been any unusual activity on the company’s Twitter or Facebook pages.

Is Investing in Crypto Safe?

Yes! While any central authority like stock markets does not regulate cryptocurrencies such as Bitcoin, they still remain safe investments. There are different types of cryptocurrencies, each having its own advantages and disadvantages. Some are considered stable, while others fluctuate wildly.

What is a Rug Pull?

A rug pull event, one of the most common ways an investor can lose money in the crypto space, is when a developer promotes a new token or coin, and once several people buy, they vanish with investors’ money.