If you’re into crypto trading, you might’ve seen ads for certain unknown crypto coins that were hyped up a lot on social media and message boards. You know, those coins that no one has ever heard of but are suddenly being discussed all over the internet? Everyone is rushing to buy these coins but then suddenly, someone dumps a whole lot of coins into the market leaving the investors with huge losses.
This is something known as a Pump-and-Dump scheme. This is a common scam in the crypto world which is still a developing industry with relatively lower regulatory oversight. As per Chainalysis, 24% of the new tokens launched in 2022 had characteristics of pump-and-dump schemes.
This is primarily because it is very easy for malicious crypto pump-and-dump groups to launch a new token, especially on decentralized exchanges(DEXs). They can artificially pump up the token’s price and market cap to give an illusion of a high-demand token.
While such schemes are not explicitly illegal in the crypto industry, they are obviously unethical and are forbidden in the stock market. Therefore, if you have ever wondered whether your crypto is pump or dump or if you want to know how pump-and-dump works in crypto, this article is for you.
Here, we will discuss how crypto pump-and-dump groups operate, signs to identify such schemes, and how to avoid falling for a crypto pump-and-dump scam.
How Does Pump and Dump Work in Cryptocurrency?
Crypto Pump-and-dumps are a type of investment fraud that requires relatively less technical know-how. Such schemes are not new but with the rising popularity of cryptocurrency and new tokens being launched nearly every day, it is very easy to fall for a pump-and-dump scam in the search for a new up-and-coming crypto coin.
The modus operandi of pump-and-dump groups is simple. They get hold of large quantities of an asset and then artificially inflate its prices by spreading false information about the project. This is the “pumping” phase where the buzz is created around the coin and investors are attracted by promises of quick profits.
After that, once the value of the coin reaches a certain level, the group sells their holdings at the inflated price thus earning a profit. This is the “dumping” phase where large quantities of the crypto coin are dumped in the market increasing its supply and decreasing its value. This sharp decline in value makes it difficult for other investors to sell off their holdings.
Since the groups or teams carrying out such pump-and-dump scams are often anonymous, it is difficult to track their activities or get them punished. These groups use Discord or Telegram where anyone can join a channel to build initial hype around the project.
Later, they start advertising on other social media platforms and may even rope in influencers to promote the token. They incite FOMO among investors by tweeting about a “fantastic or once-in-a-lifetime investment opportunity” and then spreading the message to other platforms including specialized chat rooms. The crypto is then dumped in the market after it reaches a certain price point.
How do I Know the Crypto I invested in is Pumping and Dumping?
No one can definitely say whether a cryptocurrency is a pump-and-dump scam or not. However, there are certain signs that you can look out for to avoid investing in suspicious coins. We have listed out the most common signs to look for when analyzing if a crypto is running a pump-and-dump scheme
Sudden Price Spikes
A major red flag is when there is a sudden hike in the price of a particular coin especially if it is a new and relatively unknown coin. This can be called the “pump phase” when the price spike along with the high trading volume statistics gives the impression of high demand for said cryptocurrency.
This tactic is used to attract investors with the lure of making a quick profit by investing in the “next big thing.”
Rise in Trading Volume
You should be wary of a cryptocurrency that experiences a sudden and unexplained rise in trading volumes. If you see a new coin dominating the charts without any significant news or updates, stay away from it. The high trading volume could be due to manipulation by the pumpers.
This is done in order to create an impression of high demand and subsequently drive up the prices of the cryptocurrency.
Aggressive Ad Campaigns
Pump-and-dump schemes generally resort to aggressive advertising on social media to create hype around their cryptocurrency. A new company developing a legitimate product would not spend all its resources on creating buzz for its product. In other words, you should be skeptical if you are suddenly bombarded with messages and social media posts about an unknown cryptocurrency on all social media platforms.
No Fundamental Value
Most pump-and-dump cryptocurrencies would have shoddy designs and zero fundamental value. They have no solid business plan or vision, leaving them open to price manipulation. Pumpers may use technical jargon to entice investors and create a false sense of utility to make these coins seem more valuable than they actually are.
No Transparency
You would notice that most pump-and-dump crypto coins are released by anonymous individuals or groups. They use fake identities and pseudonyms to hide their real identity which makes it difficult to verify the information provided by them. This also makes it easy for the pumpers to simply disappear with all the money after driving the investors into a loss.
