For years, people have used crypto pump and dump schemes in traditional finance. This specific fraudulent scheme was typically carried out in the context of the stock market. The process involved a small group of investors purchasing shares of a company at a significantly low price, thereby inducing a sudden surge in the share’s value.

Subsequently, they would engage boiler rooms or call center personnel, just like in scenes from the movie “The Wolf of Wall Street,” to contact potential investors and convince them to acquire the targeted stock. These individuals would trick prospective investors by falsely asserting that the stock’s value will shoot up soon.

Once a sufficient number of investors have procured the stock and its value has risen enough, the initial investors will swiftly offload their shares. This rapid sell-off would trigger a plummet in the stock’s price, resulting in substantial losses for the other investors.

Pump-and-dump schemes have extended their influence to the crypto space as well but with a twist. Instead of relying on call centers, these schemes are orchestrated by disseminating exaggerated hype and misleading information about a specific coin or token via social media platforms.

In this article, we’ll learn about the pump and dump scheme and how to spot one and avoid it. Let’s get started.

What is a Crypto 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.

The asset’s price 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 to Spot a Pump and Dump Scheme?

Here are four signs about spotting a crypto pump and dump:

#1 Abrupt surge in price and trading activity

An abrupt and substantial upsurge in the value of crypto typically serves as the initial warning sign suggesting the potential occurrence of a pump-and-dump scheme. This price escalation is accompanied by elevated trading volumes, creating the illusion of genuine demand for the crypto.

The orchestrators of the pump and dump capitalize on this escalated price and trading activity to persuade investors to purchase the crypto asset. As more investors partake, the price escalates further. Yet, upon reaching a specific juncture, these manipulators proceed to sell their holdings, entrapping investors with a valueless token.

#2 Absence of tangible or authentic value

With various cryptos in circulation, a large proportion lacks practical utility or genuine value, rendering them prime targets for pump-and-dump endeavors.

Given their absence of genuine functionality, these cryptocurrencies become susceptible to manipulation by fraudulent actors who propagate misleading information, portraying the crypto as more valuable than its actual worth. Employing intricate jargon and unnecessarily complex language, they deceive investors and traders alike.

#3 Excess hype and promotional campaigns on social media

Practitioners of pump-and-dump schemes employ exaggerated promotional campaigns on social media platforms to amplify excitement and draw attention to a cryptocurrency. They may even resort to disseminating fabricated news stories and compensating influencers or moderately popular figures to endorse the crypto to their followers and the general populace.

This exaggerated frenzy entices unsuspecting traders seeking swift profits or the next promising cryptocurrency prospect. These traders purchase the coin, boosting demand and value, and providing a platform for the pump-and-dump orchestrators to execute their strategy: selling off holdings, reaping profits, and deserting the coin.

#4 Deficiency in transparency

Crypto pump-and-dump operations are frequently managed by anonymous individuals or collectives, rendering the verification of their identity and information challenging.

These actors might adopt counterfeit names, addresses, locations, and other personal particulars to obscure their identities. The absence of transparency serves as a glaring cautionary sign for any discerning investor.

How Can You Avoid the Pump-and-Dump Scheme?

• Avoid FOMO

Determining whether FOMO drives your decision to invest in cryptos is essential. 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.

Bottomline Thought

In the crypto space, identifying and avoiding pump-and-dump schemes hinges on vigilance and informed decision-making. From the stock market to the digital frontier, these schemes exploit excitement, false value, social media, and anonymity. Counteracting them demands diligent research, skepticism toward hype, and careful assessment of influencers. In this high-risk landscape, sound judgment prevails—avoid succumbing to FOMO, scrutinize offerings, and invest prudently. By maintaining a cautious stance and staying informed, individuals can navigate the treacherous waters of the crypto world with greater resilience against these fraudulent tides.

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.