As the name implies, these schemes involve artificially inflating the price of a stock or cryptocurrency through misleading information, and then quickly selling the assets at a profit before the price drops. In this article, we will explore what pumping and dumping means, how it works, and how to protect yourself from falling victim to one.
What is a Pump and Dump Scheme?
A pump and dump scheme is a form of securities fraud in which an individual or group of individuals artificially inflate the price of a stock or cryptocurrency through false or misleading information. This false information can take many forms, such as exaggerated claims about a company's earnings potential or rumors of a major upcoming announcement. The goal is to create a buying frenzy among investors, causing the price of the asset to skyrocket.
Once the price has reached a certain level, the individuals behind the scheme will sell their holdings, realizing a large profit. The price of the asset then falls back to its original level or lower, leaving those who bought at the inflated price with a significant loss. In some cases, the individuals behind the scheme will continue to promote the asset, hoping to pump up the price again and repeat the process.
Pump and Dump Schemes in the NFT Market
With the rise of NFTs, there has also been a rise in fraudulent activities, particularly in the form of pump and dump schemes. Pump and dump NFTs are becoming more common, with scammers using various tactics to inflate the value of these digital assets.
One tactic used in pump and dump NFTs is the creation of false scarcity. This involves artificially limiting the supply of an NFT and creating a sense of urgency among potential buyers. Scammers may also create fake accounts to place large bids on their own NFTs, further inflating the price.
Another tactic used by scammers is to collaborate with popular influencers or celebrities to promote their NFTs. This gives the impression that the NFT has value and increases its demand, leading to a rise in its price. However, once the promotion is over, the price drops, and investors are left with worthless assets.
To protect yourself from falling victim to pump and dump NFTs, it's essential to do your research and be cautious when investing in NFTs. Always check the authenticity of the NFT and the person selling it. Look out for red flags, such as limited-time offers, claims of high returns, and promises of exclusive access to future NFT offerings.
How Does a Pump and Dump Scheme Work?
The crypto industry remains a relatively unregulated frontier. With dozens of exchanges and the ease of issuing new cryptocurrencies, it has become a fertile ground for thinly traded currencies and scammers who can manipulate and dump those assets.
Typically, a pump and dump crypto scheme begins with an organizer assembling a group of influencers in a private online community. They coordinate the purchase of the targeted crypto asset to avoid price spikes. Once they are ready to pump the asset and get the public to invest, the influencers will promote the trade to their social media followers. The organizers will then execute the sale, or dump, in order to profit, leaving unsuspecting investors with the depreciated asset.
What makes crypto particularly vulnerable to this tactic is that the organizers don't have to work hard to find thinly traded crypto assets. They can simply create them with minimal research and coding knowledge.
Moreover, newly established cryptocurrencies are largely unregulated, allowing individuals or groups to make exaggerated claims about the token's utility without facing repercussions when these claims prove to be false promises.
Recognizing and Avoiding Pump and Dump Crypto Scams
Pump and dump crypto scams are nothing new in the cryptocurrency market. Many investors have fallen victim to these fraudulent schemes, losing significant amounts of money in the process. The challenge for investors is how to identify potential pump and dump scams before they happen.
Doing research is the first step. When you come across an unfamiliar cryptocurrency being promoted online, take the time to look up the token and read through its whitepaper. Find out who's behind the project and what its objectives are. This can help you determine if the cryptocurrency has long-term potential to increase in value.
If the project appears to have no clear purpose, unrealistic benefits, a poorly thought-out development roadmap, or is associated with previous bad actors, those are all red flags to watch out for. In addition, if the influencers you follow suddenly start talking about a cryptocurrency that you've never heard of, be wary.
If you do come across a potential crypto investment on social media, always check if the project has its own website and social media presence. Going straight to the source is safer than relying on information from third parties.
Checking how the cryptocurrency trades is another way to spot potential pump and dump scams. If it's traded on a reputable exchange, it's more likely to be a safer investment. If it's on an unknown DeFi exchange, dig deeper into the order book and check the pattern on trading volume. A recent spike in volume and big walls of the crypto asset on the buy side or sell side are all potential red flags.
If you suspect that a cryptocurrency is undergoing a pump and dump scam, it's best to avoid it. It's impossible to know when the organizers plan to sell. If you do have inside information, report it to the Commodity Futures Trading Commission (CFTC), which is offering bounties to whistleblowers.
Remember, there's no such thing as a completely safe investment in the crypto market. Be cautious and do your research before investing in any cryptocurrency, regardless of how well-regarded it is.
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