Cryptocurrency Pump and Dump Examples
Bitconnect(BCC)
BCC was a cryptocurrency touted to bring high returns to investors through a lending program. The pumpers created artificial demand for the cryptocurrency and drove up its prices to attract investors worldwide to invest in BCC. Later, the cryptocurrency was dumped and in January 2018, its price crashed causing a significant loss to investors.
VikingsChain(VKG)
VKG is a notorious example of a crypto pump-and-dump scheme. In one instance in November 2021, its price sharply went up by about 350% after Elon Musk tweeted about the Moon and the Vikings. These prices were much higher than what was expected and just as quickly they had gone up, the prices of VKG soon witnessed a steep decline.
Mimosa(MIMO)
MIMO witnessed a nearly 340% increase in its value which disappeared as quickly as it had arrived. Its price went up from an average of $0.20 to a high of $0.87 after pump groups flooded message boards with false information to stir up a frenzy regarding the coin. However, after one day, MIMO prices were back to $0.20 leaving many investors with a coin that barely had any real value.
Electroneum(ETN)
This one ties back to US millionaire John McAfee who started a “Coin of the Day” series in 2017. Most of the coins he tweeted about, such as ETN, were unknown, low-volume coins that witnessed a sudden price rise after his tweets. McAfee, however, never disclosed that he was holding those coins or being paid by Initial Coin Offering(ICO) issuers to promote those coins.
After artificially inflating the prices of altcoins like ETN, he dumped them in the market crashing their value and reaping profits himself. As a result, McAfee was indicted in 2021 on fraud and money laundering charges by the US Justice Department.
Tips to Avoid Crypto Pump and Dump Scams
Research the Cryptocurrency
An obvious way to avoid pump-and-dump cryptocurrency scams is to thoroughly research the coin. Research the project’s team and their vision, read the project’s whitepaper, and check its listing on major cryptocurrency exchanges. To research the cryptocurrency’s market cap and trading volume we too, use the websites CoinMarketCap and CoinGecko to keep track of and research the crypto market.
Analyze the Price Chart
Before investing in a new cryptocurrency, analyze its price movement and trading volumes. This will help you identify any suspicious trends or patterns in the data and check whether the coin’s prices are following the general market movement or not. An abnormal price rise or a sudden spike in trading volumes is a good indicator of a project being a pump-and-dump scheme.
Don’t Invest due to Hype
Fear of Missing out is a real thing. However, investing in a crypto asset due to hype and FOMO can leave you in big losses if the value of said asset steeply declines. Building up social media hype is a common tactic used by pump-and-dump groups to lure investors. It is better to conduct independent research before putting your money into a crypto project rather than trusting random influencers and ending up investing in obscure crypto coins with barely any value.
Keep up with the latest Crypto news
Follow reputable news sources and try to stay up-to-date with crypto market trends and movements. This will help you identify and steer clear of potential crypto pump-and-dump schemes to a large extent. Making an informed investment decision is crucial to avoiding pump-and-dump scams.
Frequently Asked Questions(FAQs)
What is an example of a Pump and Dump Crypto?
VikingsChain and Viking Swap are some examples of pump-and-dump crypto. Their value rose by 350% and 3,700% respectively after Elon Musk sent out a series of tweets about the Vikings and the Moon. However, the prices of these cryptocurrencies later came down as sharply as they had gone up.
Is Crypto Pump and Dump Legal?
Pump-and-dump schemes are illegal in the stock market. However, since cryptocurrencies themselves operate in a legal grey area, pump-and-dump schemes in the industry are not explicitly illegal. However, they are controversial from an ethical point of view, and most regulated cryptocurrency exchanges prohibit crypto pump-and-dump schemes.
How to Know Which Coin Will Pump?
You can study price charts and trading volumes and look out for certain signs to make predictions on whether or when a coin will pump. However, the crypto market is very unpredictable and there is no sure-shot way to know whether a coin will pump or not.
Conclusion
Pump-and-dump schemes are a common scam in the crypto trading arena. They operate by building hype around a cryptocurrency and capitalizing on the investors’ FOMO. They lure investors with the promise of high returns and quick profits but in the end, they are left with essentially worthless coins in their possession. Therefore, it is important to do your due diligence before investing in a cryptocurrency, especially an obscure one.
Don’t get caught up in the hype and technically analyze the cryptocurrency project and its roadmap before putting in your money. Additionally, the age-old advice of not investing money that you cannot afford to lose also applies to cryptocurrencies.