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Crypto AI Pump-and-Dump Tokens Are On The Rise, Beware!

By February 23, 2023February 26th, 20235 minute read
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

A flurry of tokens based on popular Artificial Intelligence (AI) projects such as ChatGPT and Bing AI Chat has clogged the BNB chain. Many dozens of the newly created BingChatGPT tokens have been identified by several investigators, and experts believe these are “pump and dump” schemes—tag along to learn more about these AI pump-and-dump tokens and why you should beware of them.

Before we move forward, let’s have a look at what exactly is the pump-and-dump scheme.

What is a pump-and-dump scheme?

Pump-and-dump schemes have existed since the commencement of the securities market. When the price of a thinly traded asset, such as a penny stock, is low, a person or group of people buys into it.

They then begin spreading positive information about the asset. But, unfortunately, more often than not, the positive news is entirely fabricated.

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The price of the asset continues to rise as more investors buy into it. Once the price has been fully “pumped,” the scam’s creator sells their stake to the purchasers who are still coming in. Since they possess a sizable portion of the outstanding shares, it causes the price to plummet.

Pump-and-dump schemes, in a nutshell, are a type of fraud. The scheme’s creators intend to defraud unsuspecting investors by enticing them to purchase an asset based on misleading information. When those investors buy-in, the pumper sells, thus lowering the price. As a result, the scammer makes a lot of money while everyone else loses.

How does the pump-and-dump scheme work?

In a Crypto pump-and-dump scheme, organizers use various tactics to artificially inflate the price of a particular Crypto and then quickly sell their holdings for a profit, leaving other investors with significant losses. Here’s how it typically works:

STEP 1: Selection of the Crypto

The organizers first choose a low-market-cap Crypto that can be easily manipulated. Next, they target lesser-known or newer Cryptos that have low trading volume, making it easier to move the market.

STEP 2: Building the hype

The organizers use various tactics to build hype around Crypto. They create social media groups, forums, and chat rooms, where they spread rumors and false information about Crypto, touting it as the “next big thing” or “revolutionary.” They often promise large returns on investment and encourage other investors to buy the Crypto.

STEP 3: Buy-in

The organizers and their insiders start buying the Crypto, creating a buying frenzy in the market. So naturally, this demand drives up the price of Crypto.

STEP 4: Dumping

Once the price has reached a high enough level, the organizers and their insiders start selling off their holdings, causing the price to plummet. This leaves unsuspecting investors with devalued assets.

STEP 5: Profit

The organizers make a profit from the price difference between their buy-in price and the higher price that was artificially created. Meanwhile, other investors are left with significant losses.

So, this was the basic about pump-and-dump tokens. Next, let’s learn about AI tools and why Crypto AI tokens can be a significant pump-and-dump scheme.

What is ChatGPT?

OpenAI created ChatGPT, a sophisticated artificial intelligence bot. Its creators, Altman, Musk, and other Silicon Valley investors, established an artificial intelligence research non-profit company in 2015 and was unveiled to the public on November 30th, 2022. ChatGPT is an abbreviation for Chat Generative Pre-Trained Transformer. It is a powerful AI bot capable of interpreting human speech and producing detailed writing that humans can understand. In addition, ChatGPT’s question-and-answer format makes it intriguing. With its distinctive feature to answer general questions, OpenAI’s ChatGPT has grabbed the attention of the entire world.

What’s happening with Crypto AI tokens?

PeckShield, a blockchain security company, has issued an alert after discovering dozens of tokens pretending to be tied to the artificial intelligence (AI) powered chatbot ChatGPT. Several of these tokens have already lost most, if not all, of their value in what is known as a “pump-and-dump” scheme or a “rug pull.”

The developers of a pump-and-dump scheme often orchestrate a campaign of bogus statements and hype to induce investors to purchase tokens, then discreetly liquidate their position in the scheme as prices rise. You could think it’s intriguing to check out a token allegedly tied to the recent buzz surrounding Bing AI chat and ChatGPT, but we’re here to warn you to be cautious when investing in any of them.

How can you avoid the pump-and-dump scheme?

  • Avoid FOMO: It’s essential to determine whether FOMO drives your decision to invest in cryptos. It may appear that everyone is making money off of Cryptos, but this is not the case.
  • Do your homework and research well: The next step is to do your homework. Those who understand coding can easily create cryptos or tokens. Do some Google searches to discover more about a new coin meant to make you rich. The initial coin offering, or ICO, will include a “white paper” that provides information on the coin, who is behind it, its goal, and so on.
  • Don’t go after the hype on social platforms: Then there’s the issue of the hype that’s being created. Going into places where people are enthusiastic about cryptos, such as Discord channels, social media, and forums, is one-way scammers spread the news about their coin. If someone suddenly starts hyping up a brand new token, there’s a significant probability they’re promoting a scam.
  • Carefully trust your influencers: Be aware of any influencer who you may follow who barely talks about cryptos and randomly begins supporting a token. If you want financial advice, seek it from a professional rather than someone renowned influencer for being amazing at video games.
  • Invest carefully: Finally, if you still want to invest, don’t invest more than you afford to lose. It’s possible that an investor could profit from a pump-and-dump scheme with the appropriate timing, but it’s preferable to anticipate that the money you use to buy tokens will be gone forever.

Bottom line

Pump-and-dump schemes are one of the most insidious scams in the history of Crypto investment. This happens especially when a new trend is live, and people can’t avoid that hype and want to be a part. Therefore, it’s always advisable to do your research, take advice from experts, or choose a trusted Crypto exchange to invest in Crypto.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Shashank is an ETH maximalist who bought his first crypto in 2013. He's also a digital marketing entrepreneur, a cosmology enthusiast, and DJ.

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